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Court Remands FERC Decision on Iroquois' Recovery of Legal Costs

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&ampT "[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 "generic."

"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.

Susan Parker

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