# Gordon v. Council of the City of New Orleans

> Louisiana Court of Appeal · February 25, 2008 · 977 So. 2d 212

URL: https://www.frixlaw.com/law-library/cases/1153621

## Case

- **Court:** Louisiana Court of Appeal
- **Decided:** February 25, 2008
- **Citations:** 977 So. 2d 212; 2008 WL 586207
- **Precedential status:** Published
- **Opinion:** Opinion
- **Judges:** Charles R. Jones
- **Cited by:** 1 later opinions in the Frix Law Library

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## Opinion text

977 So.2d 212 (2008)
Reverend C.S. GORDON, Jr., J. Michael Malec, Darryl Malek-Wiley, Willie Webb, Jr., and Maison St. Charles, L.L.C. d/b/a Quality Inn Maison St. Charles
v.
The COUNCIL OF the CITY OF NEW ORLEANS and Entergy New Orleans, Inc.
No. 2005-CA-1381.
Court of Appeal of Louisiana, Fourth Circuit.
February 25, 2008.
Rehearing Denied in Part, Granted in Part April 4, 2008.
*213 J. Kenton Parsons, Luke F. Piontek, Roedel Parsons Koch Blache Balhoff & McCollister, Baton Rouge, LA, Bob F. Wright, James Parkerson Roy, Domengeaux, Wright, Roy & Edwards, Lafayette, LA, Edwin R. Murray, Michael C. Darnell, Murray, Darnell & Associates, L.L.C., Walter C. Thompson, Jr., James M. White, III, Barkley & Thompson, L.C., New Orleans, LA, for Plaintiffs/Appellants.
Clinton A. Vince, Regina Speed-Boost, Orlando E. Vidal, Sullivan & Worcester, LLP, Washington, DC, Walter J. Wilkerson, Wilkerson & Henry, L.L.C., New Orleans, LA, for the Council of the City of New Orleans.
Ewejl E. Eagan, Jr., Marcy V, Massengale, Wendy Hickok Robinson, Phillip J. Arttis, Jr., Gordon, Arata, McCollam, Duplantis & Eagan, L.L.P., J. Wayne Anderson, Matthew R. Suffern, Margot G. *214 Augustin, Entergy Services Inc., New Orleans, LA, for Entergy New Orleans, Inc.
(Court composed of Judge CHARLES R. JONES, Judge DAVID S. GORBATY, and Judge EDWIN A. LOMBARD).
CHARLES R. JONES, Judge.
The Appellants, Rev. C.S. Gordon, Jr., et al, seek review of an adverse district court judgment that affirmed the earlier decision of the New Orleans City Council ( hereinafter "the City Council"), a named Appellee, by which the City Council ordered Entergy New Orleans, also a named Appellee, to reimburse ratepayers for alleged Fuel Adjustment Clause ( hereinafter "FAC") overcharges, but for only a fraction of the damages actually prayed for by the Appellants. We affirm in part and reverse in part.
FACTS AND PROCEDURAL HISTORY
Entergy New Orleans, Inc. ( hereinafter "ENO"), is an electric utility company engaged in the manufacture, generation, transmission, distribution and sale of electric power and energy to residential, commercial, industrial, and governmental customers in the State of Louisiana. ENO is a part of the Entergy Corporation and one of five (5) "Operating Companies" [1] which collectively form an integrated System which is operated pursuant to what is referred to as "the System Agreement."
The City Council is the legislative branch of local government in New Orleans. Its purpose is to enact laws to protect the public health, safety and welfare of the citizens of New Orleans.
Reverend C.S. Gordon, Jr., on behalf of the New Zion Baptist Church, Michael Malec, Darryl Malek-Wiley, Willie Webb, Jr., and Maison St. Charles, L.L.C., d/b/a Quality Inn Maison St. Charles ( hereinafter "the Appellants") appealed the February 5, 2004, Resolution of the New Orleans City Council, No. R-04-66, under the administrative adjudicatory proceeding they brought as Plaintiffs for the recovery of alleged overcharges billed to them and all other ratepayers (more than 180,000) by ENO. [2] They also alleged that the overcharges perpetrated by ENO were routinely done at the direction of and with the participation of ENO's parent company, Entergy Corporation, and its unregulated affiliate, Entergy Services, Inc., (ESI), by improperly passing ineligible costs for fuel through a fuel adjustment charge component on its bills for electric service.
The City Council Proceedings [3]
On May 12, 1999, the Appellants filed a complaint with the New Orleans City Council in which they alleged that they, as *215 ratepayers, had incurred or paid, overcharges for electricity service sold by ENG. They further alleged that these charges were incurred or levied by ENO through costs included in its FAC without advance approval from the City Council. In the alternative, the Appellants alleged that the portion of the unapproved items and amounts that were included as purported costs were actually costs which were, not "prudently" incurred, or which did not produce "just and reasonable rates, or which were otherwise improperly included."
The complaint also alleged that Entergy overcharged ratepayers over "$160 million dollars, including interest, through its FAC charges from the period of 1985 through 2001."
Nevertheless, during the City Council proceedings, the Appellants were allowed to submit the written, pre-filed testimony of their experts concerning their respective opinions on Entergy's FAC charges. In response, ENO, the Interveners, [4] and the Advisors of the City Council [5] also submitted pre-filed expert testimony.
After the initial investigation and testimony was reviewed, it was determined that the Advisors of the City Council agreed with the Appellants and recommended that more than $34 million dollars be refunded to the New Orleans ratepayers as a result of ENO's "improper fuel adjustment practices and charges."
An administrative trial was conducted before the City Council's appointed administrative hearing officer, from February 26, 2002, through March 15, 2002. Pursuant to Resolution No. 99-525, the hearing officer's authority was limited to making evidentiary rulings, compiling records of the proceeding, and submitting the record to the City Council for final consideration.
Eventually, the City Council adopted a resolution, but instead of ordering refunds in the amounts recommended by both the Appellants' experts and the Advisors of the City Council, the City Council instead ordered Entergy to issue refunds to the Appellants of a lesser sum. The City Council did not consider ordering repayment of the refunds as recommended by the Advisors of the City Council. The Appellants contend that this action by the Council was arbitrary and capricious. [6]
The Civil District Court Proceedings
In April 1998, the Appellants filed suit in the Civil District Court for the Parish of Orleans against ENO, Entergy, Inc., and a number of Entergy's affiliates, [7] including ESI, alleging imprudent practices and overcharges. They also sought damages, including treble damages for the Appellees' alleged violations of Louisiana antitrust law and other state laws. Specifically, the Appellants alleged that Entergy charged ratepayers more than $190 million dollars, including interest, through its FAC.
After filing their petition, the Appellants also filed a complaint with the New Orleans City Council seeking an administrative remedy against ENO for refunds of alleged overcharges billed through fuel adjustment charges.
*216 From February 26th through March 15th, 2002, the City Council's trial of the administrative proceedings occurred. At trial the Appellants' experts testified that the overcharges resulting from the fuel adjustment charges exceeded $90 million dollars since 1985. The record also indicates that the City Council's own experts also testified that ratepayers were overcharged at least $34,300,000.00, which they too also recommended be refunded. However, by its February 5, 2004 Resolution, the City Council declined to award the, refund of the non-fuel costs that were allegedly passed to ratepayers in the fuel adjustment charge found on ENO's utility bills for electric service. Rather, the City Council adopted Resolution, No. R-04-66 and awarded $7,203,427.00 [8] in refunds to ratepayers.
Subsequently, the Civil District Court for the Parish of Orleans, which heard the case pursuant to the Administrative Procedures Act, La. R.S. § 49:950, affirmed the City Council's adoption of the resolution on May 26, 2005, [9] and concluded that:
a. the City Council correctly applied the burden of proof, requiring the plaintiffs to make a showing of a "serious doubt" with regard to allegations of imprudence. Additionally, the District Court held that ENO proved the prudence of his actions;
b. the City Council's decision not to order refunds of SFI Period Costs that were passed on to customers through the FAC was supported by the evidence in the record;
c. the City Council's calculation of a refund in the amount of $1,831,404 plus interest due to ENO's customers relating to what the plaintiffs referred to as "wrongful profits" that were not "trued up" in base rates is supported by the evidence in the record;
d. the City Council's decision not to order a refund of the AECC Energy Adders included in the FAC was supported by evidence in the record;
e. the City Council's calculation of refunds and the amount of $3,957,925 plus interest related to purchases of EPI energy by EAI, was supported by the evidence in the record;
f. the City Council's decision not to order refunds resulting from the System's use of the margin in making power purchases in the wholesale market was supported by the evidence in the record. In addition, the City Council's decision to require ENO to provide an annual analysis of third-party offers to demonstrate that the use of the margin remains an effective tool to secure power at the lowest reasonable cost is supported by the record;
g. the City Council's conclusion that resale of wholesale power to third-party purchasers was not imprudent, and therefore that no refund should be ordered, was supported by the record;
h. the City Council's decision that ENO was not imprudent and not purchasing power for its own account was supported by the evidence in the record;
i. the City Council was not arbitrary or capricious in concluding that the plaintiffs failed to present credible *217 evidence that less expensive power , was available for purchase, and could have been purchased by ENO or the System. The district court found that the evidence in the record supported the City Council's decision; and,
j. the administrative law judge properly denied and the City Council properly affirmed the denial of the plaintiffs motion for judgment on the pleadings.
Additionally, in its written reasons for judgment, the district court indicated "for its reasons for judgment, this [c]ourt adopts the memoranda and argument of Entergy New Orleans, which is supported by the Public Service Commission's finding in Delaney v. Entergy Louisiana, Inc., L..P.S.C. Docket # U-23356."
The Appellants were granted a devolutive appeal on June 13, 2005.
Subsequently, on September 25, 2005, ENO filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Eastern District of Louisiana. On February 14, 2006, the Bankruptcy Court lifted the stay of proceedings in the bankruptcy court in order for this appeal to move forward.
Appellants' Assignments of Error
The Appellants have raised the following four (4) assignments of error:
1. System Fuels, Inc. [10] ( hereinafter "SFI") Period Costs: The Appellants assert that the City Council, in violation of its role as adjudicative administrator, erred by invoking "equity" in conflict with positive law, in order to decline the award of refunds of $26,723,918.73, plus interest in, SFI Period Costs that it found were improperly included in ENO's fuel adjustment charges. In the alternative they assert that even if the City Council had any "regulatory" discretion to deny an administrative remedy of refunds of those overcharges, it abused that discretion;
2. Arkansas Electric Cooperative Corporation ( hereinafter "AECC") Adders: The Appellants allege that the City Council erred by failing to award refunds of $6,065,151, plus interest, in fixed, predictable base rate costs, called the "AECC Adders," that had been included improperly in ENO's fuel adjustment charges;
3. The Margin: The Appellants allege that the City Council erred by refusing to award $24,400,000 in overcharges, plus interest, which Entergy and ESI caused ENO to impose on ratepayers by use of a so-called "margin" — a fictitious discount to make it falsely appear that affiliate power was cheaper than power available from nonaffiliates;
4. The Appellants allege that the City Council erred in exceeding its administrative adjudicatory authority, and impinged upon the constitutional jurisdiction of the courts, by purporting to comment on issues such as intent, motive, and fraud, which are relevant only to [the Appellants'] legal claims in court against ENO's parent and unregulated affiliates, are outside the Council's jurisdiction, were not the subject of discovery or evidence in the Council Proceeding, and are superfluous to its resolution of [the Appellants'] administrative claims for recovery of overcharges representing costs improperly included in the fuel adjustment *218 component of ENO's bills to customers.
Additionally, the Appellants have raised the following issues for review before this Court:
• Did the City Council violate the dictate of Daily Advertiser v. Trans-La, 612 So.2d 7 (La.1993), and abdicate its duties as administrative adjudicator by failing to award refunds for overcharges flowed through ENO's fuel adjustment mechanism, and caused by ENO's violations of Council rules and orders, fundamental regulatory policy, and law;
• Whether the City Council improperly invoked "equity" in refusing to order refunds of non-fuel, administrative SFI Period Costs improperly placed in the fuel adjustment mechanism and billed to ratepayers;
• And, considering even if the Council had discretion not to order refunds of overcharges (which the Appellant's brief states parenthetically that the Council did not), whether the Council abused that discretion, and acted arbitrarily and capriciously, by refusing to order refunds for ENO's inclusion of fixed predictable, non-fuel costs in the fuel adjustment mechanism, in violation of the Council's own orders. Fundamentally regulatory policy, and positive law, are inconsistent with the Council's ruling on a similar issue in the same proceeding, which ENO did not appeal;
• In refusing to order refunds for overcharges caused by ENO's practice of using a so-called "margin" by fictitiously discounting the price of power offered by its affiliates offers to nonaffiliate offers, whether the City Council improperly failed to apply ENO's burden of proof as a regulated utility, where ENO presented no contemporaneous evidence to prove that the margin was reasonable or saved ratepayers money, where Entergy's own study proved that the margin cause ratepayers to pay higher costs for electricity, and where the City Council order inconsistently that there be a later study to determine if the use of the margin is reasonable.
• Whether the City Council exceeded its jurisdiction, and impinged on the jurisdiction of the court, in making gratuitous "finding" in dicta on pages 19, 38, 44, 47, 51, 55, and 58 regarding ENO's motive, intent or fraud (which the Appellants urge are "issues on which the Council has no special expertise") when such issues were not can could not have been presented to the Council for adjudication; and,
• Whether the City Council's wholly superfluous purported "findings" on intent, motive and fraud are binding on the courts, which will adjudicate Appellants' non-regulatory, state law claims against ENO's parent and unregulated affiliates, who were not parties to the Council proceeding.
LAW AND DISCUSSION
In reviewing the decisions of public bodies . . . the courts will not interfere with the functions of these bodies in the exercise of the discretion vested in them unless such bodies abuse this power by acting capriciously or arbitrarily. Alliance For Affordable Energy v. Council of City of New Orleans, 96-0700 (La.7/2/96), 677 So.2d 424, 434 , citing Coliseum Square Association v. New Orleans, 544 So.2d 351, 360 (La.1989); Caz-Perk Realty, Inc. v. Police Jury of Parish of East Baton Rouge, 207 La. 796 , 22 So.2d 121 (1945). In Central Louisiana Electric Co. v. *219 Louisiana Public Service Comm'n , [11] 86-1781, 508 So.2d 1361, 1365-66 (La.1987), the Supreme Court re-iterated the standard of review for ratemaking determinations as follows:
While we thus have the power and it is undoubtedly our duty to set aside the rulings of the Commission where we believe them to be clearly wrong on the facts and/or the law, we nevertheless should accord great weight to the rulings of the Commission and should not overturn them in the absence of a clear showing of error. Courts should act slowly in substituting their own views and discretion for those of a body peculiarly constituted to act intelligently in such cases and primarily charged with doing so. Southern Bell Telephone Telegraph Co. v. Louisiana Public Service Comm'n, [ 239 La. 175 ] 118 So.2d 372, 378 (La.1960).
Further, we have described our role in the following way. Initially, as the orders of the Commission are entitled to great weight, they should not be overturned absent a showing of arbitrariness, capriciousness, or abuse of authority by the Commission. Secondly, courts should be reluctant to substitute their own views for those of the expert body charged with the legislative function of rate-making. Lastly, a decision of the Commission will not be overturned absent a finding that it is clearly erroneous or that it is unsupported by the record. South Central Bell v. Louisiana Public Service Comm'n, 352 So.2d 964, 968-69 (La.1977); Gulf States Utilities Co. v. Louisiana Public Service Comm'n, 364 So.2d 1266, 1268 (La.1978), and the cases cited therein. Moreover, in Central Louisiana Electric Co. v. Louisiana Public Service Comm'n, 437 So.2d 278 (La.1983), we reiterated these principles, stating: "A reviewing court will not substitute its judgment for that of the Commission in fixing public utility rates, and the agency's rate, order will be upheld unless shown to be arbitrary, capricious, abusive of its authority, clearly erroneous, or unsupported by the evidence." Id. at 279 .
Pursuant to La.R.S. 45:1176, the Public Service Commission has the power to set "just and reasonable" rates to be charged by public "utility companies in this state. In reviewing the rate-making process, the inquiry therefore is whether the commission acted unreasonably or arbitrarily in setting rates for the utility. South Central Bell v. Louisiana Public Service Comm'n, 352 So.2d 964, 968 (La. 1971 [1977]). Accordingly, the decisive issue in this case is whether or not the commission was arbitrary in denying CLECO's request for a rate increase.
Additionally, in Central Louisiana Electric Co. v. Louisiana Public Service Comm'n, Id ., the Supreme Court also reviewed the rate-making methodology of utility companies as follows:
In utility rate^making, the primary objective is to allow the company sufficient revenues to meet its operating expenses, provide its shareholders *220 with a reasonable rate of return, and attract new capital. South Central Bell Telephone Co. v. Louisiana Public Service Comm'n, 352 So.2d at 967 ; Jones, Judicial Determination of Public Utility Rates: A Critique, 54 B.U.L.Rev. 873, 875 (1975). At this level, the utility's revenues are said to produce a "fair rate of return." The legal standard for determining what is a fair rate of return was articulated in two seminal cases: Federal Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591 , 64 S.Ct. 281 , 88 L.Ed. 333 (1944) and Bluefield Waterworks & Improvement Co. v. Public Service Comm'n, 262 U.S. 679 , 43 S.Ct. 675 , 67 L.Ed. 1176 (1923). In Bluefield, the Court observed:
What annual rate will constitute just compensation depends upon many circumstances, and must be determined by the exercise of a fair and enlightened judgment, having regard to all relevant facts. A public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties; but it has no constitutional right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures. The return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties. A rate of return may be reasonable at one time and become too high or too low by changes affecting opportunities for investment, the money market and business conditions generally. 262 U.S. at 692-93 , 43 S.Ct. at 679 .
In Hope, the Court reiterated these principles, stating: [r]ates which enable the company to operate successfully, to maintain its financial integrity, to attract capital, and to compensate its investors for the risks assumed certainly cannot be condemned as invalid, . . . 320 U.S. at 605 , 64 S.Ct. at 289 .
Generalizing, these cases hold the rate-making process rests on a balancing of interests between the investors and the consumers.
The method used to balance the interests of the investors and the consumers is well established. The initial determination that must be made is the utility's future revenue requirement. City of Evansville v. Southern Ind. Gas & Electric Co., 167 Ind.App. 472 , 339 N.E.2d 562, 568 (2d Dist.1975). As a guide to such a determination, data is generally gathered from some twelve month period taken as a "test year." Bonbright, Principles of Public Utility Rates, p. 150, n. 7 (1961) (hereinafter "Bonbright"). Customarily, the test year selected is the most recent annual period from which actual operating data is available. The data gathered is then used to calculate the following four variables:
1. The amount of revenues generated under the present rate structure.
2. The operating expenses, including maintenance, depreciation, and taxes, incurred to produce revenues.
3. The rate base, i.e., the value of the property, plant, and equipment, (less accumulated depreciation) which provide the service, and on which a return should be earned.
*221 4. The rate of return, a percentage figure which, when applied to the rata base, will generate revenues sufficient to cover costs and give investors a fair return on their investment.
Comment, Gulf State Utilities, The Public Service Commission, and the Supreme Court: On Raising the Electric Rates, 40 La.L.Rev. 1048, 1049-60 (1980).
These variables are then used to determine the "return" that is available to be distributed to the utility's investors and the "actual rate of return" presently being earned by the utility. The "return" or earnings is equal to the utility's revenues less its operating expenses, exclusive of interest. The ratio of the utility's return to its rate base is equal, to its actual rate of return. Lastly, the Commission must decide whether the utility's actual rate of return is deficient, adequate, or excessive. South Central Bell, 352 So.2d 864 [964], 967 (La.1977). Commission orders that approve rate increases or require rate decreases are generally based on the determination that, given the utility's current earnings, the existing rates will likely yield a deficient or an excessive rate of return in the near future. Bonbright, p. 150, n. 7.
Delaney, et al. v. Entergy
In this Court, both parties argue that the case at bar has issues very similar to another case that was heard before the Louisiana Public Service Commission, [12] *222 Delaney et al. v. Entergy. [13] Further considering that the district court has adopted the LPSC's findings in Delaney and has so stated in its reasons for judgment, we shall closely examine Delaney in our review of this present appeal.
In Delaney, a petition was filed by Plaintiffs including Ms. Delaney and others who sued as representatives of New Orleans ratepayers. The petition requested that the LPSC review the FAC charges of Entergy of Louisiana and to identify and quantify any overcharges that may have occurred beginning in January, 1975. [14]
As a result of the allegations made by the Plaintiffs/ratepayers, the LPSC conducted an independent review of the costs flowed through Entergy's FAC beginning with the period of January 1, 1975, up until the date the complaint was filed with the Public Service Commission.
Through extensive discovery, the LPSC Staff gathered information which it believed warranted further investigation. Entergy, in turn, produced extensive information relating to the Operations under the Entergy System Agreement, affiliate transactions, and the costs included in its Fuel Adjustment Charges. The LPSC Staff also conducted informal meetings with the employees and representatives of Entergy, as well as inspected the dispatch center for the Entergy System, in Woodlands, Texas, and reviewed all FAC filings.
At the close of the lengthy investigation, the LPSC Staff found no facts to support the disallowance or refund obligation by Entergy. The LPSC Staff also found no evidence of or an intention on Entergy's part:"
1. to deceive or harm Entergy ratepayers;
2. to manipulate or abuse Fuel Adjustment Charges;
3. to inflate costs included in the Fuel Adjustment Charges; or
4. to abuse or manipulate system operations.
In May 2000, an Agreement of Settlement in Principle was reached by the LPSC and Entergy. Delaney was eventually decided at an Executive Session on December 13, 2000, via a consent decree. Additionally, Settlement Order U-23356, also incorporated and attached the LPSC's Proposed Findings of Fact and Conclusions of Law into the Order. The Order, which initially sets forth the Commission's original jurisdiction in hearing the type of claims set forth in the Delaney plaintiffs' petition, provides:
1. "Entergy shall refund to its then current LPSC-jurisdictional ratepayers the sum of $72 million dollars (the "Settlement Amount") via a credit to the fuel adjustment clause." The refund was applicable to then current customers who were subject to the fuel adjustment charges at the time of *223 the refund, on a kWh allocation basis. Additionally, the credit would be spread over the months of July, August, and September 2001, subject to accrual of interest on the uncredited amount for those months from the date of the order until the refund is completed at the rate set by the Commission's November 1997 General Order relating to fuel.
2. Entergy "shall include an-adjustment in its 2000 Formula Rate Plan proceeding to reflect a credit to revenues in the FRP [15] calculation for off-system sales of $18,854 for 1997 and $3*567,485 for 1998, which adjustment will result in a credit to customers of $2,276 million..," "plus interest from August 1, 1999."
3. Entergy "shall impute prospectively," beginning with the May 2000 billing month, "the lower price for gas purchased pursuant to the Evangeline gas contract set forth in the proposed findings of Fact and Conclusions of Law" and "[tfiere will be no change in [Entergy']s recovery of the reservation fee and the lease fee charged to [Entergy] the Evangeline contract"
4. "Entergy" will no longer sell the output of its unit to the regulated Entergy Operating Companies through the Power Coordination, Interchange, and Transmission Service Agreement ("PCITA"). [16]
5. Entergy shall implement all of the other commitments described in the Proposed Findings of Fact and Conclusions of Law including the implementation of the risk management and documentation plans and submission of the transmission study and the analysis of certain purchase power decision rules.
6. Payment of the Settlement Amount and implementation of the other commitments of Entergy described in the Proposed Findings of Fact and Conclusions of Law shall represent full and final settlement of all amounts due, both as to principle and interest, as a result of the LPSC's reasonableness review of Entergy's FAC filings, and shall be in consideration of the release of any and all claims as issues arising out of or relating to the FAC filings of Entergy from January 1, 1975, through December 31, 1999, except as to the (a) the Evangeline contract and (b) purchased power and associated costs for May 1, through September 30, 1999.
7. Entergy would "be permitted to recover through base rates the prudently incurred costs of litigation associated with this [ Delaney ] proceeding, including both the costs incurred" by Entergy and the attorney fees and costs incurred by the Staff and properly chargeable to Entergy. However, Entergy will not be permitted to recover any attorneys fees and costs of the Delaney plaintiffs that Entergy may pay to the Delaney plaintiffs or their attorneys.
8. "If, any year, Entergy is required to enter contracts for the purchase of off-system power to meet line anticipated plant loads and a proceeding is initiated to approve the contracts entered, any intervenor shall be entitled, subject to a confidentiality agreement, to discuss the documentation provided to Commission Staff. . . . "
*224 9. The settlement with Entergy Louisiana; Inc., [Docket/Order No. U-23356] concludes the Commission's investigation and the docket shall be dismissed as to all issues that were or could have been raised in this docket. However, the results after exchange of documents and the like, shall be reviewed in a subdocket of this [ Delaney ] docket.
10. "This order is to become effective immediately."
Additionally, the Order also stipulates that the Findings of Fact and Conclusions of Law, which consists of 382 clauses, be made a part of and adopted into the record. Some of the facts and law set forth by the LPSC include the nature of the complaint raised by the Appellants, as well as other factual determinations (including, but not limited to the following): [17]
• At the time the Delaney matter was heard before the LPSC, Entergy owned a 95% undivided interest in the Grand Gulf Nuclear Power Plant. Additionally, Entergy owned, or was a part owner of ninety (90) generating units at 35 sites throughout Arkansas, Louisiana, Mississippi, and Texas.
• Output — In 1999, it was estimated that Entergy's output was 22,569 MW. This amount included 701 MW of capacity held in extended reserve shutdown.
• What is produced — (1) oil; (2) natural gas; (3) coal; (4) hydroelectric power, and (5) nuclear power. [18]
• In addition to its own generating units, Entergy's Operating Companies along with System Energy Resources, Inc., (SERI), [19] owns, or is part owner of ninety generating units at thirty five sites in the service states.
• Pursuant the FERC-approved Unit Power Sales Agreement (UPSA), the Operating Companies were allocated the following shares of capacity, energy, and costs of Grand Gulf Nuclear Station: EAI — 36%; ELI — 14%; EMI — 33%; and ENO — 17%. EGS is not allocated a portion of the Grand Gulf Station's capacity, energy, or costs. (The Federal Energy Regulatory Commission, the "FERC," is an independent agency that regulates the interstate transmission of electricity, natural gas, and oil.)
• Any ability of a competing utility to sell electric energy to an LPSC jurisdictional retail ratepayer of ELI at a particular location arises by reason of rules and restrictions imposed by the regime of regulation existing and enforced by the LPSC during the period in question, including, but not limited to, the 300-foot rule.
As to Entergy's FAC filings, the LPSC Staff also noted:
• FACs for electric utilities have been in use for more than twenty-five (25) years.
• The purpose of FACs are to track changes in the cost of fuel and purchased energy, and thereby to provide for the recovery of fuel costs, which tend, to fluctuate more than cost normally included in base rates. [20]
*225 • An FAC is a formula rate., Thus the rate is the formula and not a specific dollar rate. The FAC formula establishes the fuel cost components that can be included comment provides the formula by which the costs are translated into a rate per kilowatt hour. Id.
• An FAC, combined with deferred fuel cost accounting is intended to permit the company to recover the actual allowable cost of fuel, no more and no less, it ensures that customers will pay for actual cost of fuel, no more no less.
• Noting that it has from time to time articulated and applied state policies on the company by company in case by case basis, the Commission indicated that it has also issued general orders related to FAC charges.
• The prices ELI charges and/or may charge its ratepayers for electric service are determined and fixed by the LPSC, and are reflected in the ELI tariffs on file with and approved by the Commission. Those tariffs include an adjustment to ELI's charges in the amount of ELI's monthly FAC charge.
• The LPSC approved other FACs in tariff filings by ELI. The Commission's Order No. 7763, dated February 27, 1959, the Commission approved ELI's request to include an FAC in its tariffs setting forth rates applicable to all domestic, commercial, and small general service customers. During the Delaney proceedings, all of ELI's rate schedules and or tariffs on file with and approved by the Commission include an FAC.
• In a May 26, 1999 Order, Order No. U-23626, the LPSC ordered ELI to realign $60 million from its FAC to base rates on a revenue neutral basis. The aforementioned order followed the LPSC's. General Order No. U-21497, dated November 6, 1997, in which the LPSC defined and in certain respects, changed the types of costs that may be included in the utility's FAC filings.
• Pursuant to requirement imposed by the LPSC, the amounts of ELI's FAC charges are disclosed to the LPSC, its Staff, and ELI's customers. Additionally, by the Commission's General Orders dated July 10, 1975, and November 20, 1975, the LPSC specifically mandated what information, jurisdictional utilities, including ELI, must close on their monthly statements to their customers. By requiring these utilities to make detailed monthly filings, the LPSC makes the components of these charges a matter of public record for any customer to review.
• Under the prudent investment rule, a utility is compensated for all prudent investments at their cost when made, a respective of whether they are deemed necessary are beneficial in hindsight. Does, the focus in the prudent inquiry is not whether a decision produced a favorable or unfavorable result, rather, whether the process leading to a decision was a logical one, and whether the utility company reasonably relied on information and planning techniques known or knowable at the time. [21] The utility must demonstrate that it went through a reasonable decision making process to arrive at a course of action and, given the facts as they were or should of been known at the time, responded in a reasonable manner.
• Capital and other expenditures reflected in utilities' pro forma requests for rate increases are generally accepted by the LPSC as appropriate and *226 necessary, and therefore recoverable expenses. But utilities investments are presumed to be prudent and allowable. However, when the LPSC itself raises serious doubts about the prudence of a particular investment or other expenditures, a searching inquiry becomes necessary, and at that point, the burden shifts to the utility to prove that the expenditure was in fact necessary and appropriate, or resulted in no additional costs. Id.
• The plaintiffs bear the burden of proof to show a "serious doubt" that ELI did not act prudently with respect to any of the costs included in its FAC filings. Id.
• Bare allegations are insufficient to support a claim a of imprudence.
• To the extent that there has been no antecedent reasonableness review of such costs, the LPSC has the authority to disallow costs passed through utility's FAC. [22]
• The LPSC's Staff conducted reviews of ELI's FACs each month concerning the contents of ELI's filings. It has also exercised its right to conduct audits of ELI's FAC filings. Additionally, the LPSC authorized audits of fuel purchases to be conducted by independent nationally recognized certified public accounting firms and has also authorize an outside consultant an outside counsel to review ELI's fuel positions and fuel adjustments.
• The LPSC held hearings to prove the monthly FAC filings of ELI and other jurisdictional electric utilities. By General Order dated April 23, 1975, the LPSC ordered public hearings beginning on a monthly basis regarding the cost figures for fuel and cost figures for purchase power to be applied by means of the cost adjustments. As a result of the order beginning May 1975, ELI presented its FAC filings at such public hearings.
• On September 24, 1991, the LPSC's Secretary advised that while the commission will no longer be conducting monthly FAC hearings, the LPSC "will review each filing a notify the utility of its acceptance or rejection of the filing" and that a consumer or any interested party may request that the LPSC conduct a hearing relating to any such filing.
The Proposed Findings of Fact and Conclusions of Law in the Delaney proceedings also outlines the LPSC's General Orders Nos. U-21497 and U-23626. In Order No. U-21497, [23] the LPSC Staff conducted a generic investigation regarding the FACs of jurisdictional electric utilities. The resulting order revised the format in which FAC filings are to be made, providing for the realignment of certain, costs from FAC recovery to base rates, and establishing certain reporting and other requirements relating to LPSC jurisdictional FACs. The General Order includes a list of the types of costs considered includable and LPSC jurisdictional FAC filings and the types of costs considered to be excludable costs. The realignment of such costs from the utility's FAC to its base rates apply prospectively only, as evidenced by the LPSC's provision that such costs are to be realigned on a revenue neutral basis. Costs can be realigned on a revenue neutral basis only if recovery through base rates is commenced at the same time such costs are removed from *227 the FAC calculation. However, the LPSC Staff noted that the action of ordering the realignment of costs did not, in and of itself, imply that any realigned costs had been improperly recovered through the FAC in prior periods. The Order does, not establish that any particular costs component was improperly included in FAG filings prior to the revenue realignment prescribed by the LPSC's General Order.
Lower of Cost-Market Test
General Order U-23626, [24] as discussed in Delaney, provided that the cost of fuel purchase from affiliates included in the fuel adjustment charge, shall be at the lower of cost or market, unless that fuel is allocated pursuant to a' FERC-approved tariff. If the cost was allocated by a FERC-approved tariff, the utility must include the direct cost of fuel established Joy the FERC. The Order also states that the costs of energy purchased from affiliates included in the FAC charge shall be the lower cost or market.
The LPSC Staff noted that the sale of gas in intrastate commerce has been deregulated, and the FERC does not approve or set tariffs for the sale or allocation of gas or any other fuel in interstate commerce. Additionally, the FERC approves tariffs and contracts for the sale of electric energy and wholesale markets, and the FERC also has sole jurisdiction over the price of energy sold in wholesale markets. Furthermore, all purchases of Entergy by ELI from affiliates are made pursuant to FERC-approved tariffs.
The LPSC Staff added, however, that the lower of costs, or market test, however, would apply to any energy purchased by ELI from any ELI affiliate outside of MSS-3, [25] by the FERC-approved UPSA, and the LPSC's General Order U-21497. The MSS-3 price/charge is not the appropriate price signal to be used to determine whether less expensive power is available for purchase off-system and lieu of System generation of power. Rather, the off-system energy should be compared to the appropriate system lambda [26] or incremental cost, [27] and the off-system power should be purchased by ESI if it can be delivered to the system at a cost below system lambda, or avoided costs, taking into account an appropriate margin used for purposes of making purchase decisions over the applicable time period.
In LPSC Order No. U-23626, the LPSC approved the realignment of costs' proposed by ELI, pursuant to the 1997 General Order. This realignment was implemented prospectively, and on a revenue neutral basis. The costs that were removed from the FAC are now recovered through a per kilowatt hour charge included in a base rate rider. The LPSC noted the fact that certain costs that are currently included in its base rates formerly were included in ELI's FAC charges has not caused any harm to ELI's ratepayers, as these are costs that ELI is and has been entitled to recover from its ratepayers. The LPSC determined that there were no facts to support a claim that any of the *228 costs realigned from ELI's fuel clause to its base rates were unreasonable or excessive.
The LPSC's Staff also maintained the position that the appropriate market test to be applied is whether the Entergy System is utilizing the off-system economy energy market in a reasonable manner in pursuit of its goal to achieve the lowest reasonable costs of energy for the integrated. System. [28] It was also the LPSC Staffs position that if less expensive off-system economy energy were otherwise available, below system lambda or aborted costs as appropriate, that the LPSC has the jurisdiction and reserves the jurisdiction to determine whether allocations pursuant to MSS-3 or the UPSA were prudent, and therefore, to disallow purchases/allocations of such energy and costs to ELI from other Entergy Operating Companies.
However, the LPSC also noted in its findings that the U.S. Supreme Court has stated "[w]ithout deciding the issue, we may assume that a particular quantity of power procure by utility from at a particular source could be deemed unreasonably excessive if lower cost power is available elsewhere, even though the higher costs power actually purchased is obtained at a FERC-approved, and therefore reasonable, price. " [29] The Commission noted that the Supreme Court also stated, in a case which specifically addressed the FERC's preemption with respect to the UPSA, that "it might well be unreasonable for a utility to purchase unnecessary quantities of high-cost power, even at FERC-approved rates, if it had the legal right to refuse to buy that power." [30]
Based upon the Supreme Court's cases discussed above, the LPSC stated that it was its Staffs position that it necessarily follows from these [Supreme Court] decisions that although a state commission may not alter a FERC approved rate, it can and should consider the effect on consumers of the utility's choice to pay those rates when lower cost power was available elsewhere. [31] (emphasis added)
The LPSC observed that ELI did not agree with the above-stated principle because ELI did not have the legal right to refuse to purchase energy allocated to it pursuant to a FERC-approved rate schedule such as the UPSA or the System Agreement. ELI's stated position was that federal preemption precludes the LPSC and other state regulators from disallowing costs incurred as a result of allocations of power pursuant to the UPSA or the System Agreement.
The LPSC indicated that while the Supreme Court stated that "it might be reasonable for a utility to purchase unnecessary quantities of high-cost power, even at FERC-approved rates, if it had the legal right to refuse to do buy that power," specifically, in Mississippi Power and Light Co. v. Mississippi ex rel. Moore, 487 U.S. 354, 373-374 , 108 S.Ct. 2428 , 101 L.Ed.2d 322 (U.S.1988), the Supreme Court concluded that Mississippi Power & Light (MP & L) did not have the legal right to refuse to buy the power at issue in *229 that case, [32] and stated: "[i]f the integrity of FERC regulation is to be preserved, it obviously cannot be unreasonable for MP & L to procure the particular quantity of high-priced Grand Gulf power that FERC has ordered it to pay for." Id.
The System Agreement [33]
The LPSC also outlined the Entergy System Agreement in its Proposed Findings of Fact and Conclusions of Law. It acknowledged that since the 1930s, the Entergy Operating Companies have operated as a single, integrated system ("the Entergy System" or "the System"). In 1973, FERC [34] approved the System Agreement among ELI and the other Operating Companies in the Entergy System. The System Agreement addressed the allocation of energy among the Operating Companies, and is identical to the most recent System Agreement entered into on April 23, 1982. [35] The System Agreement is among each of the Operating Companies and Entergy Services Inc. (ESI), which is composed of the employees who manage and operate the Entergy System. [36]
The System Agreement governs transactions among electric utility companies located in four states: Louisiana, Arkansas, Mississippi, and Texas. It also governs the allocation of purchases and sales, and associated costs and revenues, among the Operating Companies in the four states. Thus the System Agreement directly and necessarily involves interstate commerce and, more specifically, "the sale of electric energy at wholesale in interstate commerce." [37]
The System Agreement is the responsibility of the Operating Committee, which is comprised of one representative from each Operating Company, and a representative of Entergy Corporation. The daily administration of the System Agreement is carried out by the Entergy Management Organization.
Since any off-system purchase or sale of electric energy under the System Agreement and the resulting allocation of electric capacity, energy and costs, or revenues pursuant to the System Agreement is made in interstate commerce, the FERC has exclusive authority to determine the reasonableness of wholesale power rates and wholesale energy rates under the System Agreement. This "exclusive jurisdiction applies not only to rates but also to power allocations that affect wholesale rates." [38]
*230 The LPSC's Staffs position, based on the above Supreme Court rulings, was that the LPSC is not precluded from disallowing purchases pursuant to the System Agreement if off-system power could have been purchased by the Entergy System, and delivered to the System, at a price below system lambda or avoided costs, taking into account an appropriate margin.
The System Agreement provides for the participation by each of the Operating Companies in the interstate wholesale electricity market. The fundamental principle of the System Agreement is that the System is planned and operated on an integrated total system basis, and its purpose "is to provide the contractual basis for the continued planning, construction, and operation of the electric generation, transmission, and other facilities of the Operating Companies in such a manner as to achieve economies consistent with the highest practicable reliability of service, subject to financial considerations, reasonable utilization of natural resources and minimization of the effect on the environment." [39] It also provides a basis for equalizing among the Operating Companies any imbalance of costs associated with the construction, ownership, and operation of such facilities used for the mutual benefit of all the Operating Companies.
The System Agreement also provides that its goals include the operation of the system capability to obtain the lowest reasonable costs of energy to the Operating Companies as a whole, consistent with the requirements of daily operating generation reserves, voltages control, electrical stability, loading of facilities, and continuity of service to the customers of each Operating Company.
The Entergy System's generation resources are dispatched, subject to reliability and operating constraints, in a way designed to achieve the lowest reasonable total cost of energy for the combined system as a whole. The aggregation of all System loads and all System resources into a single integrated System means that combined resources of all Operating Companies can be dispatched efficiently, allowing the Operating Companies' total load to be supplied with the most economical combination of resources available to the System. As a result of these coordinated operations, the Entergy Operating Companies experience enhanced reliability.
Additionally, the operation of the Entergy System as an integrated system allows emergency conditions to be met with less probability of impairment of service to the public. The integrated operation of the Entergy System also allows for fuel savings because the System is economically dispatched, subject to reliability and operation constraints, to achieve a lower cost of energy for the combined System as a whole. Therefore, each Operating Company saves fuel costs over what it would achieve if it operated on a stand-alone basis.
Under the supervision of the Operating Companies, ESI is directed to manage the centralized operations center to dispatch the capacity and energy capability of the Operating Companies, including the capacity and energy in an efficient, economical and reliable manner. The Entergy System dispatcher has the ability to dispatch all of the units of the Operating Companies that are available for dispatch. The individual Operating Companies' capacity resources *231 and loads are the component parts of the System power supply plan. Implementation of the System plan requires that the individual Operating Companies' needs be subsumed within the interests of the integrated system. See, Middle South Energy, Inc., 32 FERC ¶ 61,958 .
However, the LPSC's Staff noted that there may be instances when an individual Operating Company may be adversely affected; by a transaction that may be cost-minimizing for the Entergy System. However, these disadvantages by a particular transaction to an individual Operating Company, collectively, or to its ratepayers in particular instances, are significantly outweighed over time by the benefits to the Operating Company through its participation in the System Agreement and by the Operating Company being a member of the Entergy System.
The System's capability and resources are dispatched in "real time" in an attempt to obtain the lowest practicable operating costs for the entire System within the constraints of maintaining the proper daily operating reserves, voltage control, stability, proper noting of facilities, and continuity of service to all customers. Service Schedule MSS-3 allocates the energy and associated costs among the Operating Companies on an "after-the-fact" basis. Service Schedule MSS-3 also allocates Entergy from the lowest cost System capability available on an hourly basis in order of priorities: first, to the loads of the Operating Company that owns those sources; and second, to supply the requirements of other Operating Companies' loads.
The FERC has ruled that "the interchange transactions [among the Operating Companies under the System Agreement] are' wholly within the integrated System, are centrally dispatched, and are mandated by [ESI] rather than the individual companies." [40] However, the LPSC Staff objected to ELI's position that the economic dispatch [41] of System resources to serve System loads, including the effects of economy off-system purchases, the allocation of energy, and associated costs to the Operating Companies from the Entergy System exchange, is not discretionary. The LPSC Staff noted that the fact that MSS-3 allocations are not discretionary is not determinative of the prudence of costs incurred by the System. The LPSC Staff also noted that the LPSC reserves the jurisdiction to disallow such purchases or allocations if it determines that the Entergy System is not utilizing the off-system economy energy market in a reasonable manner in pursuit of its goal of achieving the lowest reasonable cost of energy for the integrated System.
Pursuant to the MSS-3 Service Schedule, an allocation or sale occurs only when in a given period, an Operating Company has energy supplied from its own sources in excess of its own needs. [42] An Entergy Operating Company cannot buy from the System Exchange pool and sell to the System Exchange pool in the same hour. An *232 Entergy Operating Company whose energy from its own generation is allocated to the^System Exchange is subsequently reimbursed for the cost of that Entergy based upon the estimated cost of fuel used, plus an O & M adder set by the FERC. The estimated cost of fuel for each generating unit is determined by multiplying that unit's average annual heat rate from the prior year by the current estimated cost per British thermal unit ("Btu") of that fuel used. The O & M adder used for MSS-3 is calculated using the formula specified in System Agreement § 30.08.
An Operating Company is allocated energy from the Exchange pool in an hour when that Operating Company has load in excess of the energy generated or supplied by its own sources (including its share of off-system purchases) in that hour. Pursuant to Service Schedule MSS-3, that Operating Company's cost for that energy is the weighted average cost per kilowatt hour of all energy allocated to the Exchange in that hour.
Although Exchange pool energy is nonfirm in that there is no guaranteed availability as to any particular Operating Company, the system dispatcher may call on any unit to produce electricity for the System to the extent that the unit is available for dispatch. All generation resources owned or controlled by the System constitute firm resources to the System. The System Agreement provides that the output of an Operating Company's resources are first dedicated to the load of the Operating Company that owns the resource, and to the extent not needed for that purpose, the output is dedicated to the needs of the other Operating Companies. Such an output may be sold off-system only to the extent that it is not needed by or deliverable to the System. ELI bears the exact same cost per kilowatt hour for energy allocated to it by Service Schedule MSS-3 in a given hour as does any other Operating Company that is allocated energy from the Exchange pool in that hour.
Joint account off-system energy purchases are allocated to each Operating Company in proportion to its Responsibility Ratio (as "defined in the System Agreement) in effect at the end of the preceding month. Hence, ELI receives its Responsibility Ratio share of all these purchases. No Operating Company is entitled to receive more or less than its Responsibility Ratio share of joint account purchases [43] of energy. [44] This allocation method for joint account energy purchases cannot be changed without the FERC's prior approval, which if granted, could operate only on a prospective basis.
If for a given hour an Operating Company has sources (i.e., energy from its generation and purchases) in excess of its load, and its allocated share of a joint account energy purchase is more costly than its other resources, the Operating Company's share of that joint account energy purchase goes into the Entergy System Exchange for that hour. The amount of any *233 costs calculated pursuant to Service Schedule MSS-3 associated with energy produced or purchased to serve joint account sales is deducted from the gross revenue received for such sales, and that amount of costs is distributed to the Operating Companies who sources supplied the sale. He remainder of the revenues; the net balance, is distributed among the Operating Companies in proportion to the Responsibility Ratio of each Operating Company.
Both the FERC and the SEC require that power supply operations of a nonexempt holding company be conducted as a single, integrated utility system. Therefore, it can also be said that the operation of the System as a single integrated system and the use of service schedules as part of the System Agreement constitutes any intent on the part of ELI or Entergy Corporation to harm the ratepayers or to manipulate costs in such a way to harm ratepayers. [45]
The LPSC Staff concluded that the operation of the System as a single, integrated system and the use of the service schedules as part of the System Agreement, does not constitute any intent on the part of ELI or Entergy Corp., to harm the ratepayers are to manipulate costs in such a way as to harm the ratepayers. Furthermore, there were no facts to support a claim that any aspect of the administration of the System Agreement was (i) the result of any intention to harm or deceive ELI's ratepayers, or the result of any manipulation or abuse of the System Agreement to the detriment of ELI's ratepayers; or (ii) the result of any agreement between xELI and any of its affiliates to harm the ratepayers, or (iii) fraudulent.
Dispatch of the Entergy System [46]
The Entergy System utilizes sophisticated computer programs order to optimize its system dispatch. These programs are used to address the economic dispatch problem over several time frames. The System has numerous generating units, each of which may have different incremental heat rates and fuel prices, and off-system energy purchases available at different costs, any or all of which may change over time and operating conditions. The economic dispatch problem is to find the optimum operating level for each unit, in combination with off-system purchases.
The solution to the economic dispatch problem is the determination of the optimum level of output for each unit (or purchased power resource) at each instant in time, while meeting constraints and assuring reliability, which minimizes the cost of serving the combined loads of the System. Available resources that are included in the solution of the economic dispatch problem are generating units that are on-line and purchases that can be scheduled from off-system third parties. [47]
The Entergy System, like almost every other major electric utility in the United States, uses the equal incremental cost solution in the dispatch of its generation resources. The equal incremental cost solution produces the lowest overall cost solution to the economic dispatch problem.. The manner in which the Entergy System is dispatched is consistent with industry standards. Over time, the LPSC Staff *234 opined, this method should benefit all ratepayers of all Operating Companies, including ELI and its ratepayers. The incremental production cost of generating unit is the product of the incremental cost [48] of fuel, the incremental heat rate, and the incremental transmission loss factor, [49] plus incremental non-fuel O & M.
The incremental heat rate of the generating unit is calculated as the quotient of incremental amounts of heat input to the generating unit (measured in Btu) and the incremental output of the generating unit (measured in kWh). Incremental heat rate [50] therefore is expressed as Btu/kWh. A polynomial equation, referred to the input output curve, is used in the planning and operations processes to represent the efficiency of each generating unit at each level of output.
Factors considered in the economic dispatch of an electric system include operating constraints; unit constraints; transmission constraints; purchase power constraints; and operating reserve constraints. Typical generating unit constraints include the amount of time required to start the unit, to shut down the unit, to change (also referred to as "ramp") the unit's output from one level to another, and the high and low operating limits of the unit. In addition, generating units require scheduled maintenance and equipment testing.
Constraints imposed by the Entergy transmission system affect the Entergy System's ability to import electric energy from or export electric energy to neighboring systems. The Entergy transmission system will not allow 100% of Entergy System's load to be served by imports of power; neither will system limitations such as voltage, frequency and area stability permit 100% of the Entergy System load to be served by imports of power. Under normal circumstances, a simultaneous import level of approximately 3,500 MW into the Entergy System is the most that can be accomplished reliably. Transmission limitations on other systems affect the ability of some purchased electric energy to flow on to the Entergy System.
Every electrical system in the United States is required to maintain adequate operating reserves. Even if less costly purchases may be available from off-system, the Energy System must have some units providing-operating reserves that can be called upon within a short period of time in the event of a contingency. Because the System is dispatched in real time and on a system basis, at the time the System dispatcher makes dispatch decisions, he is unaware of the effect that those decisions may have on the costs of any specific Operating Company.
It is the policy of both the Entergy System and System Agreement that the resources available to the Entergy System are dispatched to achieve the lowest reasonable total operating cost for the System, and not for any one Operating Company.
The LPSC Staff concluded that the Delaney plaintiffs did not support their claim that the Entergy System resells low-cost purchases (i.e., purchases at prices below System incremental cost) when those purchases could have been used directly to serve the power demands of System native *235 load customers. [51] These resales benefit customers because the "margins" (i.e., profits) from such sales are used to reduce ELI's retail rates. In yard making the decision whether to purchase energy off-system, the Entergy System requires that the price of such a purchase be lower than the estimated avoided cost. This differential or margin is necessary to ensure that the purchase produces a benefit to the system and its customers. There were no facts presented in Delaney which indicated that the use of the margin was intended to harm ratepayers are suppliers, or for any purpose other than attempting to produce the lowest reasonable cost of energy for the total System.
In order to determine whether a price offered by third-party supplier for future delivery of energy is attractive to the Entergy System, the offer is compared to an estimate of future avoided costs. The System requires & margin for purposes of deciding the maximum acceptable price for fixed price economy energy purchases for the next hour, the next day, next month, next session, or year. The use of the margin is intended to reduce the cost of energy. There was no evidence in Delaney to support the contention that the defendants intended, through the use of the margin, to harm ELI ratepayers. Furthermore, conceptually, the System's approach of requiring a margin for purposes of determining whether it will purchase off system supplies was prudent.
However, the LPSC noted that the record did not demonstrate that the specific numerical values of the margins used by the Entergy System for making purchase power decisions are the most appropriate margins for that purpose. It may be appropriate to adjust those margins as market conditions change. The LPSC Staff did not opine as to the specific quantification of the margins that should be used in making future hourly, daily, weekly, monthly, or annual off-system purchase decisions, and recommended that the Entergy System reevaluate those margins, and to provide the basis and justification for continuing to use current margins in the future, or to determine that they should be adjusted in order to more properly access the off-system economy energy market in order to achieve reliable service at the lowest reasonable cost for the System. Thus, the appropriate level of the margin would be subject to future review and prospective adjustment, if deemed appropriate.
The LPSC Staff concluded that there were no facts presented in Delaney which supported the plaintiffs' claim that the Entergy System historically has not made proper use of off-system purchases from nonaffiliated sellers to obtain the lowest reasonable cost of energy for the System. Furthermore, there were no facts presented which supported a claim that the Entergy System has not been operated in a manner consistent with the objectives and principles of economic dispatch. No serious doubt was raised about the prudence of the administration or operation of the System Agreement with respect to the costs that have been flowed through the FAC during the period under review.
Additionally, no facts were presented that supported the Delaney plaintiffs' claim that the System fails to monitor the price of electricity products in the wholesale electricity markets, and no facts were found which supported the plaintiffs' claim that the System fails to make use of those *236 markets in an appropriate manner. The LPSC Staff noted that the mere fact that the Entergy System bought a certain amount of energy at a certain price does not by itself demonstrate that additional energy might have been available on that or subsequent hours in the same day, and if so, how much additional energy might have been available or at what price.
Furthermore, the LPSC's Staff concluded that there were no facts which supported a claim that ELI's ratepayers were harmed by the System's decision not to maintain written records of purchase power offers that were not accepted, or potential transactions that were not entered into. [52] The LPSC Staff found that there was no reliable evidence that the System's resale to others of relatively low-cost non-affiliated energy, or the sale to others of relatively low-cost System energy caused harm to System customers. Because the System makes dispatch, purchase, and sale decisions on an incremental basis, the cost of the System will be the same whether resources are stacked incrementally and the highest incremental cost source is sold or whether resources are stacked incrementally and the lowest cost resource is sold. The LPSC Staff concluded that the Delaney plaintiffs offered no ' evidence that relatively low-cost off-system purchases that were resold could have been used by the System to serve native load. The plaintiffs presented no facts to support a claim that ELI or the Entergy System have acted imprudently in connection with any off-system sale of energy.
ELI's share of profits from the off-system sales is credited to ratepayers. Prior to the realignment of costs pursuant to LPSC General Order No. U-21497, these profits were reflected in the determination of base rates. Since the realignment, they have been credited entirely to the monthly FAC to reduce fuel costs collected from ELI ratepayers. The LPSC Staff concluded that there were no facts presented to support a claim that ELI ratepayers were harmed by any Entergy System dispatch decisions as they relate to the use of owned generating facilities, purchases of and/or sales of off-system power. The LPSC Staff also concluded that there were no facts presented to support a claim that ELI or any of its affiliates manipulated the FAC or included inflated costs as a result of any dispatch decisions that were imprudent or improper. There was also no facts presented which would support the claim that any economic dispatch decisions by ELI or any of its affiliates were done with any intent to harm or deceive ratepayers.
The decision to purchase system energy on an hourly basis is based on a comparison of the purchase price to system lambda, [53] adjusted for a margin. The cost of affiliate energy allocated among the Operating Companies by the System Agreement is based on average operating cost and not incremental costs, pursuant to the terms of Service Schedule MSS-3 of the FERC-approved System Agreement. Consequently, the LPSC Staff concluded that a comparison of the cost of off-system *237 purchases to the MSS-3 cost allocated to affiliates within the System is not valid for purposes of evaluating the Entergy System's off-system purchases.
After a 1978 audit, Price Waterhouee auditors concluded, "[biased on our review, we believe that MSS [Middle South Services, predecessor to ESI] has established adequate procedures to dispatch power economically within the MSU [predecessor to Entergy Corporation] system. Procedures are adequate to ensure that [off-system] economy power will be purchased only when there is a cost savings to the MSU system. . . ." [54] The same basic procedures that Price Waterhouse found in place in 1978 remained in place through 1999. The LPSC Staff concluded that no facts were found to support a claim that dispatch decisions as to off-system purchases versus System generated energy were not reasonably made to lead to the lowest overall cost, subject to" constraints, to the Entergy System as a whole and thus to the ratepayers of the Entergy Operating Companies. The LPSC Staff concluded that there were no facts presented which indicated that ELI had omitted any material facts about System's dispatch decisions in the course of dealing with the LPSC. Additionally it was concluded that there were no facts to support a claim that any aspect of the dispatch of the Entergy System was: (i) the result of any intention to harm or deceive ELI's ratepayers, or the result of any manipulation or abuse of the System processes to the detriment of ELI's ratepayers; or (ii) the result of any agreement between ELI and any of its affiliates to harm the ratepayers, or (iii) fraudulent. [55]
Affiliate Transactions [56]
The generating units of the Operating Companies operated as a single integrated electric system and, with the exception of purchases from Qualified Facilities in certain capacity purchases, purchases of electricity from the wholesale market are made as joint account purchases on behalf of all of the Operating Companies collectively. In deciding whether to increase production from the resources of the Entergy Operating Companies or to buy from the off-system wholesale market, the Entergy System's dispatchers operate the Entergy System in a way designed to implement the principles of economic dispatch so as to obtain the lowest reasonable overall cost for the entire Entergy System. In making their dispatch decisions, they do not know whether such decisions may favor one or more individual Operating Companies to the detriment of one of the others, and do not consider the potential effects of their decisions on individual Operating Companies. The LPSC Staff concluded that the manner in which the `Entergy System is dispatched is generally consistent with industry practice and no evidence was presented which suggested any imprudence in the dispatch system employed by the Entergy System, or that the Entergy System had been dispatched in a matter that was intentionally wrongful.
Since dispatch and purchase decisions properly made on the basis of comparisons with incremental cost, and the after-the-fact [57] accounting is based on average fuel *238 costs, the Delaney plaintiffs characterized the allocations of energy and costs to ELI under the Entergy System Agreement as a "bait-and-switch" scheme or a "shell game." [58] The LPSC Staff concluded that the Delaney plaintiffs' allegation, with respect to bait and switch, was without merit. They determined that the concept of bait and switch required that an attractive offer be made to the consumer and that the consumer be deceived by the substitution of a different product or different price. The LPSC Staff determined that no offer was made to a consumer in Delaney. Rather, the "purchasers" were Operating Companies, and there was no reason to believe (and no evidence was offered to show) that the Operating Companies did not understand that the dispatch of the System was based on incremental cost and that the after-the-fact accounting pursuant to the FERC rate schedule MSS-3 was premised on average fuel cost. Hence, the LPSC Staff concluded that no facts are presented to support a claim that ELI or any of its affiliates (or any other person) attempted to mislead, harm, or defraud any ELI ratepayer or other person with respect to affiliate purchases, either individually or as a result of an agreement between them.
Additionally, the LPSC Staff rejected the Delaney plaintiffs' argument that an Operating Company should be able to make purchases on its own. The Staff noted that the plaintiffs' argument contradicted a position taken by the LPSC in April 2000, in a complaint filed before the FERC and against the Entergy System. The complaint was brought under Section 206 of the Federal Power Act and alleged that any activity that would deprive Louisiana ratepayers of the benefits and rights of having energy excess to an Operating Company's needs put into the MSS-3 pool would render the System Agreement unjust and unreasonable. Therefore, the LPSC urged that it sued the Entergy System to guarantee Louisiana ratepayers' right to access low-cost energy from other Operating Companies that is surplus to those Operating Companies' energy requirements. The Staff reiterated that historic reliance on joint account purchases as opposed to direct purchases is consistent with the approach taken on the System for at least fifteen (15), or more, years. [59]
The LPSC Staff noted off-system, non-affiliate energy is less firm as to the Entergy System than the affiliate MSS-3 energy, even though MSS-3 energy is nonfirm with respect to any particular Operating Company other than the owner of the generating unit. The LPSC Staff also opined that the "Premium" identified by *239 the Delaney plaintiffs as the difference between the average MSS-3 price and the average non-affiliate all the System energy price cannot be used in a damage calculation as the plaintiffs proposed because it assumes, without any basis in fact, that additional supplies of non-affiliated power were both available (at the average price of purchases transacted) and importable by the System in the hour in which the alleged damage occurred. [60]
The "cost" of non-affiliate power is an average; in reality, non-affiliate supplies consist of a number of different supplies, some of which are lower in price than the average and some of which are higher in price than the average. The LPSC Staff determined that no reasonable inference concerning the prudence of the System's wholesale purchases may be drawn from the fact that the average cost of energy pursuant to Service Schedule MSS-3 is different from the average price of energy paid for non-affiliated purchases.
While the Delaney plaintiffs' damage calculations concerning affiliate Entergy purchases assumed that additional supplies of off-system energy were always available at the average price of purchases made and that the acquisition of those additional supplies would not have influenced the market prices paid by the Entergy System, the LPSC Staff concluded that both assumptions were unrealistic and that there was no evidence to provide support for either assumption. Hence, the Staff found that there were no facts to support a claim that any affiliate transactions were: (i) the result of any intention to harm or deceive ELI'S ratepayers, or the result of any manipulation or abuse to the detriment of ELI's ratepayers; or (ii) the result of any agreement between ELI and any of its affiliates to harm ratepayers; or (iii) fraudulent. [61]
SFI Period Costs [62]
The LPSC Staff noted that "SFI," System Fuels Inc., had provided fuel procurement and fuel storage services to the Operating Companies throughout the period under investigation in Delaney, and until SFI Period Costs were realigned into base rates pursuant to LPSC General Order No. U-21497, all costs paid by ELI for these services, including Period Costs, were recovered through the FAC.
SFI charges each Operating Company for the services on an actual cost basis pursuant to an SEC approved procedure. Period Costs are costs other than the purchase price paid by SFI for fuel. [63] Period Costs were reflected in the calculation of ELI's FAC charges, and were stated as a separate component of the SFI fuel and invoice included in the monthly FAC filings, throughout the period prior to their realignment into base rates and the LPSC sanctioned that method of recovery in numerous base rate proceedings and monthly FAC hearings prior to October 1991. [64]
*240 In a 1977 LP & L base rate proceeding, LPSC Docket No. U-13220, the LPSC recognized that SFI Period Costs were reflected and recovered via ELI's FAC filings. The LPSC also recognized that ELI had an investment in SFI and that ELI recovered a return on its investment in SFI. The LPSC indicated that in order to prevent a double recovery of ELI's return on its SFI investment, it ruled that ELI's investment in SFI was to be included in its base rate and that the earnings of SFI allocated to ELI were to be added to ELI's net operating income. [65]
Additionally, the LPSC ordered an audit of ELI's FAC at the end of the year in 1977. The audit, which was performed by Price Waterhouse, made it clear that SFI Period Costs were included in ELI's FAG charges. Although Price Waterhouse recommended further review of the inclusion of these costs in the FAC, Price Waterhouse found that ELI was calculating the FAC filing in accordance with the LPSC's orders. Further, the LPSC did not order any refunds of SFI Period Costs as a consequence of the 1977 audit. Therefore, the LPSC, in Delaney, determined that no serious doubt was raised about the prudence of SFI Period Costs. [66]
Wrongful Profits [67]
In its FAC filings, ELI includes the total to fuel costs associated with purchased and generated power, then subtracts the fuel cost associated with power that is reallocated pursuant to MSS-3 or that is sold off-system, so that ELI ratepayers are not required to pay the cost of this power. The amount of fuel cost that is removed from the FAC calculation is based on the average cost of power from particular generating units and purchased power contracts, not the incremental cost.
The difference between the incremental cost included in the FAC and the average cost that is removed when power is sold off-system or through MSS-3 may be positive (resulting in what has been referred to as "wrongful profits") or negative (resulting in corresponding "wrongful losses"). This method of removing from the FAC fuel costs associated with power that is sold or reallocated pursuant to MSS-3 has been used since prior to 1979, when ELI was ordered by the LPSC to implement deferred fuel accounting and, in doing so, to continue to compute the monthly fuel adjustment factor "in the same exact manner" as it was using at the time. Any additional revenues received by ELI when power is sold off-system or through MSS-3 are reflected in calculating base rates, such that any so-called "wrongful profits" are returned to customers through base rates. Any difference, whether positive or negative, between fuel cost and fuel cost recovery is and has been "trued up" through base rates.
The LPSC Staff noted that beginning with the 1997 test year, ELI changed its base rate methodology in such a way, as to remove from its cost of service all fuel expenses and revenues. Consequently, the LPSC Staff determined that for the years 1997 and 1998, the correction and base rates for this differential was inadvertently eliminated by ELI and resulted in *241 ratepayers not receiving a credit to revenues in the FRP [68] calculation for the off system sales totaling $18,854.00 for 1997 and $3,567,475.00 in 1998.
To remedy this problem, in Delaney, the LPSC Staff proposed that an adjustment be included in ELI's 2000 FRP proceeding to reflect the appropriate adjustment for customers through base rates. The adjustment would have no effect on the FRP rate adjustment with respect to the 1997 test year, but would result in a credit to customers of "$2,267 million with respect to the 1998 test year, plus interest from August 1, 1999."
However, the LPSC Staff determined that there were no facts to support a claim that ELI's actions with respect to removal of the FAC of costs associated with off-system sales and MSS-3 allocations were: (i) the result of any intention to harm or deceive its ratepayers, or the result of any manipulation or abuse of the FAC to the detriment of its ratepayers; (ii) the result of any agreement between ELI and any of its affiliates to harm ratepayers; or (iii) fraudulent.
Supporting Invoices [69]
Pursuant to the LPSC General Order dated November 6, 1997, electric utilities are required to submit invoices supporting their monthly FAC filings. Prior to the date of the General Order, utilities submitted invoices in support of their monthly FAC filings.
The LPSC Staff observed that on occasion, ELI had included a fuel purchase and FAC filing without the supporting invoice. However, in each and every case, the supporting invoice was provided in a subsequent FAC filing. In no instance had a fuel purchase been passed through the ELI FAC filings without a substantiating invoice being supplied in a subsequent month. [70]
The LPSC Staff determined that delaying recovery until an invoice was submitted would defeat the purpose of timely recovery of actual fuel and generation dependent costs incurred by electric utilities on a monthly basis. Hence, the LPSC Staff concluded that ELI ratepayers Were not harmed by any delay in the filing of supporting invoices and it further concluded that no serious doubt was raised about the prudence of ELI's handling of its supporting invoices.
Purchases and Sales from Qualifying Facilities [71]
ELI has purchased electric energy from various, qualifying facilities ("QFs"). The LPSC Staff pointed out that although the Delaney plaintiffs alleged that there were discrepancies between information contained in ELI's Intra-System Bills ("ISBs") and in the information provided in the FAC filings relating to such QF purchases, it opined that the cost of QF purchases were prudently incurred. Additionally, since ELI included the total cost associated with purchases from QFs in its *242 FAC, the LPSC Staff noted that any additional revenues received by ELI when QF power is sold off-system or through MS3 are reflected in calculating base rates. In the event that there is a difference between fuel costs and fuel recovery is "trued up" through base rates. Hence, the LPSC Staff concluded that there were no facts to support a claim that the inclusion of costs from QFs were: (i) the result of any intention to harm or deceive its ratepayers, or the result of any manipulation or abuse of the FAC to the detriment of its ratepayers; (ii) the result of any agreement between ELI and any of its affiliates to harm ratepayers; or (iii) fraudulent.
The LPSC's Conclusion [72]
The LPSC Staff concluded that in its reasonableness review of all costs flowed through the FAC during the period of January 1, 1975 through the end of 1999, there were no facts to support any claim that ELI or its affiliates caused any undue harm to ELI's ratepayers with respect to ELI's FAC filings and costs. Additionally, the LPSC Staff determined that the Delaney plaintiffs' criticisms of the Entergy System's procurement practices were inconsistent with the System Agreement and inconsistent with positions taken by the LPSC.
Considering the extensive review of the Entergy System Agreement in Delaney, we conclude that it is the System Agreement itself which shall serve as the binding law in our discussion of the case sub judice.
I.
In its first assignment of error, the Appellants argue that under Daily Advertiser v. Trans-La , a Div. of Atmos Energy Corp., 612 So.2d 7 (La.1993), the City Council violated its position as an administrative adjudicator in failing to award the Appellants refunds for overages charged by ENO through its FAC.
In Daily Advertiser , natural gas customers brought a purported class action suit against an intrastate pipeline, a local distribution company, and their unregulated affiliates, alleging, inter alia, antitrust violations in connection with alleged manipulations of automatic FACs. The district court overruled the defendants declinatory and dilatory exceptions, and the defendants appealed. The Court of Appeal, 594 So.2d 546 , affirmed. The Louisiana Supreme Court granted writs of certiorari, and held that: (1) automatic FACs allegedly manipulated by defendants were integral components of rate structure and, thus, the gas purchasers claims were within exclusive jurisdiction of LPSC and were subject to the requirement of exhaustion of administrative remedies insofar as they arose out of FAC computations and sought reparation for overcharges; and (2) primary jurisdiction doctrine warranted deferral, to the LPSC of claims seeking damages other than overcharges.
The New Orleans City Council
The New Orleans City Council is the legislative branch of local government and has the power to enact ordinances to protect the public health, safety, and welfare of the citizens of New Orleans. "[T]he Council of the city of New Orleans is vested with the sole legal authority to regulate the rates charged by companies furnishing utility services in the city of New Orleans." State ex rel. Guste v. Council of City of New Orleans, 309 So.2d 290, 294 (La.1975). The City Councils power is conferred by the Code of the City of New Orleans. Specifically, with respect *243 to regulatory authority, Article III, § 3-130, titled Administration of the Home Rule Charter specifies:
Section 3-130. Establishment of Rates
(1) The Council of the City of New Orleans shall have all powers of supervision, regulation, and control consistent with the maximum permissible exercise of the City's home rule authority and the Constitution of the State of Louisiana and shall be subject to all constitutional restrictions over any street railroad, electric, gas, heat, power, waterworks, and other public utility providing service within the City of New Orleans including, but not limited to the New Orleans Public Service, Inc., and the Louisiana Power arid Light Company, their successors or assigns.
(2) In the exercise of its powers of supervision, regulation and control of any street, railroad, electric, gas, heat, power, waterworks, or other public utility, the Council shall, in cases involving the establishment, change or alteration of rates, charges, tolls, prices, fares or compensation for service or commodities supplied by such utilities, cause notice of the matter to be served upon the person, firm or corporation affected thereby, so that such person, firm or corporation shall have an opportunity, at a time and place to be specified in said notice, to be heard in respect to said matter. The Council shall make all necessary and reasonable rules and regulations to govern applications for the fixing or changing of rates and charges of public utilities and all petitions and complaints relating to any matter pertaining to the regulation of public utilities, and shall prescribe reasonable rules and regulations to govern the trial, hearing and rehearing of all matters referred to herein, under the same procedure as provided for ordinances granting franchises.
(3) The City of New Orleans may institute or participate in any proceeding affecting the City Councils powers of supervision, regulation and control granted hereunder over public utilities or affecting in any way the interests of the ratepayers of the City of New Orleans, and any recovery or benefit derived from any such proceeding shall be allocated by the City Council as it deems fit and proper, pursuant to such reasonable rules and regulations as the Council may adopt.
(4) The City Council's powers of supervision, regulation and control over any street, railroad, electric, gas, heat, power, waterworks, or other public utility shall include, inter alia, the power, to allocate any funds, awards, recovery or any other benefit obtained by any public utility supervised, regulated or controlled under the provisions of this Chapter from any person, firm or corporation in connection with or in any way related to negotiations, judicial or administrative proceedings, directly or indirectly related to or in connection with any matter which is under the powers and authority herein granted to the City Council affecting the ratepayers in the City of New Orleans, and such allocations shall be made by ordinance or resolution, provided same shall be in accordance with the provisions hereof.
(5) The powers of supervision, regulation, and control over any street, railroad, electric, gas, heat, power, waterworks, or other public utility, shall include the authority to assess *244 against such public utilities all costs, fees, and expenses incurred by the City of New Orleans in (a) the exercise of its powers of supervision, regulation, and control thereof, (b) the conduct of or participation in judicial, administrative or other proceedings which directly or indirectly affect the ratepayers of the City of New Orleans, including but not limited to the costs, fees and expenses of all services provided by consultants, engineers, attorneys, experts and such other persons, firms or corporations having expertise in the supervision, regulation or control of a public utility and (c) any costs, fees, and expenses otherwise related to such other matters over which the Council has jurisdiction.
(6) The orders of the Council fixing or establishing any rate, fare or charge for any commodity furnished, service rendered, or to be rendered, by any street, railroad, electric, gas, heat, power, waterworks, or other public utility, or allocating any funds or other benefits, shall go into effect at such time as may be fixed by the Council and shall remain in effect and be complied with, unless and until changed, set aside or suspended by the Council or by a court of competent jurisdiction. Such order of the Council shall be upon a resolution or an ordinance in open council meeting and passed by an affirmative vote of a majority of all members of the Council.
(7) The orders of the Council shall be enforced by the imposition of such reasonable penalties as the Council may provide, and any party in interest may appeal from orders of the Council to the Civil District Court for the Parish of Orleans by filing suit against the Council within thirty (30) days from the date of the order of the Council, and not thereafter.
(8) The Council shall supervise, regulate, and control any street, railroad, electric, gas, heat, power, waterworks, or other public utility, including but not limited to New Orleans Public Service, Inc. and Louisiana Power and Light Company, and their respective successors and assigns. The Council shall have the right and authority to obtain from the street railroad, electric, gas, heat, power, waterworks, or other public utility, supervised, regulated and controlled by it all information, papers, books, records, documents, and such other materials as shall be necessary and proper for the exercise of said powers, regulatory or otherwise and all costs, fees, and expenses in connection therewith shalI be borne by the public utility required to furnish or produce same.
(9) No matter subject to the supervision, regulation and control of the Council, as provided herein, shall be affected, augmented, diminished, or modified in any manner or form except as provided herein or by subsequent order or action of the Council or by order or judgment of a court of competent jurisdiction.
Code of the City of New Orleans, Home Rule Charter, Article III, § 3-130.
The Appellants alleged that ENO improperly included in its fuel adjustment mechanism charges from its unregulated affiliate, SFI. [73] As discussed earlier, SFI owns and leases oil storage facilities and transportation equipment, and also provides fuel oil that ENO uses at generating *245 facilities. The charges at issue are referred to as "SFI Period Costs," and include general and administrative costs, operation costs, depreciation and amortization expenses, and interest charges on SFI's loans, and taxes other than income taxes (such as property taxes).
The Appellants alleged that in October 1995, SFI billed ENO more than $618.08 for the delivery of 20 barrels of oil, for an average price of $25.65 delivery charge per barrel. The Appellants further alleged that SFI added $68,810.00 for Period Costs, or the equivalent of $3,440.50 per barrel. Hence, the Appellants contend that the delivery costs and SFI Period Costs together resulted in a purchase price of $3,466.15 per barrel of oil. For the total review period of April 1985 through August 1999, the Appellants claimed that ENO billed and collected $26,723,918.73 in Period Costs.
Although the Appellants averred that the City Council found that SFI Period Costs were base rate type costs that ENO should not have included in its FAC charges, they also argued that the City Council rejected the testimony of every non-Entergy witness in the case/including its own experts, who recommended refunds.
The Appellants also argued that the City Council misapplied the equity doctrine where there was ample positive law concerning the regulatory policy concerning ENO's fuel adjustment mechanism. They claimed that equity is determined by resorting to justice, reason, and prevailing usages, and it may, pursuant to La. Civ. Code art. 4, only he applied when no rule for a particular situation can be derived from legislation or custom.
The Appellants maintained that the orders of the LPSC prohibit the recovery of fixed, non-fuel costs via the FAC mechanism and that Louisiana Supreme Court decisions have affirmed that fixed, non-fuel costs must not be included in a utility's fuel adjustment mechanism. In support of this argument, the Appellants cited Entergy Gulf States, Inc. v. La Pub. Serv. Comm'n, XXXX-XXXX (La.1/20/1999), 726 So.2d 870 ; Gulf States Utilities Co. v. La. Pub. Serv. Comm'n, 1996-2046 (La.2/25/97), 689 So.2d 1337 ; and Daily Advertiser v. Trans-La, supra.
In Entergy Gulf States, Inc. v. La. Pub. Serv. Comm'n, Entergy Gulf States appealed an LPSC order which disallowed its FAC filings. The district court ordered the Entergy Gulf States to refund ratepayers for portion of fuel adjustment charges and determined that portion of disallowances were not reasonable. The LPSC and Entergy Gulf States appealed portions of the district ruling concerning LPSC Order No. U-19904, which required that Entergy Gulf States refund to its ratepayers $34.24 million of its FAC charges collected between 1991 through 1994. The Supreme Court affirmed in part and reversed in part and held, inter alia, that: (1) the LPSC applied the proper prudence review standards in scrutinizing Entergy Gulf States' decision-making, Id., p. 26, 726 So.2d 886 ; (2) the disallowance of FAC recovery for forced outages and refueling outage extensions was not arbitrary nor capricious, Id., p. 9, 726 So.2d at 877 ; (3) Entergy Gulf States failed to demonstrate that it acted prudently in incurring replacement power costs; Id., p. 16, 726 So.2d 881 ; (4) finding imprudence due to poor management and provision of inadequate written procedures was reasonable, Id., p. 28, 726 So.2d 887 ; (5) between the ratepayers and Entergy Gulf States, Entergy Gulf States had to bear the burden of vendor negligence and not pass losses through to ratepayers, Id., p. 20, 726 So.2d 883 ; (6) imprudence disallowances based on Entergy Gulf States' failure to upgrade *246 capacity of nuclear generating station was reasonable, Id., p. 21, 726 So.2d 884 ; and (7) the determination that a gas storage facility was in fact an asset of Entergy Gulf States and the facility's electrical service was an operational expense includable only in the base rate, was reasonable, Id., p. 35, 726 So.2d 891 .
In Gulf States Utilities Co. v. La. Pub. Serv. Comm'n, 96-2046 (La.2/25/97), 689 So.2d 1337 , an electric utility company, Gulf States Utility Co., (GSU) appealed the Public Service Commission's (PSC) order requiring that a portion of a $6.35 million annual payment representing gain received by GSU on sale of generating units to joint ventures be eliminated from its FAC and in rates charged to its ratepayers. GSU appealed. The district court reversed and vacated. The PSC appealed. The Supreme Court reversed and remanded the case.
On remand, the PSC issued an order requiring GSU to refund to customers certain amounts for fuel adjustment overcharges, imprudence disallowances, and interest on past refunds. On review, the district court affirmed.
On direct appeal, the Supreme Court, affirmed in part, reversed in part and rendered, holding that: (1) the PSC's calculation of GSU's FAC overcharge refund to ratepayers of a portion of an annual payment representing gain received by GSU on sale of generating units to joint venture, without allowing any setoff for GSU's investments in certain common facilities transferred to generating units project, was reasonable, despite contention that setoff denial permanently foreclosed recovery of GSU's investment in common facilities because Commission had since removed plant from base rates, 689 So.2d at 1342 ; (2) the PSC acted reasonably in allowing GSU's shareholders recovery of, but not return on, expenses incurred in transaction with joint venture, in calculating GSU fuel adjustment clause overcharge refund, Id., at 1344 ; (3) the PSC did not violate rule against retroactive rate making when it retroactively disallowed GSU's FAC charges for prior period, requiring overcharge refund to ratepayers, Id., at 1345 ; (4) for purposes of GSU's FAC recovery, the PSC did not act arbitrarily and capriciously in disallowing as imprudent purchased-power costs stemming from power outages beyond scheduled refueling outages at GSU's nuclear power plant, Id. at 1350 ; (5) the PSC properly calculated refund for imprudent purchased-power costs stemming from nuclear plant outages by separately determining amount purchased-power costs for replacement power were greater than GSU's cost of capacity generated by regulated portion of plant and amount of difference between purchased-power costs and cost of higher-priced capacity from unregulated portion of plant, Id. at 1347 ; and (6) the PSC could not require GSU to refund to ratepayers interest on fuel adjustment clause over-recovery due to accounting error as to its buy back of portions of nuclear power plant, which over-recovery GSU had refunded to ratepayers, without interest at time its fuel clause mechanism contained no interest factor, Id. at 1351 .
Finally, in Daily Advertiser v. Trans-La , a Div. of Atmos Energy Corp., 612 So.2d 7 , natural gas customers brought a purported class action against an intrastate pipeline, a local distribution company, and their unregulated affiliates, alleging, inter alia, antitrust violations in connection with alleged manipulations of automatic FACs. The district court overruled the defendants' declinatory and dilatory exceptions, and defendants appealed. The appeals court affirmed the district court's judgment. Granting certiorari, the Supreme Court, held that: (1) automatic *247 FACs allegedly manipulated by defendants were an integral component of the rate structure and, thus, the gas purchasers' claims were within the exclusive jurisdiction of the LPSC and were subject to requirement of exhaustion of administrative remedies insofar as they arose out of adjustment clause computations and sought reparation for overcharges, Id. 612 So.2d at 26 ; (2) primary jurisdiction doctrine warranted deferral to the LPSC of claims seeking damages other than overcharges, Id. at 32 .
The Appellants maintained that ENO did not attempt to obtain approval from the City Council before including SFI Period Costs in its fuel adjustment mechanism. The Appellants noted that during the administrative proceedings the evidence supported that SFI Period Costs are fixed non-fuel expenses. They asserted that the City Council's consultant, Mr. Kennan Walsh, and ENO's witness, George Panzeea, both agreed that SFI Period Costs are not direct costs of fuel and are not generation dependent.
Additionally, they also claimed that Mr. Louiselle, ENO's expert witness, admitted that none of the resolutions utilized by ENO in preparing and charging costs through its FAC mention SFI Period Costs.: The Appellants also maintained that there was no City Council review or deliberation followed by an order or resolution recommending that SFI Period Costs be included in ENO's FAC. In short, the Appellants maintained that ENO deliberately chose to forego regulatory oversight and, instead, opted to grant itself a rate increase.
The Appellants urged that ENO and its affiliates were warned by the regulating authorities, particularly the Department of Utilities and the City of New Orleans, to exclude SFI Period Costs. In further support, of their position, the Appellants indicated that ENO was warned repeatedly that SFI Period Costs do not belong in the FAC. They note that in 1977, the FERC audited ENO's regulated Mississippi affiliate and found that the company had improperly included SFI Period Costs in its adjustment charges. Thereafter, all of Entergy's Operating Companies, including ENO, agreed that they would not include SFI Period Costs in their wholesale FAC charges.
However, just a few years later the FERC discovered that ENO's affiliate, ELI, had continued to include SFI Period Costs in its fuel adjustment mechanism, in violation of the earlier commitment exclude them. Specifically, the Appellants indicate that in Louisiana Power & Light Co., 57 F.E.R.C. ¶ ¶ 61,101 (Opinion No. 36) (1991), the FERC ordered ELI to refund the SFI Period Costs included in its FAC because such costs were ineligible for recovery, even in the absence of any obligation regarding the legitimacy or prudence of those costs, or that such costs were excessive. The Appellants asserted that ENO also received direct warnings from the FERC that SFI Period Costs were not properly included in its fuel adjustment mechanism. Based on these prior warnings, the Appellants assert that equity was not properly invoked by the City Council concerning the collection of SFI Period Costs via the FAC mechanism.
The Appellants also argued that Entergy's personnel were well aware that ENO might not be allowed to recover any SFI Period Costs, if it attempted to realign those cost with base rates. In order to prove this fact at trial, the Appellants introduced an internal ENO memorandum which spelled out the dangers of losing the entire amount of SFI Period Costs if the fuel adjustment mechanism was changed. The Appellants assert that the memo reveals that ENO wanted to avoid any action *248 which could bring its actions of including SFI Period Costs, that were estimated between $17 million to $18 million dollars per year, to the attention of the City Council. The Appellants asserted that this evidence alone is compelling enough to prove that ENO had the requisite knowledge that it had improperly collected SFI Period Costs in its FAC mechanism.
The Appellants argued that the City Council's decision to not order refunds allows ENO to recover SFI Period Costs that it would not have recovered. During the review period, 1985 though 2001, ENO agreed to freeze its base rates, thereby foregoing the ability to recover any additional base rate increases. One of the City Council's consultants, Mr. Walsh, agreed that ENO circumvented the City Council's rate freeze orders by flowing SFI Period Costs via its fuel adjustment mechanism. Hence, the Appellants concluded that the City Council's decision to not order refunds is expressly contrary to the decisions of both the LPSC and the Louisiana Supreme Court. The Appellants alleged that the City Council's inaction, under these circumstances, condones ENO's circumvention of the base rate freeze.
The Appellants also pointed out that there was absolutely no evidentiary or factual support for the City Council's decision to deny refunds. The Appellants claimed that their experts, Mr. Robert Janssen, along with Mr. Chavanne (the S & WB's [74] expert), and the City Council's experts, Mr. Walsh and Mr. Philip Movish, unanimously agreed that the SFI Period Costs were improperly included in the FAC adjustment mechanism, without the City Council's prior approval. It was also unanimously concluded that the inclusion of SFI Period Costs had harmed ratepayers.
In support of their argument, the Appellants relied extensively on the opinions of its experts, Mr. Janssen, and Mr. Chavanne.
Their first expert, Mil Janssen, after being duly sworn and qualified as an expert in "fuel adjustment clause analysis and policy," testified regarding the alleged wrongful profits and costs improperly included in the retail FAC charges of Entergy Louisiana and its affiliate of Entergy New Orleans. He further indicated that many of the issues he addressed in earlier proceedings are identical to those in the instant proceeding. These issues include: (a) wrongful profits, (b) improperly included Period Costs, and (c) improperly included decontamination and decommissioning costs found in both ENO's and ELI's FAC charges.
He testified that his purpose in testifying was to present the results of his review of the FAC filings of ENO, and to identify overcharges flowed through the FAC to ENO's ratepayers. He testified that these overcharges have resulted in wrongful profits, conflicts with regulatory resolutions, and improperly included costs.
Mr. Janssen testified that he was retained in 1998 to review ENO's FAC for inappropriate costs and calculations. He testified that his review started with the City Council in its capacity as a regulator of ENO's FAC charges. Additionally, he personally reviewed 15 years of ENO's FAC charges and supporting data, as well as dozens of the City Council's resolutions, as well as past orders of the FERC, the LPSC, and the Louisiana Supreme Court regarding the regulation of FACs.
Mr. Janssen testified that the City Council has produced several resolutions which addressed the cost credits included *249 in ENO's FAC charges, provided a review of those costs, and/or addressed the calculation of those costs to produce ENO's FAC charges. These resolutions include the following: a Resolution dated October 25, 1973; Resolution R-75-118 (dated September 11, 1975); Resolution R-81-73 (dated April 9, 1981); Resolution R-81-216 (dated August 16, 1981); Resolution R-85-248 (dated May 9, 1985); Resolution R-85-526 (dated September 5, 1985); Resolution R-86-112 (dated March 20, 1986); Resolution R-87-81 (dated May 21, 1987); Resolution R-91-157 (dated September 5, 1991); Resolution R-94-960 (dated December 22, 1994); and Resolution R-95-360 (dated April 6, 1995).
In the October 25, 1973 Resolution, the City Council approved a request by ENO to "revise the Fuel Adjustment [C]lause in each of its electric rate schedules which contain such a clause so as to permit the average fossil fuel costs per kilowatt-hour as delivered during the month to be used in determination of the fuel adjustment for the month in which the kilowatt hours were used."
In Resolution R-75-118, Mr. Janssen testified that the City Council required ENO to pay sixty (60) days of interest on any over-billings to its customers through its FAC charge starting with the month of November 1975.
In Resolution R-81-73, Mr. Janssen testified that the City Council fixed and established new electric and gas rate schedules for ENO. With regard to ENO's [FAC], the City Council removed the word fossil' from the title and required the Department of Utilities to conduct an annual audit of both ENO's FACs and gas cost adjustments and report the results to the Council.
In Resolution R-81-216, he testified that the City Council "determined that it would be in the best interest of ENO's customers if it used an average fuel and gas cost adjustment clause mechanism for a twelve (12) month period." Therefore, it authorized ENO to use the same method that was employed at that time by the electric and gas utilities subject to the LPSC's jurisdiction.
Mr. Janssen testified that in 1985, the City Council regained regulatory authority over ENO after it had been ceded to the LPSC for a short time. Resolution R-85-248 provided for the continuance of "[a]ll rates, controls, petitions, complaints, investigations, applications, and other pending matters, of whatever nature or kind" that were in existence immediately preceding the transfer of regulatory authority, "except as inconsistent with Home Rule Charter of the City, of New Orleans. . . ." Additionally, Mr. Janssen testified that the City Council also ordered that the pending matters and all new matters from that point on would be governed by the "rules, regulations, practices, and procedures of the Council of the City New Orleans" that were in effect on December 31, 1981. Hence, the City Council provided for the continuance of all the existing matters and the regulation of any new matters under the regulations and procedures in effect before regulation of ENO (then NOPSI) was transferred to the LPSC.
In Resolution R-85-526, Mr. Janssen testified that "the City Council froze ENO's FAC recovery at its then-effective level for the purpose of providing interim rate relief for electric service in order to enable them to pay for its share of the Grand Gulf 1 nuclear generating Station."
Mr. Janssen testified that in Resolution R-87-81, the City Council directed ENO to amortize excess deferred taxes through its FAC over to six-month periods in 1987 and 1988.
*250 In Resolution R-91-157, Mr. Janssen testified that "the City Council required ENO to calculate the difference between the System Energy Resources, Inc. (SERI) non-fuel costs billed to ENO pursuant to the allocation of Grand Gulf and the estimate of such costs contained in the Resolution. This calculation was to be included in the `over/under' provision in ENO's FAC."
In Resolution R-94-960, Mr. Janssen testified that "the City Council required ENO to include an interest component for all over and under-recoveries in the existing `over/under' true-up procedure for Grand Gulf non-fuel costs in ENO's FAC."
Lastly, he testified that in Resolution 95-360, "the City Council clarified the calculation of interest provided for in Resolution R-94-960."
Mr. Janssen testified that he believed that ENO relied on some of the aforementioned Resolutions when it assembled and filed its FAC, however he surmised that it is difficult to determine precisely which resolutions and/or documents on which ENO relied upon in filing its FAC.
Mr. Janssen testified that the aforementioned Resolutions provided specific guidelines and general principles concerning the costs included in ENO's FAC. He indicated that the resolutions "primarily pertaining to (a) the timing and type of average fuel costs mechanism that would be used, (b) a few very specific costs, credits and calculations to be included in ENO's FAC, (c) establishing audits of ENO's FAC, and (d) the continuance of ENO's FAC under the City Council's original regulatory framework prior to the regulation of ENO by the LPSC."
He also stated that extensive proceedings regarding the reviews of fuel adjustment charges have been conducted at both the state (by the LPSC) and federal (by the FERC) levels. He indicated that the state and federal proceedings show that there are additional principles and guidelines required for the appropriate level of review to be undertaken. He also indicated that many of these principles have been affirmed by the Louisiana Supreme Court and some have been firmly established for at least 25 years. Thus, he opined, the City Council can rely on these specific guidelines and general principles, "(a) as being in the public interest and (b) for determining whether ENO's rates are just and reasonable."
Mr. Janssen also testified that none of the City Council's resolutions contradicted the FERC's and the LPSC's principles and guidelines for costs included in FACs. He indicated that aside from providing interest calculations, excess tax deferral amortization, and a temporary recovery freeze, the City Council did not determine the propriety or prudence of costs included in ENO's FAC. He opined that there is "little overlap, and no contradiction, between the intention, as set forth therein, and substance of the City Council's Resolutions and the guidelines and principles of the FERC and [the] LPSC."
Mr. Janssen testified that he believed that the City Council is free to adopt the general principles and specific guidelines developed by the FERC and the LPSC for the Council's own review of ENO's FAC. He indicated that if the Council determines that the general principles and specific guidelines developed by the FERC and the LPSC are in the public interest and produce just and reasonable rates for its own regulatory jurisdiction, then it would be appropriate for the City Council to adopt the precedents of the FERC and the LPSC.
Mr. Janssen testified that the FERC has developed general principles of specific guidelines for both reviewing and ordering *251 refunds on utilities' wholesale FAC's across the country. He indicated that these principles and guidelines can be found in various orders issued by the FERC in audits performed by its Staff. The orders and audits that he specifically reviewed and relied upon are: (1) FERC Orders in Docket No. ER76-285 (Phase II); (2) FERC Orders in Docket No. E-8570, (3) FERC's April 1977 Report on Results of Audit related to Charges for wholesale Electric Service by Mississippi Power and Light Company under Fuel Adjustment Clauses filed with the Federal Power Commission; and (4) FERC Orders in Docket Nos. FA86-63-000 and FA86-63-4D01.
Regarding Docket No. ER76-285 (Phase II), he testified that the FERC issued two (2) relevant orders: (1) Opinion No. 37, 6 FERC ¶ 61,299 , dated March 30, 1979 and (2) a November 19, 1979 order, denying rehearing. Specifically, these orders provide general principles related to retroactive rate-making and the prudence of costs passed through FACs. He also stated that in the same proceeding, the FERC found that the Public Service Company of New Hampshire (PSNH) imprudently passed through its FAC, costs related to spot market purchases of 204,000 tons of coal when alternative supplies of cheaper coal were available. The FERC ordered PSNH to refund these imprudently incurred costs, plus interest.
He testified that the general principles contained in the FERC Docket No. ER76-285 (Phase II) are as follows:
• Public utility regulators have the ability to review the FACs of their jurisdictional utilities to determine the prudence of costs recovered from their customers;
• Orders for refunds based on reviews of FACs are not barred by principles against retroactive rate-making;
• Valid fuel clause formulas allow the inclusion of fuel expenses that are just and reasonable. If costs are included that should have been collected elsewhere, then one of the elements necessary for proper computation of fuel adjustments has been misstated; and
• Any inequities resulting from fuel adjustment clauses should be discovered through surveillance and can be remedied through complaint proceedings. The responding utility should their present an affirmative defense.
Mr. Janssen further testified that in Docket No. E-8570, the FERC issued two orders relevant to this proceeding: (1) the Initial Decision on non-fuel costs adjustment issue, dated July 20, 1976; and (2) the April 26, 1970, order that Affirmed in Part and Modified in Part an initial decision on FACs. These orders explained the intent and purpose of FACs and the eligibility of certain types of costs to be included in FACs. In the same proceeding, the FERC found that the Southern California Edison Company improperly included several costs in its FAC and it ordered the Southern California ^Edison Company to refund these improperly included costs, plus interest.
In Docket No. E-8570, he indicated that the general process from the proceeding is as follows:
• The intent and purpose of FACs is to reflect changes in only the fuel component per kilowatt of energy cost and that this should be strictly construed.
• The cost of capital to acquire fuel and to maintain an adequate fuel inventory is not subject to treatment any different from the cost of capital for any other purpose. Financing costs are clearly not the kind of costs that may or should enter into computations under Commission-approved FACs.
*252 • The FERC's policy is to scrutinize costs reflected in FACs to make sure only eligible fuel expenses are covered through the monthly fuel charge.
• The substance of costs is more important than the form when determining what costs are includable in FACs.
• Fuel exploration and development costs should not be included in FACs. A properly conceived and applied FAC cannot reflect such fixed, known in measurable costs without doing violence to both the intended purpose and the very rationale supporting the allowance of flow-through of particularly volatile fuel costs.
• Considerations of prudence are irrelevant to a proper determination of the legitimate fuel costs components includable in FACs.
He also noted that in the FERC's April 1977, Report on Results of Audit related to Charges for wholesale Electric Service by Mississippi Power and Light Company under Fuel Adjustment Clauses filed with the Federal Power Commission, the FERC's auditors published a report documenting their analysis of SFI Period Costs included in Entergy's wholesale FACs and reached an agreement with the Entergy Operating Companies that excluded SFI Period Costs from inclusion in wholesale FACs on a prospective basis. Additionally, he noted that the general principles contained in this April 1970 report are as follows:
• Utilities should not have the opportunity to recover through FACs any fuel costs which ordinarily are incurred directly by utilities after obtaining delivery of fuel to the unloading point.
• Although costs may be proper cost of service items to be considered in setting utility base rates, they may not be properly accounted for as cost of fuel and therefore would be improperly included in FACs.
Mr. Janssen stated that in FERC Docket Nos. FA86-63-000 and FA86-63-001, the FERC issued several orders and discussed the practice of Entergy Louisiana Inc. (ELI), as well as other Entergy Operating Companies, of passing SFI Period Costs through their wholesale FACs. He testified that the orders and documents in these proceedings revealed that in both the late 1970s and early 1980s the FERC determined that SFI Period Costs were improperly included in the FACs of Entergy Operating Companies since those costs were not properly included in the FERC's System of Accounts as a fuel cost. In the late 1980s, Mr. Janssen noted, the FERC auditors found that ELI had reintroduced SFI Period Costs into its wholesale FAC, contrary to its previous agreement with the FERC documented in the April 1977 report. The FERC determined that the SFI Period Costs were improperly included and these costs were subsequently refunded to ELI's wholesale customers. The general principles found in these orders are as follows:
• Costs not properly includable in FERC Accounts as fuel costs are not properly recoverable from customers through FAC billings.
• `[W]hile an automatic adjustment clause such as the FAC is part of the filed rate, the components of such clause remains subject to review and modification to ensure that only eligible cost items are flowed through to customers in the clause.'
•`[D]ue to the prohibition against retroactive rate-making, utilities which choose to disregard our accounting and rate regulations face the risk of permanently forfeiting ev

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/1153621. Public record. Not legal advice.