184 F.3d 892 (D.C. Cir. 1999)
Louisiana Public Service Commission, Petitionerv.Federal Energy Regulatory Commission, RespondentMississippi Public Service Commission, et al.,Intervenors
No. 97-1661
United States Court of AppealsFOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued December 4, 1998Decided August 6, 1999

On Petition for Review of Orders of the Federal Energy Regulatory CommissionMichael R. Fontham argued the cause for petitioner. With him on the briefs was Noel J. Darce.
Larry D. Gasteiger, Attorney, Federal Energy Regulatory  Commission, argued the cause for respondent.  With him on
the brief were Jay L. Witkin, Solicitor, and John H. Conway,  Deputy Solicitor.
Earle H. O'Donnell argued the cause for intervenor Occidental Chemical Corporation.  With him on the briefs was  Roger St. Vincent.
John S. Moot argued the cause for intervenor Entergy  Services, Inc.  With him on the brief were William S. Scherman, Gerard A. Clark and J. Wayne Anderson.
Glen L. Ortman argued the cause for intervenors City  Council of New Orleans, et al.  With him on the brief were  Clinton A. Vince, Mary W. Cochran, Paul R. Hightower and  George M. Fleming.
Before:  Ginsburg, Henderson, and Rogers, Circuit Judges.
Opinion for the Court filed by Circuit Judge Ginsburg.
Ginsburg, Circuit Judge:


1
The Louisiana Public Service  Commission petitions for review of two orders of the Federal  Energy Regulatory Commission dismissing its complaint  against Entergy Services, Inc., which owns operating companies that generate and sell electricity in Louisiana and other  states.  The LPSC claims that Entergy may not count interruptible service when allocating capacity costs pro rata  among its operating companies because interruptible service,  unlike firm service, does not require Entergy to add new  capacity.  The Commission held that interruptible service is  properly assessed responsibility for capacity costs and, in the  alternative, that the LPSC was not entitled to a hearing on its  complaint because it had not alleged that the overall "rough  equalization" of costs among the operating companies has  been upset.


2
We hold that it was arbitrary and capricious for the Commission to assess capacity costs for interruptible service  without an explanation for departing from its own precedent.In addition, because we are unable on this record to discern  what the Commission meant by "rough equalization," we  remand the case for the agency to explain its reasoning on  that score as well.

I. Background

3
Entergy, a public utility holding company, owns five operating companies that generate and sell electricity in four states,  including Louisiana.  Transactions among the operating companies are governed by a system agreement they first entered into in 1951 and last amended in 1982, when it was  approved by the Commission and this court after protracted  litigation.* Section 3.01 of the agreement sets forth the  general goal of the companies to act as a single economic unit:


4
The purpose of this Agreement is to provide the contractual basis for the continued planning, construction, and operation of the electric generation, transmission and other facilities of the Companies in such a manner as to achieve economies consistent with the highest practicable reliability of service....  This agreement also provides a basis for equalizing among the Companies any imbalance of costs associated with the construction, ownership and operation of such facilities as are used for the mutual benefit of all the Companies.


5
The system agreement allocates capacity (or demand) costs  to each operating company in direct proportion to the power  that it takes when total demand upon the Entergy system  peaks each month.  If, at the monthly system peak, a company takes more energy than it generates, then it is considered  "short" and must make an equalizing payment to the "long"  companies that have provided the excess capacity.  This  arrangement is mutually beneficial because companies that  are long have a ready outlet for their surplus energy and are  thereby compensated for carrying excess capacity, while companies that are short enjoy the benefit of a low cost and dependable way of meeting their energy requirements.  See  Mississippi Indus., 808 F.2d at 1528-31.


6
The LPSC filed a complaint against Entergy under § 206  of the Federal Power Act, 16 U.S.C. § 824e(a), alleging that,  due to changed circumstances, the allocation of capacity costs  had become unjust and unreasonable.  The Commission held  the allegedly changed circumstances insufficient to warrant  investigation and dismissed the complaint.  See Louisiana  Pub. Serv. Comm'n v. Entergy Servs., Inc., 76 F.E.R.C.  p 61,168 (1996), reh'g denied, 80 F.E.R.C. p 61,282 (1997).The LPSC now petitions for review of the Commission's  decision and Occidental Chemical Corporation intervenes on  its behalf.  Entergy and a group consisting of two state  agencies and the City Council of New Orleans (collectively  the state agencies) intervene on behalf of the Commission.

II. Analysis

7
The LPSC claims principally that the Commission should  have scheduled a hearing on its complaint.  In general, the  Commission must hold an evidentiary hearing whenever a  complainant raises a genuine issue of fact that is material to  the justness and reasonableness of a rate and cannot be  resolved upon the written record.  The mere allegation of a  disputed fact is insufficient to command a hearing, of course;the petitioner must proffer evidence in support of its factual  claim.  We review a Commission decision to deny an evidentiary hearing for abuse of discretion.  See Cajun Elec. Power  Coop. v. FERC, 28 F.3d 173, 177 (D.C. Cir. 1994).


8
In this case the Commission accepted all the LPSC's  factual allegations as true--they are supported by an adequate proffer of evidence--and dismissed the complaint on  the ground that those facts did not justify reopening the  Agreement.  Accordingly, we too accept the LPSC's factual  allegations as true and turn directly to the question whether  the manner in which the Commission addressed them was  arbitrary and capricious.  See Sithe/Independence Power  Partners, L.P. v. FERC, 165 F.3d 944, 948 (D.C. Cir. 1999).

A.Interruptible Load and Capacity Costs

9
Capacity costs "are assessed to the peak-period users  because it is peak demand that determines how much a utility  will invest in capacity."  Union Elec. Co. v. FERC, 890 F.2d  1193, 1198 (D.C. Cir. 1989).  During the off-peak periods the  capacity is available at no marginal cost;  it "would be there  whether or not the off-peak user made demands on it."  1  Alfred E. Kahn, The Economics of Regulation 101 (1970).  A  utility's decision to invest in additional capacity is therefore  informed by the type of demand placed upon the system at its  peak.  As we have previously observed:


10
Electric utilities often distinguish between "firm" ser-vice, under which customers can demand power or trans-mission at any time, and "interruptible" service, whichthe utility is entitled to shut off at any point when thereis not enough excess capacity beyond that required toguarantee the needs of the utility's firm customers.  In-terruptible service is typically offered at a significantdiscount because the utility's ability simply to cut offservice at peak demand periods alleviates its need to planfor and finance additional capacity to offer the service.Fort Pierce Util. Auth. v. FERC, 730 F.2d 778, 785-86 (D.C.  Cir. 1984).


11
The Commission firmly embraced this principle of cost  causation in Kentucky Utilities Co., 15 F.E.R.C. p 61,002  (1981), where it persuasively set out its rationale for not  considering interruptible service when allocating capacity  costs.  In that case KU had the right, by agreement, to  interrupt service to the City of Paris.  The utility argued that  it should be able to charge Paris capacity costs whenever it  supplied electricity to Paris at peak.  The Commission flatly  rejected this position, reasoning that "because of the right to  interrupt, Kentucky can keep Paris from imposing any demand on Kentucky's system during peak periods and thereby  control its capacity costs."  Id. at 61,004;  see also Delmarva  Power & Light Co., 24 F.E.R.C. p 61,199, 61,462 (1983) (following Kentucky Utilities).


12
The Entergy system agreement does not distinguish between interruptible and firm load in allocating capacity costs  to the operating companies.  Doing so was unnecessary when  the agreement was last amended, apparently because the  system was then awash in capacity;  even projected firm load  did not require additional future capacity.


13
The LPSC alleges, however, that changed circumstances  now make it unjust and unreasonable for Entergy to continue  counting interruptible load when calculating an operating  company's capacity charge.  First, the system no longer has  surplus capacity;  it even purchases electricity from other  sources in order to maintain its reserve requirements during  the months when demand is greatest.  Second, Entergy has  changed its planning criteria and no longer counts interruptible load when deciding whether to add capacity.  Neither  point is contested, and both are supported by affidavits  attached to the LPSC's complaint;  the second point is further  supported by the testimony of an Entergy executive given in  a retail rate proceeding before the LPSC.


14
In its order dismissing the complaint the Commission reasoned that "the mere fact that a load may be curtailable does  not mean that it should not be considered in allocating costs"  if power is in fact taken at peak.  Louisiana PSC, 76  F.E.R.C. at 61,955-956.  Sound familiar?  This is the argument the agency rejected in Kentucky Utilities.  See 15  F.E.R.C. at 61,004 ("Although Kentucky has not interrupted  service to Paris at every peak period, this is irrelevant to the  application of the peak responsibility method").  Presumably  for that reason the Commission appended a somewhat cryptic  footnote to its decision, citing testimony in which an Entergy  executive said that the allocation of current, as opposed to  future, capacity costs presents "a different issue."  Louisiana  PSC, 76 F.E.R.C. at 61,956 n.9.  Similarly, the state agencies  argue in the present case that planning for future capacity is  immaterial to how the costs of existing capacity should be  allocated, and Entergy asserts that avoidance of future costs  does not warrant an investigation today.


15
These arguments fail to recognize that the cost-causation  principle the Commission adopted in Kentucky Utilities is  inherently forward-looking.  As the Commission itself explained in Kentucky Utilities, "[t]he theory is that the utility  must build bulk power facilities, i.e., generating units and  transmission lines, in large part to meet the maximum or  peak anticipated demands of its customers."  Kentucky Util.,  15 F.E.R.C. at 61,003 (citing James C. Bonbright, Principles  of Public Utility Rates 352 (1961), 1 Kahn, Economics of  Regulation 89-95).  This is how Professor Alfred E. Kahn  explains the point:


16
Marginal costs look to the future, not to the past:  it is only future costs for which additional production can becausally responsible;  it is only future costs that can be saved if that production is not undertaken.  If capital costs are to be included in price, the capital costs in question are those that will have to be covered over time in the future if service is to continue to be rendered.


17
1 Kahn, at 88;  see Fort Pierce, 730 F.2d at 787 ("The clear  import of the Commission's decision in Kentucky Utilities is  that the allocation of capacity costs to transmission service  must ordinarily be justified on the basis of the transmitting  utility's inability to avoid service at peak demand and its need  to plan future capacity based in part on the transmission  service at issue").


18
Pursuing a different but no less fallacious line of reasoning,  the Commission claims in the alternative that it need not  follow Kentucky Utilities here because that case


19
dealt with how a utility recovers fixed costs from customers that bought at arm's-length.  Since the purchaser itself was an interruptible customer, we found that it should bear none of the seller's fixed costs.  Here, in stark contrast, the rate at issue allocates the costs of an integrated system among its constituent parts.  While ostensibly "purchasers," the Entergy operating companies in reality comprise the seller, the Entergy system.


20
Louisiana PSC, 80 F.E.R.C. at 62,007.  Although the Commission does not explain what it thinks follows from this  distinction between arm's-length and affiliated purchasers, its  position seems to be that, because the Entergy system may  be viewed as a single seller at retail, the Commission need not  regulate antecedent wholesale transactions among the operating companies.


21
If that is the point, we reject it out of hand.  As we have  held before, and as the Commission itself has long insisted, it  alone has jurisdiction to regulate wholesale transactions  among Entergy's operating companies.  See Mississippi Indus., 808 F.2d at 1540.  And as to matters within its jurisdiction, the Commission has the duty--not the option--to reform  rates that by virtue of changed circumstances are no longer  just and reasonable.  See id. at 1557;  16 U.S.C. § 824e(a).Moreover, "once FERC permits a utility to charge a rate  reflecting investment in a particular plant, a state commission  may be obliged to reflect such an investment in the retail rate  base."  Mississippi Indus., 808 F.2d at 1548.  Consequently,  if the allocation of costs among the operating companies is  unjust or unreasonable, then retail customers in one regulating jurisdiction effectively subsidize those in another.**


22
We therefore hold that the Commission's 180 degree turn  away from Kentucky Utilities was arbitrary and capricious. For the agency to reverse its position in the face of a  precedent it has not persuasively distinguished is quintessentially arbitrary and capricious.  See Motor Vehicle Mfrs.  Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 57  (1983) ("An agency's view of what is in the public interest may change, either with or without a change in circumstances.  But an agency changing its course must supply a  reasoned analysis").  If there is any reason interruptible load  should be considered in the assessment of capacity costs, it  has not been articulated either by the Commission or by its  claque in this proceeding.

B. Rough Equalization

23
In denying rehearing the Commission, perhaps hoping to  insulate from legal consequence its failure to follow Kentucky Utilities, adopted an alternative rationale:  that the LPSC  was not entitled to a hearing because it had not alleged that  the change in circumstances had upset the "rough equalization" among the operating companies achieved by the system  agreement.  See Louisiana PSC, 80 F.E.R.C. at 62,007.  The  LPSC responds that the standard in the Federal Power Act  is not rough equalization but whether the cost allocation is  unjust, unreasonable, or unduly discriminatory.  See 16  U.S.C. § 824e(a).


24
In order to function as a reviewing body the court must be  "advised of the considerations underlying the action under  review."  SEC v. Chenery Corp., 318 U.S. 80, 94 (1943).Though it is eminently reasonable for the Commission to  require some showing of materiality before it investigates the  allegations made in a complaint, we cannot on this record tell  how rough (that is, unequal) the agency thinks the equalization must be before it grants a hearing--and the equalization  in this case seems pretty rough.  See Philadelphia Gas  Works v. FERC, 989 F.2d 1246, 1251 (D.C. Cir. 1993) ("For  FERC to utter the words 'unique facts and circumstances'  and 'equity,' ... as a wand waved over an undifferentiated  porridge of facts, leaves regulated parties and a reviewing  court completely in the dark as to the core of FERC's  reasoning and its relationship to past precedent").


25
The LPSC attached to its complaint an affidavit stating  that Louisiana Power & Light places nearly 1,000 MW (or 1  million KW) of interruptible load upon the system at a  capacity cost of $1 to $2 per KW-month, whereas other  operating companies place very little interruptible load upon the system.  Compl. Ex. C.  Assuming, as is clearly implied,  that all of this interruptible power is taken at peak, the  imbalance results in $12 to $24 million per year in demand  charges erroneously allocated to Louisiana ratepayers.  The  Commission does not rebut nor even cast doubt upon these  data, other than to point to its own conclusory statement on  rehearing that neither the LPSC nor Occidental claims Entergy's allocation of capacity costs upsets the rough cost  equalization among the operating companies.  See Louisiana  PSC, 80 F.E.R.C. at 62,007.


26
Instead the Commission, joined by Entergy, argues that  the allocation of capacity costs to interruptible load is but one  component of a complex rate.  In this connection the Commission observes that in Arkansas Pub. Serv. Comm'n v.  Entergy Servs., Inc, 76 F.E.R.C. p 61,040 (1996), when it  granted a hearing upon the allegation that "Arkansans, who  make up 31 percent of the Entergy system's load, bear[ ]  approximately 62 percent of the Entergy system's total nuclear plant decommissioning costs," id. at 61,197, it set down for  hearing the question "whether changes in other system costs  may offset increases in nuclear plant decommissioning costs."Id. at 61,198.  In that case, however, the Commission did not  fault the petitioner for failing to allege that no other elements  of the rate could offset the facially significant charges of  which it complained;  rather, the agency quite reasonably set  the issue of offsetting changes in costs down for hearing at  the request of the respondent utility.


27
Entergy also cites Houlton Water Co., 55 F.E.R.C. p 61,037  (1991) (Houlton I), in which the Commission refused to grant  a hearing to a petitioner that challenged only one aspect of a  utility's rate without alleging that the entire rate had become  unreasonable.  We note that subsequently the petitioner filed  another complaint supported by additional cost data indicating that the utility was overcharging its ratepayers by  $567,400 annually, which showing the Commission held sufficient to warrant a hearing.  See Houlton Water Co., 58  F.E.R.C. p 61,301 (1992) (Houlton II).  The principal rationale of both Houlton cases seems to have been that a  petitioner "must provide some basis to question the reasonableness of the overall rate level, taking into account changes in all cost components."  Houlton I, 55 F.E.R.C. at 61,110;see also Houlton II, 58 F.E.R.C. at 61,963.  If an alleged  annual overcharge of $567,400 was sufficiently material to  warrant a hearing in that case, then we are at a loss to  understand why the $12 to $24 million annual difference  alleged here fails to provide "some basis to question the  reasonableness of the overall rate level," Houlton I, 55  F.E.R.C. at 61,110, granting, of course, that it does not  preclude the possibility that there might be offsetting  changes in other costs.  Moreover, even if Entergy is correct  that Houlton I stands for the proposition that the Commission requires a complainant to support its petition with an  analysis of all components of the overall rate, we do not see  how such a rule can be squared with the result the Commission later reached in Arkansas PSC.  As discussed above, in  that case the Commission did not require the petitioner,  which had alleged a facially significant disparity arising from  changed circumstances, to submit data tending to negate the  possibility that there might be offsetting changes in other  costs;  it merely held that the hearing "also should take into  account whether changes in other system costs may offset  increases in [the] costs" that the Arkansas PSC had challenged.  Arkansas PSC, 76 F.E.R.C. at 61,198.


28
For these reasons, we think the Commission's position that  the LPSC has failed to allege a departure from the rough  equalization of costs among the operating companies is unresponsive to the LPSC's claim that the method of allocating  costs provided in the system agreement has become unjust  and unreasonable.  The opacity of the Commission's terse  orders, however, makes it impossible for us to discern the  content of its "rough equalization" standard.  (We are reminded of what Lord Byron wrote of Coleridge:  "like a hawk  encumber'd with his hood, Explaining metaphysics to the  nation--I wish he would explain his Explanation."  Don  Juan, canto I, dedication, stanza 2.)  The Commission must  explain its rough equalization standard on remand and then  either reveal why the LPSC's allegation of an unjust and  unreasonable method of allocation with facially significant  consequences does not meet that standard, or grant the  LPSC a hearing, as the case may be.

C.PURPA

29
The Public Utilities Regulatory Policy Act of 1992 requires  states to consider--but not to adopt--economically efficient  practices such as offering consumers "an interruptible rate  which reflects the cost of providing interruptible service."  16  U.S.C. § 2621(d)(5).  The LPSC claims it has implemented  this section of the PURPA (as well as another, which we need  not discuss for the result is the same) and that the Commission's orders impermissibly conflict with the PURPA.  Formulating the issue another way, the LPSC asserts that the  asserted conflict with the PURPA violates principles of federalism because it amounts to a "reverse trapping" of costs at  the retail level.  "Trapping" at the wholesale level occurs  when a state exercises its "jurisdiction over retail sales to  prevent the wholesaler-as-seller from recovering the costs of  paying the FERC-approved rate."  Nantahala Power &  Light Co. v. Thornburg, 476 U.S. 953, 970 (1986) (holding such  "trapping" prohibited by Supremacy Clause).  The LPSC  asserts that the Commission's refusal to implement the  PURPA, combined with the LPSC's own adoption of those  standards, leaves unrecoverable at the retail level costs that  must be paid under the wholesale tariff, or in this instance  the system agreement.


30
The Commission claims this second formulation is raised  for the first time on review and therefore waived.  We need  not resolve the waiver question, however, because both versions in substance make the same argument, which lacks any  merit.  The Congress, perhaps mindful that the Commission  could be faced with 50 separate regulatory regimes affecting  any policy it might implement, specifically provided that the  PURPA does "not apply to the operations of an electric utility  ... to the extent that such operations ... relate to sales of  electric energy for purposes of resale."  16 U.S.C. § 2612(b);see also Cities of Bethany v. FERC, 727 F.2d 1131, 1137 (D.C.  Cir. 1984) ("Nothing in the [PURPA] requires FERC to  adopt the views of state rate-setting commissions when the  Commission evaluates the reasonableness of rates that a  utility may charge to wholesale customers").


31
It is apparent, therefore, that the LPSC's implementation  of the PURPA does not bind the Commission in this case. The Congress has expressly precluded that result.

III. Conclusion

32
The Commission's unexplained failure to follow its precedent in Kentucky Utilities is arbitrary and capricious.  The  Commission needs to give a reasoned explanation of its  seemingly obscure standard of "rough equalization," and to  apply that standard to the facts alleged by the LPSC.  Accordingly, the petition for review is granted, the orders of the  Commission are vacated, and this matter is remanded to the  Commission for further proceedings consistent herewith.


33
So ordered.



Notes:


*
 See Middle South Energy, Inc., 31 F.E.R.C. p 61,305, reh'g  denied, 32 F.E.R.C. p 61,425 (1985), aff'd, Mississippi Indus. v.  FERC, 808 F.2d 1525 (D.C. Cir.), vacated in part after recons., 822  F.2d 1104 (D.C. Cir.) (in banc), order on remand, System Energy  Resources, Inc., 41 F.E.R.C. p 61,238 (1987), reh'g denied, 42  F.E.R.C. p 61,091 (1988), aff'd, City of New Orleans v. FERC, 875  F.2d 903 (D.C. Cir. 1989).


**
 In response to a similar concern raised in Mississippi Industries, we observed that "[i]n any wholesale rate proceeding, the  state commissions may protect their interests [by] presenting evidence before the Commission, a neutral body."  Id.  In making that  observation, however, we presumed the Commission would not  abdicate its exclusive jurisdiction over wholesale rates.  See Southern Cal. Edison Co. v. FERC, 162 F.3d 116, 118 (D.C. Cir. 1998)  (rejecting Commission's argument that, because petitioner's interest  stemmed from downstream effect on retail rates, Commission  lacked jurisdiction over wholesale allocation of costs in settlement).


