By Rich Heidorn Jr.

The D.C. Circuit Court of Appeals on Friday upheld FERC’s 2017 ruling denying Baltimore Gas and Electric’s bid to recover $38 million in taxes deferred over more than a decade (18-1298).

In 2016, BGE sought approval for three adjustments to its formula rate for how taxes are recovered, seeking recovery of $38 million from future ratepayers for costs incurred by the company dating to 2005 (ER17-528). The commission rejected the request, saying BGE took too long to make the adjustments. (See FERC Denies BGE Recovery of $38M in Deferred Taxes.)

The three-judge panel described the case as arising from FERC’s “effort to apply its ‘matching’ principles to divergences between the timing of deductions for tax purposes and timing for purposes of allocating costs to ratepayers. While Congress and other bodies imposing taxes may want to allow early depreciation of an asset (to encourage investment), for example, the commission wants a cost (less offsetting tax benefits) to be charged in the period over which the resulting asset provides services to the utility’s customers.”

FERC ruled that BGE had violated Order 144 by failing to file for recovery of these amounts in its “next rate case,” which the commission said was BGE’s 2005 rate filing.

BGE’s appeal alleged that FERC’s ruling was arbitrary and capricious under the Administrative Procedure Act and that the commission had failed to explain why it had previously allowed delayed recoveries under Financial Accounting Standard 109 (FAS 109) to four “similarly situated” entities: MISO, PPL Electric Utilities, Duquesne Light Co. and Virginia Electric and Power Co. (VEPCO).

FERC contended that the four prior actions were not binding precedent because three of them were issued by staff exercising subdelegated authority and that none of the four “squarely presented” or “necessarily resolved” the issues raised by BGE.

The court rejected part of FERC’s defense, saying “the commission cannot lend its authority to staff and then disclaim responsibility for the actions they take. Delegated staff actions are actions of the agency.”

“It is not enough for FERC to say, ‘The staff did it,’” the court continued. “Reasoned decision-making requires FERC to explain differential treatment under the same rules.”

However, the court found the commission ultimately did provide an adequate explanation to distinguish BGE’s case from the prior decisions.

The court noted that its standards for arbitrary and capricious review apply a lower burden of explanation for agencies when applying existing rules in individual cases. When an agency changes policy, it must meet the standards of FCC v. Fox Television Stations Inc., which require the agency to “display awareness that it is changing position,” show “the new policy is permissible under the statute” and “show that there are good reasons for the new policy.”

“The commission reasonably determined BGE waited far longer than the other four utilities to collect accumulated FAS 109 amounts and failed to offer an adequate reason for the delay (noting PPL and Duquesne involved delays of four and seven years, respectively, compared to BGE’s 12). Moreover, FERC offered specific ways in which each of the four prior cases differed from BGE’s filings in at least one key respect (distinguishing BGE from PPL, Duquesne and VEPCO based on the type of makeup provisions sought and on specific accounting matters) [and] (noting [MISO] and VEPCO sought collection on deficiencies going forward rather than accumulated amounts).”

Senior Circuit Judge Stephen F. Williams filed a partial dissent arguing that agencies such as FERC need not explain disparate outcomes under the same rule unless parties opposed the agency’s administration of the rule in the prior cases.

“Given the number of uncontested issues that an agency typically resolves — uncontested, we may infer, either because any adversely affected parties got no notice or, having notice, thought it not worth the trouble to oppose — a requirement that an agency address its past vermicelli, either by reconciling its current decision with the earlier record or by applying Fox Television, would tie courts and agencies in linguistic knots for little or no benefit to the rule of law,” Williams wrote.

“Indeed, the majority’s approach invites a litigant to dive deep into the records of past agency cases, find one with facts loosely comparable to its own case, and then require the agency to adjudicate, ex post and likely on a limited record, whether and to what extent each past case is like the present one. Our precedents do not require this.”