Court Remands FERC Decision on Iroquois' Recovery of Legal Costs
The D.C. Circuit Court of Appeals last week remanded a FERC
order denying Iroquois Gas Transmission the recovery of legal costs
stemming from criminal and civil investigations into environmental
violations associated with the construction of pipeline facilities
in the early 1990s.
In 1996, the Commission reversed the decision of an
administrative law judge (ALJ) and refused to allow the recovery of
the pipeline's legal expenses - more than $15 million - on the
basis that Iroquois Gas had failed to demonstrate any economic or
non-economic benefits to ratepayers as a result of its activities.
The fact that the legal costs grew out of civil and criminal
violations, FERC argued then, cast doubt on their prudence. The
court, however, said FERC failed to adequately justify the reason
for its decision in the case.
The Commission "has not made clear which types of legal defense
costs are presumed recoverable for ratemaking purposes and which
[are] not, or why the costs here belong on the nonrecoverable side
of the line," wrote Circuit Judge Stephen Williams in the July 21st
opinion [[No. 97-1276, 97-1533].
The order in Iroquois, according to Williams, fell short of the
court's opinion in Mountain States I, which held that the illegal
behavior of AT&T "[did] not inexorably compel or warrant either
rejection or stigmatization of the [legal] expenses as a factor in
rate calculations." The FERC order also was in conflict with the
court's Mountain States II ruling, which essentially found that
legal expenses arising from a company's violation of federal
statutes could be recoverable if the activities of the company
economically 'benefited' the ratepayers.
The court cited a case where customers/ratepayers could benefit
from a company's illegal behavior. In its example, a "carrier" is
forced to decide between instituting a strict pollution-monitoring
policy or a lax policy that would cost $50,000 less. If it chooses
the latter, the company will be sued under a federal statute and
faces a 10% chance of losing. In the event that happens, it
estimates the plaintiff would recover $100,000, making the expected
cost of the lawsuit ($100,000 x 10%) about $10,000. "Thus the
carrier reasonably determines that adopting the lax policy will
produce a net benefit of $40,000 to the ratepayers, who would
otherwise have to pay the cost of the strict monitoring policy. It
would be misleading to say that requiring ratepayers to bear the
cost of the resulting judgment, if any, causes them to subsidize
the carrier's illegal activity."
In Iroquois, the Commission did not specifically address
whether the pipeline's illegal activities had any economic benefit
for ratepayers. Instead, it raised the issue of non-economic harm
arising from the pipeline's violation of federal environmental and
safety laws. It argued that ratepayers had a "general interest" in
Iroquois complying with those laws, and thus were harmed when the
pipeline violated them. The court called FERC's argument too
"Because all citizens share an interest in widespread
compliance, not just with environmental or safety laws but with
laws of any kind, the Commission's approach would result in the
presumptive disallowance of all litigation expenses leading to
anything short of outright triumph for the regulated entity," the
appellate court opined.
Moreover, FERC's approach "utterly fails to respond to the
problem of [economic] incentives posed in Mountain States II," it
noted. "Iroquois's ratepayers...undoubtedly share an interest in
maintaining the purity of the region's creeks and streams. But the
same ratepayers have a unique and concentrated interest in timely
and efficient pipeline construction." And as a result, "a firm
incurring optimal environmental compliance costs will on occasion
take measures that are ultimately found illegal." With this in
mind, "the Commission must do a better job of explaining why all
activities that turn out to violate environmental laws should be
presumed unlikely 'to benefit ratepayers," the court majority said.
In a separate concurring opinion, Circuit Judge Patricia Wald
said both economic and non-economic benefits should be factored in
when deciding the recoverability of legal costs.