Opposition Brief — Illinois ex rel. Office of Public Counsel v. Illinois Commerce Commission

Supreme Court, U.S,

FILED

(y OCT 17 199)

No. 91-381

: OFFICE OF THE CLERK |

wail

IN THE

Supreme Court of the United States

OCTOBER TERM, 1991

THE PEOPLE OF THE STATE OF ILLINOIS

EX REL. THE OFFICE OF PUBLIC COUNSEL,

Petitioner,

Vv.

THE ILLINOIS COMMERCE COMMISSION, et al.,

Respondents.

Petition For Writ Of Certiorari

To The Illinois Supreme Court

BRIEF OF RESPONDENT ILLINOIS COMMERCE

COMMISSION IN OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI

JOHN P. KELLIHER

Counsel of Record

DAVID W. McGANN

Special Assistant Attorneys General

Illinois Commerce Commission

180 North LaSaile Street, Suite 810

Chicago, Illinois 60601

(312) 793-2877

Printed by Authority of the State of Illinois (P.O. 35241—125—10-17-91)

i

QUESTION PRESENTED

Whether the Illinois Supreme court correctly held that

Congress’ enactment of the Natural Gas Act, 15 U.S.C.,

§ 717 et seq. (1987), precludes state regulatory commissions

from conducting prudency reviews regarding the pass-

through to end-use customers, of direct-billed take-or-pay

costs imposed upon local distribution companies by the

Federal Energy Regulatory Commission (“FERC’’).

il

TABLE OF CONTENTS

PAGE

QUESTION PRESENTED .................-. i

TABLE OF AUTHORITIES .......scccccvees iii

CONSTITUTIONAL PROVISION

AND STATUTE INVOLVED ...............

STATEMENT OF THE CASE ...............

SUMMARY OF THE ARGUMENT ........... 10

REASONS FOR DENYING THE WRIT ..... 11

I.

STATE AGENCIES ARE PREEMPTED BY

BOTH THE SUPREMACY CLAUSE AND THE

FILED RATE DOCTRINE FROM REVIEWING

THE PRUDENCY OF FERC-ALLOCATED,

DIRECT-BILLED TAKE-OR-PAY COSTS .... 12

A. The take-or-pay liabilities involved in this

case are FERC-mandated ............ 15

B. The law of preemption is directly appli-

cable to the take-or-pay costs involved in

CROG GOOD ic sec ca'Wen ee Sine sein ca kenees 16

C. Congress intended to preempt this area

as it involves the rates, charges and allo-

cations of costs associated with providing

sales for resale services ...........++. 18

II.

THE FILED RATE DOCTRINE IS A RULE

DESIGNED TO ENFORCE THE SUPREMACY

CLAUSE OF THE CONSTITUTION, IT IS NOT

A RULE OF DEFERENCE TO THE DECI-

SIONS OF ADMINISTRATIVE AGENCIES ... 21

CONCLUSION ..nccccccvcccvtscscceccessceses 22

i iil ial lmeliael |

ili

TABLE OF AUTHORITIES

Cases - PAGE

Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571,

169 L.Ed. 856, 101 S.Ct. 2925 (1981)....... 14

City of Chicago v. Illinois Commerce Commission,

Re 3, 18, 15

FPC v. Southern California Edison Co., 376 U.S.

205, 11 L.Ed. 2d 638, 84 S.Ct. 644 (1964) .. 13, 21, 22

General Motors Corporation v. Illinois Commerce

Commission, 143 Ill. 2d 407 (1991) .... 9, 10, 11, 21

General Motors Corporation v. Illinois Commerce

Commission, 191 Ill. App. 3d 450 (1990)... 8, 9, 21

Interstate Natural Gas Co. v. Federal Power Com-

mission, 3381 U.S. 682 (1947) ............... 19

Kentucky West Virginia Gas Company v. Penn-

sylvania Public Utility Commission, 837 F.2d

I vec cc te scvecepeseovees 16, 17

Mississippi Power & Light Co. v. Moore, 487 U.S.

354, 101 L.Ed 2d 322, 108 S.Ct. 2428 (1988) ..

OS oot OE 3, 7, 12, 14, 17, 18, 20

Mississippi River Fuel Corporation v. Federal

Power Commission, 121 F.2d 159 (1941) .... 19

Nantahala Power and Light Company v. Thorn-

burg, 476 U.S. 953, 90 L.Ed 2d 948, 106 S.Ct.

CE 3, 12, 18, 15, 20, 21

Public Utilities Commission of Ohio v. United

Fuel Gas Company, 317 U.S. 456 (1943) ... 19

Re Costs Associated with Take-or-pay Charges, 95

a cs ck aes cuerecceeeeees 3, 7

Re Costs Associated with Take-or-pay Charges, 97

eR 3, 4, 7, 8

iv

Other Authorities

The Supremacy Clause of the United States Consti-

tution (US. Const., art. VI, d. 2).........

The Natural Gas Act, § 1(b), (15 U.S.C.A., § 717(b)) .

FERC Statutes and Regulations, Regulations Pre-

ambles (CCH), 4 30,637 (1985) .............. 4

FERC Statutes and Regulations, Regulations Pre-

ambles (CCH), 930,665 (1985) ..............

FERC Statutes and Regulations, Regulations Pre-

or

ambles (CCH), $430,761 (1987) ............. passim

FERC Statutes and Regulations, Regulations Pre-

ambles (CCH), 4 30,867 (1989) .............. )

Ill. Rev. Stat. 1987, ch. 11136, § 9-220 ......... 8, 18

No. 91-381

IN THE

Supreme Court of the United States

OCTOBER TERM, 1991

THE PEOPLE OF THE STATE OF ILLINOIS

EX REL. THE OFFICE OF PUBLIC COUNSEL,

Petitioner,

Vv.

THE ILLINOIS COMMERCE COMMISSION, et al.,

Respondents.

Petition For Writ Of Certiorari

To The Illinois Supreme Court

BRIEF OF RESPONDENT ILLINOIS COMMERCE

COMMISSION IN OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI

oS

CONSTITUTIONAL PROVISION

AND STATUTE INVOLVED

The Supremacy Clause of the United States Constitu-

tion (U.S. Const., art. VI, cl. 2):

This Constitution, and the Laws of the United States

which shall be made in Purswance thereof; and all

Treaties made, or which shall be made, under the

Authority of the United States, shall be the supreme

Law of the Land; and the Judges in @rery State shall

be bound thereby, any Thing in the Constitution or

Laws of any State to the Contrary notwithstanding.

The Natural Gas Act, § 1(b), (15 U.S.C.A., NJ17(b)):

(b) The provisions of this Chapter shall apply tg the

transportation of natural gas in interstate commerge,

to the sale in interstate commerce of natural gas for

resale for ultimate public consumption for domestic, ~

commercial, industrial, or any other use, and to ~,

natural gas companies engaged in such transporta-

tion or sale, but shall not apply to any other trans-

portation or sale of natural gas or to the local distri-

bution of natural gas or to the facilities used for such

distribution or to the production or gathering of na-

tural gas.

=

STATEMENT OF THE CASE

On November 22, 1988, the Illinois Commerce Commis-

sion (‘‘Commission’’) entered an order in Commission

Docket No. 88-103 establishing the preferred methodology

for Local Distribution Company (‘‘LDC’’) recovery of

“take-or-pay” settlement costs billed to them by interstate

pipeline companies. Re Costs Associated with Take-or-pay

Charges, 97 PUR 4th 189 (1988) (“November Order’’). In

an earlier interim order in this matter concerning the

scope of the hearing, the Commission found, inter alia,

that the “filed rate doctrine’ should be applied in the

investigation. The filed rate doctrine is a rule of pre-

emption, which requires states to give effect to wholesale

rates on file with or approved by the FERC. The Com-

mission found that the filed rate doctrine requires that

it permit the recovery of all take-or-pay costs incurred

through FERC-approved direct-billed rates. Re Costs

Associated with Take-or-pay Charges, 95 PUR 4th 5 at

9 (1988), citing Mississippi Power & Light Co. v. Moore,

487 U.S. 354, 101 L.Ed 2d 322, 108 S.Ct 2428 (1988); Nan-

tahala Power and Light Company v. Thornburg, 476 U.S.

953, 90 L.Ed 2d 943, 106 S.Ct. 2349 (1986); City of Chi-

cago v. Illinois Commerce Commission, 13 Ill. 2d 602

(1958).

Take-or-pay clauses are a standard and accepted part

of long-term gas purchase agreements between interstate

pipelines and their producer-suppliers. The FERC noted

in a 1985 policy statement that:

Contracts for the sale of natural gas have traditional-

ly contained provisions requiring the purchaser to

take, or pay for, if tendered by the seller and not

taken, some specified quantity of natural gas. (foot-

note omitted) Typically, the contracts provided for a

specified period during which gas paid for could be

a we

“made up”’ by the buyer. Indeed, during the 1960’s,

following a period during which a number of pipelines

experienced take-or-pay difficulties, the Commission

promulgated a rule in effect requiring a five-year

period for jurisdictional sales.

Regulatory Treatment of Payments Made in Lieu of Take-

or-pay Obligations, FERC Statutes and Regulations, Reg-

ulations Preambles (CCH), 30,637, p. 31,301 (1985).

Under take-or-pay agreements, pipelines are required

to pay for a stated volume of natural gas held by a pro-

ducer, whether or not that quantity is actually taken by

the pipeline in order to serve LDCs. As the Commission

noted in its November Order, pipeline take-or-pay prob-

lems developed when pipelines were no longer able to

maintain historical levels of gas purchases in order to

avoid the take-or-pay liability as specified in their con-

tracts with producers. Re Costs Associated with Take-or-

pay Charges, 97 PUR 4th 189, 192 (1988).

In its November Order, the Commission described four

historical events which appear to have caused the take-

or-pay problem. First, a nationwide shortage of natural

gas took place in the 1970’s resulting in many LDCs hav-

ing to curtail sales of natural gas to end-use customers.

Second, as a result of this shortage of natural gas, inter-

state pipelines sought out new sources of gas and con-

tracted .* substantial volumes of new natural gas from

producers. Third, in response to the national shortage of

natural gas which was occurring, Congress enacted the

Natural Gas Policy Act of 1978, resulting in additional

sources of natural gas becoming available, but at higher

prices than had been previously charged. Finally, a “‘gas

bubble” or surplus developed which gave rise to the spot

gas market which further eroded the market for pipeline

sales gas. The foregoing events and factors combined to

-

reduce the pipelines’ need to take long term gas supplies

from producers. The reduced market for pipeline sales gas

led in turn to the take-or-pay problem.

In reaction to these market forces, new supplies of

natural gas developed, creating a surplus which allowed

both LDCs and large end-use customers of LDCs to by-

pass interstate pipelines and their suppliers, and purchase

natural gas directly from sellers at lower prices on the

“spot market.” Consequently interstate pipelines saw their

take-or-pay liabilities increase as a result of their inabil-

ity to sell contracted supplies of gas to LDCs.

In response to these developments in the natura] gas

industry, the FERC issued its Order No. 436, on October

9, 1985. FERC Statutes and Regulations, Regulations

Preambles 1982-1985 (CCH), § 30,665 (1985). Order 436

created an open access policy which provided a simplified

gas transportation program, allowing LDCs to transport

gas over an interstate pipeline without using the pipelines

as a wholesaler. The “open access’ policy resulted in

pipeline customers having greater access to lower cost

spot market gas, as an alternative to taking higher priced

gas which pipelines had already contracted for with their

suppliers. While botii LDCs and their customers enjoyed

the benefits of lower cost alternative sources of gas,

pipeline take-or-pay liability increased because previously

contracted gas was not being taken.

On August 7, 1987, the FERC issued its Order 500 deal-

ing with the recovery of take-or-pay liability. FERC Stat-

utes and Regulations, Regulations Preambles 1986-1989

(CCH), 430,761 (1987). The FERC established two

methods for interstate pipelines to pass through to their

customers the take-or-pay liabilities. Jd. at 30,784-85. The

firs. method permitted pipelines to use commodity rate

- o

treatment for all take-or-pay costs which the FERC found

were prudently incurred. This method allowed pipelines

an opportunity to recover 100% of their prudently in-

curred take-or-pay costs, by adding them to the cost of

gas sold in the future. Jd. at 30,786.

Under the second method of recovery, if a pipeline was

willing to absorb between 25% and 50% of its take-or-pay

settlement costs, the FERC would presume that an equal

amount of take-or-pay settlement costs were prudently

incurred and allow recovery of those amounts through

direct-billed charges to the pipeline’s sales customers. The

pipeline’s remaining take-or-pay costs were recoverable

through a commodity surcharge, or a volumetric surcharge

on pipeline throughput. Jd. at 30,784-85.

The Commission order which is the subject of this ap-

* peal was concerned only with the Commission’s power to

examine LDC actions with respect to the second method:

direct billed allocations of take-or-pay settlement costs. As

the Commission noted in its November Order, pipelines

have uniformly opted for Order 500’s direct-billing method

of recovery, even though this method guarantees that

they will not recover all of their take-or-pay costs.

The direct-billing method, which tends to guarantee the

recovery of a minimum of 50% of a pipeline’s total take-

or-pay settlement expense, was preferable for several rea-

sons. First, the framework of Order 500 discouraged pipe-

line customers from initiating prudence challenges before

the FERC by creating the presumption that direct-billed

costs were prudently incurred. Moreover, any party which

failed in its efforts to challenge the prudence of these

costs was required to pay its allocated share of the ac-

tual costs the FERC found prudent. This amount could

be twice the amount that the challenger would have paid

pe

under the direct-billing methodology. FERC Statutes and

Regulations, Regulations Preambles (CCH), 430,761 at

30,787-88.

FERC Order 500 further required that the evsts recov-

ered through direct-billed take-or-pay charges would be

allocated among a pipeline’s customers based on each cus-

tomer’s contribution to the pipeline’s decline in sales

before and after “open access” took effect. Customers who

took advantage of the lower cost spot market supplies

were assigned a higher take-or-pay obligation than those

customers who purchased higher priced gas from pipelines

with take-or-pay contracts. FERC Statutes and Regula-

tions, Regulations Preambles (CCH), ¢ 30,761 ai 30,784-85

(1987).

On July 20, 1988, the Commission issued an “Interim

Order” in Commission Docket No. 88-103 finding that un-

der the Supremacy Clause of the Constitution, most re-

cently interpreted by this Court in Mississippi Power &

Light Co. v. Moore, 487 U.S. 354, 101 L.Ed 2d 322, 108

S.Ct 2428 (1988), the Commission was precluded from con-

ducting a prudency review of direct-billed take-or-pay

allocations and that the FERC could not require or au-

thorize such a prudence review by state agencies. Regard-

ing Costs Associated With Take-or-pay Charges, 95 PUR

4th 5, 8-9 (1988).

On November 22, 1988, the Commission issued its sec-

ond order in the docket dealing with the remaining issues

presented. The Commission found that take-or-pay charges

should be recovered from all classes of customers, includ-

ing transportation customers, on a uniform volumetric

basis. Re Costs Associated with Take-or-pay Charges, 97

PUR 4th 189, 197 (1988).

yr

In reaching its decision on these points, the Commis-

sion concluded that assessing take-or-pay costs on a volu-

metric basis was the most accurate way of reflecting the

underlying factors which brought about the existence of

take-or-pay costs as well as the benefits received from

using alternative sources of gas supply. Re Costs Asso-

ciated with Take-or-pay Charges, 97 PUR 4th 189, 197

(1988). The Commission also concluded that the recovery

of take-or-pay charges under the mechanism of the Uni-

form Purchase Gas Adjustment Clause (“UPGA”’), allowed

under § 9-220 of the Illinois Public Utilities Act, provided

the most efficient and effective mechanism for recover-

ing take-or-pay costs, and was a cost of gas under the

Illinois Public Utilities Act and the Commission’s regula-

tions. Re Costs Associated with Take-or-pay Charges, 97

PUR 4th 189, 197-98 (1988). Ill. Rev. Stat. 1987, ch. 111%,

§ 9-220.

OPC appealed the decisions of the Commission to the

appellate court. General Motors Corporation et al. v. IIli-

nois Commerce Commission et al., 191 Ill. App. 3d 450

(1990). OPC contended that the Commission was not pre-

empted from reviewing and possibly preventing the pass-

through of direct-billed take-or-pay costs. OPC asserted

that the Commission should conduct a “prudence review”

to determine whether those costs had been properly in-

curred by the LDCs. In a 2-to-1 decision entered on De-

cember 5, 1989, the appellate court reversed the Com-

mission’s order. In its opinion, the majority held that

the preemption analysis turned on the FERC’s intent to

preclude state regulatory commissions from considering

whether the charges in question «ould be recoverable in

their entirety. Because the FERC had suggested that

there should be an “equitable sharing”’ of take-or-pay costs

among the entire industry, including the LDCs, and had

a

stated that state regulatory commissions were free to con-

sider a variety of issues with respect to take-or-pay costs,

the majority found no intent on the part of the FERC

to compel the states to permit recovery of 100% of those

costs by the LDCs. General Motors Corporation et al. v.

Illinois Commerce Commission et al., 191 Ill. App. 3d

450, 462 (1990).

The dissenting member of the appellate court panel

found no authority for a Commission initiated prudence

review of purchasing decisions rade by the LDCs. Justice

Lund found the FERC’s allocation of take-or-pay costs to

LDCs to be controlling:

In our present case, the FERC has determined that

take-or-pay power costs, incurred by interstate power

suppliers, shall be passed on to the LDCs. The take-

or-pay costs have, thus, been determined to be part

of the wholesale cost of power by the FERC, and

must be allowed by the State utility commissioners

as reasonable operating expenses when setting retail

prices.

General Motors Corporation et al. v. Illinois Commerce

Commission et al., 191 lil. App. 3d 450, 465 (1990).

Subsequent to the issuance of the appellate court’s opin-

ion in this case, the FERC issued its Order 500-H. FERC

Order No. 500-H (Dec. 21, 1989), 54 Fed. Reg. 52344, 49

FERC Statutes and Regulations, Regulations Preambles

(CCH), ¢ 30,867. In the order, the FERC stated that its

decisions regarding take-or-pay allocations are not intended

to preempt state review of take-or-pay liabilities incurred

by LDCs.

The Illinois Supreme Court reversed the decision of the

appellate court. General Motors Corporation et al. v. Illi-

nois Commerce Commission et al., 143 Ill. 2d 407 (1991).

x=

The court found that any reliance on the FERC’s intent

was misplaced, and that it was Congress’ intent in enact-

ing the Natural Gas Act which was controlling. The court

further held that the case at bar presented the “classic

situation for application of the [filed-rate] doctrine,” and

held that the filed rate doctrine prohibited the Commis-

sion from conducting prudency reviews of direct-billed

take-or-pay costs imposed upon local distribution com-

panies by the FERC. General Motors, 143 Ill. 2d 407,

423-24.

SUMMARY OF THE ARGUMENT

State agencies are preempted by both the Supremacy

Clause and the filed rate doctrine from reviewing the pru-

dency of FERC-allocated, direct-billed take-or-pay costs.

Congress’ intent to preempt this area is clear. The direct-

billed take-or-pay charges at issue in this case involve the

rates, charges and allocations of costs associated with pro-

viding sales for resale services. These charges clearly fall

within the parameters of the FERC’s jurisdiction. More-

over, reliance on the intent of the FERC in support of

the assertion that the direct-billed take-or-pay charges in-

volved in this case are subject to state prudency reviews

is misplaced. The filed rate doctrine is a rule designed

to enforce the Supremacy Clause of the Constitution, it

is not a rule of deference to the decisions of administra-

tive agencies. It is the intent of Congress which is de-

cisive. In this case, the Natural Gas Act, as interpreted

by this Court in the filed rate doctrine, preempts state

agencies from reviewing the prudency of these FERC-

allocated, direct-billed take-or-pay costs.

_ |

REASONS FOR DENYING THE WRIT

The Commission believes that regardless of the inten-

tion of the FERC, Order 500 established a rate or charge

for natural gas. Order 500 preempts state regulatory agen-

cies, such as the Commission, from altering or denying

the pass-through of such costs to LDC customers. The

Illinois Supreme Court correctly affirmed the Commis-

sion’s November Order. The court properly described the

issue as being whether the Commission “is preempted

from disallowing distributors full recovery, from their cus-

tomers, of the FERC-allocated take-or-pay costs. General

Motors Corporation v. Illinois Commerce Commission,

143 Ill. 2d 407 at 412 (emphasis added).

The question before this Court is not, as Petitioner

argues, whether the Commission is preempted from con-

ducting a prudence review with regard to all take-or-pay

costs which flow to LDCs from interstate pipelines. Rather,

the question is whether the Commission and the Illinois

Supreme Court were correct in finding that the Commis-

sion was foreclosed from reviewing the prudence of LDC

purchasing decisions with regard to direct-billed, FERC-

allocated, take-or-pay costs. Petitioner’s global arguments

improperly expand the scope of review of the Commis-

sion’s decision with regard to these direct-billed costs.

A reading of the Commission’s November Order indi-

cates that the Commission’s preemption analysis was

confined, both in the July 20, 1988 Interim Order and

in the November Order, to recovery of direct-billed,

FERC-allocated costs. In contrast, the OPC improperly

focuses on the preemption of take-or-pay costs in gen-

eral. The Commission urges this Court to view the issue

at hand in the same narrow manner as did the Commis-

sion. The issue is simply whether the Commission can

deny LDC recovery of direct-billed take-or-pay charges

based on a prudence review of the LDC’s purchasing prac-

tices. The Commission respectfully submits that the in-

voluntary nature of these direct-billed, FERC-allocated

costs, takes them outside the sphere of exceptions to the

filed rate doctrine.

The Illinois Supreme Court’s decision is entirely con-

sistent with this Court’s decisions explaining and apply-

ing the “filed rate doctrine.” See Mississippi Power &

Light Co. v. Moore, 487 U.S. 354, 101 L.Ed 2d 322, 108

S.Ct 2428 (1988); Nantahala Power and Light Company

v. Thornburg, 476 U.S. 953, 90 L.Ed 2d 948, 106 S.Ct.

2349 (1986). For the reasons stated below, the petition

for a writ of certiorari should be denied.

s.

STATE AGENCIES ARE PREEMPTED BY BOTH THE

SUPREMACY CLAUSE AND THE FILED RATE DOC-

TRINE FROM REVIEWING THE PRUDENCY OF FERC-

ALLOCATED, DIRECT-BILLED TAKE-OR-PAY COSTS.

The preemptive effect of FERC-set allocations is well

established and was affirmed by this Court in Nantahala

Power and Light Company v. Thornburg, 476 U.S. 953,

90 L.Ed 2d 943, 106 S.Ct. 2349 (1986). In that case, the

North Carolina Utility Commission had determined that

a FERC-set allocation of low-cost Tennessee Valley Au-

thority electric power was too low, resulting in higher

electric rates for end-use customers. The North Carolina

Commission decided that the company should be imputed

to have received a higher allocation of low cost power for

purposes of determining its intrastate rates. The North

Carolina appellate and supreme courts affirmed that de-

cision.

=

This Court reversed. Looking first to the filed rate doc-

trine, this Court stated that federal and state courts are

prohibited from reviewing the reasonableness of rates

under the jurisdiction of the FERC and its predecessor,

the Federal Power Commission (‘“FPC’’), Nantahala

Power & Light v. Thornburg, 476 U.S. 958, 963-64; 90

L.Ed. 2d 948, 952-53, 106 S.Ct. 2d 2349 (1986). The Court

recognized that the filed rate doctrine is not a rule of ad-

ministrative law designed to ensure that courts respect

administrative decisions; rather, it is a matter of the en-

forcement of the Supremacy Clause of the Constitution.

Nantahala, 476 U.S. at 963, 90 L.Ed. 2d at 952. Citing

the Illinois Supreme Court’s decision in City of Chicago

v. Illinois Commerce Commission, 13 Ill. 2d 607 (1958)

with approval, this Court noted that state courts had

broadly applied the filed rate doctrine in several contexts

where the FERC had established wholesale power prices.

Id. at 965, 90 L.Ed. 2d at 953. In explaining the rationale

behind its decisions and the decision of the various state

courts, this Court stated that:

[OJjur decisions have squarely rejected the view... .

that the scope of FPC jurisdiction over interstate

sales of gas or electricity at wholesale is to be deter-

mined by a case-by-case analysis of the impact of

state regulation upon the national interest. Rather,

Congress meant to draw a bright line easily ascer-

tained, between state and federal jurisdiction, mak-

ing unnecessary such case-by-case analysis. This was

done in the Power Act by making FPC jurisdiction

plenary and extending it to all wholesale sales in in-

terstate commerce except those which Congress has

made explicitly subject to regulation by the States.

FPC v. Southern California Ediscn Co., 376 U.S.

205, 215-216, 11 L.Ed. 2d 638, 84 S.Ct. 644 (1964).

Id. at 966, 90 L.Ed. 2d at 954.

=

Thus, under the filed rate doctrine, as interpreted by

this Court, state utility commissions are precluded from

taking actions inconsistent with decisions made by the

FERC within its regulatory authority. Specifically, the

filed rate doctrine requires that States give effect to rates

set by the FERC. Arkansas Louisiana Gas Co. v. Hall,

453 U.S. 571; 169 L.Ed. 856, 101 S.Ct. 2925 (1981).

This Court reaffirmed its view of the filed rate doctrine

and the plenary authority granted the FERC in Mississippi

Power & Light v. Moore, 487 U.S. 354, 101 L.Ed 2d 322,

108 S.Ct. 2428 (1988). In Mississippi Power & Light, this

Court considered the extent of allowable state commis-

sion scrutiny over FERC-set payments by a retail util-

ity to a wholesale utility regulated by the FERC. The

Mississippi Supreme Court had held that the state com-

mission erred when it allowed t ie recovery of the retail

utility’s FERC-allocated costs, without having first con-

ductedeits own review of the prudency of those costs.

In reversing the Mississippi Supreme Court’s decision,

this Court found that there was no room under the filed

rate doctrine for the state commission to make its own

determination of reasonable costs once those costs had

been established by FERC:

* * * States may not alter FERC-ordered allocations

of power by substituting their own determinations of

what would be just and fair. FERC-mandated alloca-

tions of power are binding on the States, and States

must treat those allocations as fair and reasonable

when determining retail rates.

Mississippi Power & Light, 487 U.S. 354, 371, 101 L.Ed.

2d 322, 338 (1988).

As discussed previously, prior to its decision in this case,

the Illinois Supreme Court had also recognized the pre-

_

emptive effect the NGA has upon the Commission’s ability

to set natura! gas rates in a case cited with approval by

this court in Nantahala. City of Chicago v. Illinois Com-

merce Commission, 13 Ill. 2d 607 (1958); See Nantahala,

476 U.S. at 963, 90 L.Ed. 2d at 952. In City of Chicago,

review of a Commission order was sought which allowed

Peoples Gas Light and Coke Company, an Illinois LDC,

to automatically adjust its rates to reflect changes in

wholesale rates established by the FPC. The City of Chi-

cago had contended that because Peoples Gas received

its wholesale gas from two subsidiaries, the Commission

was required to review the reasonableness of the Federal

Power Commission-approved rates charged for that gas.

The Illinois Supreme Court held that:

[t]he Natural Gas Act of 1938, (Citation omitted)

vested the power to fix rates for natural gas trans-

ported and sold to distributing companies in inter-

state commerce exclusively in the FPC and preempted

any right which might have existed in the States to

regulate such rates. (Citations omitted). [The Sub-

sidiaries] must charge and Peoples must pay the FPC

determined rate, and the Commission has no power

over such rate.

City of Chicago v. Illinois Commerce Commission, 13 II.

2d 607, 614 (1958).

A. The take-or-pay liabilities involved in this case are FERC-

mandated. ¢

In an effort to circumvent this overwhelming author-

ity, the OPC states that “{t]ake-or-pay liabilities are not

FERC-approved allocations of costs or FERC-mandated

payments.”’ OPC Petition, n. 18. Rather, the OPC asserts,

“the issue is intrastate and is tied to FERC only through

the policy statements issued by the FERC directing the

—)]6—

states to allocate take-or-pay costs across all segments of

the industry.”’ Jd. The OPC describes the Illinois Supreme

Court’s decision in this matter as being inconsistent with

the preemption doctrine. None of the OPC’s arguments

are supportable or invite further judicial scrutiny.

OPC’s assertion that direct-billed amounts allocated to

an LDC and ordered to be paid by that LDC are neither

an allocation of costs nor a mandated payment strains the

imagination. It begs the question of whether the LDC has

any choice to avoid the charge. The OPC has offered no

theory of law which would indicate that once the FERC

validly allocates a portion of an interstate pipeline’s take-

or-pay burden directly to a particular LDC that the

LDC’s payment of that allocated amount is either elec-

tive or avoidable.

B. The law of preemption is directly applicable to the take-

or-pay costs involved in this case.

While the Commission agrees that states are only

preempted by federal agency action in particular circum-

stances (see OPC Petition, p. 19), the Commission believes

that the situation presented by this case is the precise

situation contemplated by the filed rate doctrine. As the

OPC recognizes, there are only three circumstances in

which federal law may preempt state law. One of these

is present here; where Congress has given a federal agen-

ey complete and plenary authority over an area of regula-

tion. In such an instance, it is the intent of Congress, and

not the interpretation of the agency, which must be given

effect by the courts.

The Commission respectfully suggests that the case of

Kentucky West Virginia Gas Company v. Pennsylvania

Public Utility Commission, 837 F.2d 600 (8rd Cir. 1988)

demonstrates the proper purpose and focus of prudency

reviews conducted by state commissions, as well as de-

dineating the respective spheres of authority possessed by

state and federal agencies. There, an LDC challenged the

state commission’s refusal to allow the recovery of the

costs of gas purchased, based upon the conclusion that

the utility was imprudent in not purchasing lower cost

gas which was available at the time of purchase. The util-

ity contended that because the cost of the higher cost gas

was approved by FERC, the state commission was pre-

empted from inquiring into its purchase decision. Kentucky

West Virginia Gas Company v. Pennsylvania Public Util-

ity Commission, 837 F.2d 600, 605.

The court rejected this contention, finding that while

state commissions were clearly preempted from question-

ing or altering FERC rates which established the costs

of gas, it was within the authority of the commission to

inquire into, and deny the recovery of higher cost gas pur-

chased, where other sources of lower cost gas were avail-

able. Kentucky West Virginia Gas Company v. Pennsyl-

vania Public Utility Commission, 837 F.2d 600, 609.

This Court in Mississippi Power & Light, clearly recog-

nized that the ability of a retail utility, such as an LDC,

to exercise some choice in its purchase practices is the

demarcation point between FERC authority under the

filed rate doctrine, and that of a state commission

operating under its own authority. This Court stated that:

As we assumed [in Nantahala], it might weil be un-

reasonable for a utility to purchase unnecessary quan-

tities of high cost power, even at FERC-approved

rates, if it had the legal right to refuse to buy that

power. But if 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. 101 L.Ed. 2d at 340. (Emphasis added).

Pursuant to § 9-220 of the Illinois Public Utilities Act,

Ill. Rev. Stat. 1987, ch. 111%, § 9-220, annual reconcilia-

tion hearings take place at which time each Illinois LDC

is required to establish the prudency of its purchase prac-

tices during the year under review. In order for this hear-

ing to be meaningful in any sense, the prudency of a util-

ity’s purchase practices must focus only upon those costs

concerning which the utility had the opportunity or choice

to make a lower cost purchase.

The pass-through of take-or-pay costs in the present

case, however, does not involve an issue or question of

choice by the LDCs in their purchase practices. As dis-

tinct from the question of choice in gas purchases, the

challenge made in this case is that some portion of the

take-or-pay charges properly imposed on LDCs by the

Order 500 allocation can be denied recovery from end-use

customers. Such a challenge is clearly directed to the rate

or charge imposed by FERC, and is prohibited by the

filed rate doctrine, as set forth in Mississippi Power &

Light v. Moore, 487 U.S. 354, 374, 101 L.Ed. 2d at 340.

C. Congress intended to preempt this area as it involves

the rates, charges and allocations of costs associated

with providing sales for resale services.

The OPC argues that the legislative history of the NGA

shows that the Congress expressed no intent to preempt

states in cases such as this, and that Congress did not

intend to occupy the whole of natural gas regulation. OPC

Petition, p. 20. These conclusions are purportedly gleaned

from the fact that the Congress, in enacting the NGA,

left certain admittedly interstate functions to state regula-

= oa

tion. For example, with regard to the interstate sale of

gas, the Congress only chose to regulate sales for resale.

At the time the NGA was enacted, the states had been

prohibited by the United States Supreme Court from

regulating interstate pipelines because of the Commerce

Clause. In enacting the NGA, the Congress intended to

create a comprehensive scheme of regulation that would

be complementary in its operation to that of the states,

without any confusion of functions. Public Utilities Com-

mission of Ohio v. United Fuel Gas Company, 317 U.S.

456 (1943). The chief purpose of the NGA was to secure

regulation of the transporter and large scale seller in in-

terstate commerce. Mississippi River Fuel Corporation

v. Federal Power Commission, 121 F.2d 159 (1941).

The Natural Gas Act contemplated a dual system of

regulation. The purpose of Congress in enacting the NGA

was to occupy the field in cases where courts had found

the states unable to act so that there would be no gaps

in regulation. See Interstate Natural Gas Co. v. Federal

Power Commission, 331 U.S. 682 (1947). Section 1 of the

NGA enumerated the scope of the FERC’s jurisdiction.

Generally, federal regulation applies to the transportation

of natural gas in interstate commerce but not to-any other

transportation. It applies to the sale in interstate com-

merce of natural gas for resale for ultimate public con-

sumption but not to the local distribution of natural gas.

The law in this regard is clear; the Commission is pre-

empted from regulating interstate sales for resale. Thus,

costs directly allocated to an LDC arising from pipeline

maintenance of inventories to meet responsibilities for

their sales for resale customers clearly fall outside the

ambit of state regulation insofar as the LDC has no choice

but to pay a specific allocated share of those costs.

—~20—

To reiterate, the question is not whether the Congress

intended to occupy the entire field of natural gas regula-

tion but whether it intended to occupy the portions of

the field at issue in this case, i.e., rates, charges and

allocations of costs associated with providing sales for

resale services. The law in this area, as established by

this Court, amply demonstrates that Congress indeed in-

tended to preempt the regulation of sales for resale. Take-

or-pay charges are the direct result of pipeline cost of pro-

viding sales for resale services. The FERC has recognized

as much by stating in Order 500 that:

... It is true that the Commission’s current policy,

and one of the flowthrough mechanisms found ac-

ceptable in this rule, is that take-or-pay buyout and

buydown costs are expenses related to the acquisition

of gas supplies and should therefore be classified as

production related and recovered through the pipe-

line’s commodity rates.

FERC Statutes and Regulations, Regulations Preambles

(CCH), 430,761, p. 30,786.

OPC’s fixation on Congress’ partial preemption of the

entire natural gas field should not be allowed to obscure

the fact that sales for resale and charges associated with

those sales, are under the sole jurisdiction of the FERC.

States are not allowed to interfere with FERC’s plenary

authority over interstate wholesale rates. Mississippi

Power & Light Co. v. Moore, 487 U.S. 354, 101 L.Ed 2d

322, 108 S.Ct. 2428 (1988); Nantahala Power and Light

Company v. Thornburg, 476 U.S. 953, 90 L.Ed. 2d 943,

106 S.Ct. 2349 (1986). The lesson of these cases is clear:

states are not allowed to “trap” costs found by the FERC

to be reasonable, by denying LDC’s the right to recover

them from their ratepayers. To adopt the OPC’s position

could result in just such a “trapping” of costs. Therefore,

OPC’s assertions must be rejected.

=

II.

THE FILED RATE DOCTRINE IS A RULE DESIGNED

TO ENFORCE THE SUPREMACY CLAUSE OF THE CON-

STITUTION, IT IS NOT A RULE OF DEFERENCE TO

THE DECISIONS OF ADMINISTRATIVE AGENCIES.

Finally, the OPC contends that the Illinois Supreme

Court’s decision in this matter is inconsistent with this

Court’s decisions which speak to a federal agency’s power

to declare its intention in the area of preemption. OPC

Petition, pp. 38-43. OPC continues to place importance on

the reasoning of the Illinois appellate court, which was

rejected by the Illinois Supreme Court. See, General Motors

Corporation et al. v. Illinois Commerce Commission et

al., 191 Ill. App. 3d 450, 462 (1990); General Motors Cor-

poration v. Illinois Commerce Commission, 143 Ill. 2d

407, 421 (1991). Without inquiring into whether the FERC’s

interpretation was a correct one, the appellate court simply

concluded that the FERC’s interpretation was reasonable

and followed it without further analysis.

By taking the FERC’s opinion as to the effect of its

orders at face value, the appellate court and the OPC mis-

apprehend this Court’s decision in Nantahala. Rather

than treating the issue as one of enforcement of the

Supremacy Clause, as required by Nantahala, the appel-

late court and the OPC relegate the filed rate doctrine

to a rule of deference to the decisions of administrative

agencies; the very rationale that was specifically rejected

in Nantahala, 476 U.S. at 963, 90 L.Ed. 2d at 952. In

addition, having ignored Congress’ intent to give the

FERC plenary authority in the field of natural gas rates,

as interpreted by the courts in the filed rate doctrine,

the court and the OPC engage in the very same case-by-

case analysis this Court rejected in FPC v. Southern

California Edison, 376 U.S. 205, 215-216, 11 L.Ed. 2d 638,

—22—

84 S.Ct. 644 (1964). A proper analysis of the preemption

issue in this case cannot begin and end with the FERC’s

intent as expressed in its orders. It is the intent of Con-

gress which is relevant, and in this case Congress in-

tended to preclude state regulatory commissions from con-

ducting prudency reviews regarding the pass-through to

end-use customers of costs, such as these direct-billed

take-or-pay costs, imposed upon local distribution com-

panies by the FERC.

CONCLUSION

WHEREFORE, the Illinois Commerce Commission prays

that this Court deny the petition for a writ of certiorari.

Respectfully submitted,

JOHN P. KELLIHER

Counsel of Record

DAVID W. McGANN

Special Assistant Attorneys General

Illinois Commerce Commission

180 North LaSalle Street, Suite 810

Chicago, Illinois 60601

(312) 793-2877