Appendix — Arkansas Public Service Commission v. Federal Energy Regulatory Commission

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Supreme Cour, U.S.

oer FILED

JOSEPH f. SPANIOL, JR.

a _— : CLERK =

Supreme Court of the Gnited, States

OCTOBER TERM, 1986

ARKANSAS PUBLIC SERVICE COMMISSION; STATE OF

ARKANSAS; ARKANSAS-MISSOURI CONGRESSIONAL DELEGATION;

AND MISSOURI PUBLIC SERVICE COMMISSION,

Petitioners,

¥.

FEDERAL ENERGY REGULATORY COMMISSION,

Respondents.

APPENDIX TO PETITION FOR A WRIT OF

CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

WALLACE L. DUNCAN* WILLIAM MASSEY

JAMES D. PEMBROKE Office of Senator Dale Bumpers

J. CATHY LICHTENBERG United States Senate

JANICE L. LOWER Washington, D.C. 20510

DUNCAN, WEINBERG & MILLER, P.C. (202) 224-4843

1615 M Street, N.W.

Suite 800

Washington, D.C. 20036

(202) 467-6370

Attorney for the Arkansas-

Missouri Congressional

Delegation

WILLIAM C. HARRELSON

Att s for the Arkansas .

Attorneys for P General Counsel

Public Service Commission

Missouri Public Service Commission

STEVE CLARK P.O. Box 360

Attorney General Jefferson City, Missouri 65102

Mary B. STALLCUP (314) 751-2481

Deputy Attorney General

Justice Building

Little Rock, Arkansas 72201

(501) 371-1967

Attorneys for the State of

Arkansas

February 1987 * Counsel of Record

Attorney for the Missouri Public

Service Commission

rN ETT OO ATTAE

PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. (202) 347-8203

TABLE OF CONTENTS

Appendix A Mississippi Industries v. FERC, No.

85-1611 (D.C. Cir. Jan. 6, 1987) ......

Appendix B Middle South Energy, Inc. and Middle

South Services, Inc., 32 FERC (CCH)

DE Ririclsicesctasesstunitinsactaves

Appendix C Middle South Energy, Inc. and Middle

South Services, Inc., 31 FERC (CCH)

(A £ SORES ronunemaye

Appendix D Middle South Services, Inc., 30 FERC

IEE Stiisiach ca niccinininasachnugeccoie

Appendix E Middle South Energy, Inc., 26 FERC

OD ME IIE da heisas cnlipebhvadisiscancendsute

Appendix F Statute Involved: Federal Power Act—

Part II, 16 U.S.C. § 824, et seg.

DME shan icediccthdinehi vsvkavapsaneuiscavan sakeaniess

Federal Power Act—Part III, 16 U.S.C.

Ob Fei Me PO MII kccinnccannccccsseonasesse

Appendix G Statute Involved: Public Utility Hold-

ing Company Act, 15 U.S.C. §§ 79(a),

THb), T9Hh), 79k) (1982) .............ccccees

APPENDIX A

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 85-1611

MISSISSIPPI INDUSTRIES, PETITIONER

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

MISSOURI PUBLIC SERVICE COMMISSION,

MISSISSIPPI POWER & LIGHT COMPANY,

LOUISIANA POWER & LIGHT COMPANY, et al.,

CITY OF NEW ORLEANS, LOUISIANA,

MISSISSIPPI PUBLIC SERVICE COMMISSION,

STATE OF ARKANSAS,

UNION CARBIDE CORPORATION,

OCCIDENTAL CHEMICAL CORPORATION,

ARKANSAS & MISSOURI CONGRESSIONAL DELEGATIONS,

LOUISIANA PUBLIC SERVICE COMMISSION,

ARKANSAS PUBLIC SERVICE COMMISSION,

— JEFFERSON PARISH, LOUISIANA,

ARKANSAS POWER & LIGHT COMPANY,

_ MIDDLE SouTH ENERGY, INC.,

_ MIDDLE SOUTH SERVICES, INC.,

and CITIES OF CONWAY AND WEST MEMPHIS, ARKANSAS,

INTERVENORS

Nos. 85-1613, 85-1620 & 85-1621

MISSISSIPPI PUBLIC SERVICE COMMISSION, PETITIONER

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

No. 85-1615

ARKANSAS POWER & LIGHT COMPANY, PETITIONER

Vv.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

No. 85-1616

MISSISSIPPI POWER & LIGHT COMPANY, PETITIONER

Vv.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

No. 85-1617

LOUISIANA PUBLIC SERVICE COMMISSION, PETITIONER

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

| lll

No. 85-1618

OCCIDENTAL CHEMICAL CORPORATION, et al., PETITIONERS

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

No. 85-1619

REYNOLDS METALS COMPANY, et al., PETITIONERS

Vv.

FEDERAL ENEPGY REGULATORY COMMISSION, RESPONDENT

No. 85-1623

EDWIN LLOYD PITTMAN, Attorney General of the

State of Mississippi, PETITIONER

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

No. 85-1624

ARKANSAS AND MISSOURI CONGRESSIONAL DELEGATIONS,

PETITIONER

Vv.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

No. 85-1626

ARKANSAS PUBLIC SERVICE COMMISSION, PETITIONER

Vv.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

No. 85-1637

STATE OF ARKANSAS, PETITIONER

ps Vv.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

No. 85-1640

MISSISSIPPI LEGAL SERVICES COALITION, PETITIONER

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

No. 85-1647

CITY OF NEW ORLEANS, PETITIONER

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

No. 85-1712

MISSOURI PUBLIC SERVICE COMMISSION, PETITIONER

Vv.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

No. 85-1719

Representative WEBB FRANKLIN, PETITIONER

Vv.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

No. 85-1772

JEFFERSON PARISH, LOUISIANA, PETITIONER

Vv.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

Petitions for Review of Orders of the

Federal Energy Regulatory Commission

Argued March 24, 1986

Decided January 6, 1987

James P. Murphy, with whom Michael T. Mishkin,

James V. Selna, Donald T. Bliss, and David T. Beddow

were on the brief, for petitioner Arkansas Industries.

Carl D. Hobelman, with whom Jerry D. Jackson, M. Remy

Ancarrow, and Robert J. Glasser were on the brief, for

petitioner Arkansas Power & Light Company.

J. Cathy Lichtenberg, with whom Wallace L. Duncan,

James D. Pembroke, Janice L. Lower, Martin C. Roth-

felder, William Massey, Steve Clark, and Mary B. Stall-

cup were on the brief, for petitioners Arkansas Public

Service Commission, et al.

Hiram C. Eastland, Jr., with whom Edwin L. Pittman,

Frank Spencer, John L. Maxey, Il, and Alfred Chaplin

were on the brief, for petitioners Mississippi Public Serv-

ice Commission, et al.

James K. Child, Jr., with whom Paul H. Keck, Michael

F. Healy, Douglas L. Beresford, Robert R. Nordhaus,

Adam Wenner, Howard Eliot Shapiro, and Margaret A.

Moore were on the brief, for petitioners Mississippi In-

dustries, et al.

Glenn L. Ortman, with whom Clinton A. Vince and

Paul E. Nordstrom were on the brief, for petitioner City

of New Orleans.

Michael R. Fentham, with whom David B. Robinson

and Paul L. Zimmering were on the brief, for petitioner

Louisiana Public Service Commission.

Peter C. Kissel, Richard G. Morgan, Earle H. O'Donnell,

and Robert R. Morrow were on the brief for petitioners

Occidential Chemical Corporation, et al.

A. Karen Hill, Attorney, Federal Energy Regulatory

Commission, with whom William H. Satterfield, General

Counsel, Jerome M. Feit, Solicitor, and John N. Esler,

Ill, Attorney, Federal Energy Regulatory Commission,

were on the brief, for respondent.

Richard M. Merriman, Robert S. Waters, and James

K. Mitchell were on the brief for intervenors Middle

South Services, Inc., et al.

William A. Chesnutt entered an appearance for inter-

venor Union Carbide Corporation.

Before EDWARDS and Bork, Circuit Judges, and WRIGHT,

Senior Circuit Judge.

Opinion per curiam.

Separate opinion by Circuit Judge Bork, concurring in

part and dissenting in part.

PER CURIAM: We consider eighteen consolidated peti-

tions for review of two orders of the Federal Energy

Regulatory Commission (FERC or the Commission).'

In the orders under review the Commission held that the

four operating companies of the Middle South Utilities

(MSU) system must share the costs of MSU’s investment

in nuclear energy in proportion to their relative demand

for energy generated by the system as a whole. The

Commission implemented this scheme by reallocating re-

sponsibility for investment costs associated with the cata-

strophically uneconomical Grand Gulf I nuclear plant.

The parties attack both the Commission’s jurisdiction

and the rationality of its decision. Although the Com-

mission’s allocation of nuclear investment costs is sub-

ject to reasonable dispute, we do not think such criticisms

warrant reversal of FERC’s orders. We therefore affirm.

I. BACKGROUND

The controversy facing the court today stems from the

pattern of power generation investment cost sharing prac-

ticed by Middle South Utilities and its operating com-

panies. In order to address fully the proper allocation of

the costs of nuclear power generation among those com-

panies, we review MSU’s structure, the history of its

involvement in nuclear power generation, and the record

of the proceedings below.

1 Middle South Energy, Inc. and Middle South Services, Inc.,

81 FERC { 61,305 (1985), and Middle South Energy, Inc.

and Middle South Services, Inc., 32 FERC {61,425 (1985)

(opinion on rehearing).

A. The Middle South System

1. Corporate structure. Middle South Utilities, Inc. is

a registered holding company under the Public Utility

Holding Company Act of 1985 (PUHCA). 15 U.S.C. § 79

et seg. (1982). It owns outright four utility operating

companies: Louisiana Power & Light Co. (LP&L), New

Orleans Public Service, Inc. (NOPSI), Arkansas Power

& Light Co. (AP&L), and Mississippi Power & Light Co.

(MP&L). See Middle South Energy, Inc., 26 FERC

| 63,044, 65,098 (1984). The operating companies sell

electricity, both wholesale and retail, in the states of

Louisiana, Arkansas, Missouri, and Mississippi.’

Although each operating company has a separate board

of directors, the sole stockholder, MSU, selects each di-

rector. In addition, the various companies do have com-

mon or overlapping officers and directors. The Chairman

and Chief Executive Officer (CEO) of MSU is a mem-

ber of the board of each operating company and the

CEOs of the operating companies are members of the

board of MSU. Other MSU board members are also

board members of individual operating companies. Mid-

dle South Services, Inc., 30 FERC §] 63,030, 65,142 (Doc-

ket No. ER82-463-000) (ALJ Head).

2MSU also owns a corporate services company, Middle

South Services, Inc., and a fuel purchasing company, System

Fuel, Inc. See Middle South Services, Inc., ER82-483-000,

80 FERC § 63,030, 65,141-42 (1985).

One useful way of viewing the relative size of the com-

panies is to compare their relative shares of the system’s

average demand:

Share of Total System Load

LP&L 44%

AP&L 83 %

MP&L 15%

NOPSI 8%

See Middle South Energy, Inc., ER82-616-000, 26 FERC

| 63,044, 65,109 (1984). These figures are based on average

load demand in 1982.

Transactions among the various operating companies

are governed by a System Agreement. Over its history,

MSU has filed three successive System Agreements—in

1951, 1978, and 1982. The Commission scrutinizes the

System Agreement and modifies it when necessary. See,

e.g., Middle South Services, Inc., 16 FERC {61,101

(1981) (modifving the 1973 System Agreement), a/f'd,

688 F.2d 357 (5th Cir. 1982), cert. denied, 460 U.S. 1082

(1983). Section 3.01 of the Agreement states the sys-

tem’s general goal of operating as a coherent unit:

The purpose of this Agreement is to provide the con-

tractual basis for the continued planning, construc-

tion, and operation of the electric generation * * *

facilities of the Companies in such a manner as to

achieve economies consistent with the highest practi-

cable reliability of service * * *. This agreement

also provides a basis for equalizing among the Com-

panies any imbalance of cost associated with the

construction, ownership and operation of such facili-

ties as are used for the mutual benefit of all the

Companies.

483-R. 7117, VII Joint Appendix (JA) 1569.° In light

of this language, Administrative Law Judge (ALJ) Head

found that the MSU system has sought to coordinate the

addition of operating capacity by each individual operat-

ing company while achieving the greatest economies of

scale.t As he observed:

* Citations to the record in Middle South Services, Inc.,

ER82-483-000, 80 FERC {63,080 (1985), are noted as

“483-R.” Citations to the record in Middle South Energy,

Inc., a 26 FERC { 63,044 (1984), are noted as

*616- Ra

* Specifically, ALJ Head found:

Article III of the Agreement provides, inter alia, for

planning, construction and operation of both power sup-

ply and related facilities on a coordinated basis (section

8.02); for moving toward a new fuel base of coal and

nuclear to minimize costs and reduce dependence on gas

10a

The System Agreements * * * clearly permit and

encourage, for efficiency, reliabilit’ and other econo-

mies of scale, that the individua. companies from

time to time build larger facilities than are necessary

to meet their own native load, to benefit all the

generating companies by having lower costs and

greater reliability. * * *

30 FERC at 65,142.

All three System Agreements have assigned the task

of coordinating the planning of new generating capacity

to a systemwide Operating Committee.’ The CEO of each

operating company designates one member of the com-

mittee, as does MSU. The members representing the op-

erating companies control 80% of the votes on the com-

mittee, apportioned according to each individual company’s

share of the system’s investment in generating capacity.

The representative of MSU votes the remaining 20%.

Under Section 5.04 of the System Agreement, the Operat-

ing Committee can now take action on the basis of a bare

majority. 483-R. 7129, VII JA 1581.

2. Investment cost sharing. As ALJ Liebman noted,

the MSU system planning approach to new generating

capacity inevitably results in certain operating companies

having less generating capacity than do others for vary-

ing periods of time. See 26 FERC at 65,098 (Docket No.

and oil ‘Section 3.03) ; for a long-term goal of each com-

pany having a proportionate share of coal and nuclear

units available to serve its customers * * *; and for joint

planning on a system-wide basis for construction and

operation of major facilities to achieve economies of scale

associated with construction and operation of larger

generating units * * * (Section 3.08).

30 FERC at 65,122.

5 Thus under § 5.06(c) of the 1982 System Agreement the

Operating Committee is responsible for, inter alia, deter-

mining the amount of reserve capacity on the system and

requiring the installation of that capacity. See 483-R. 7130,

VII JA 1582.

lla

ER82-616-000). If a company does not have enough

capacity to meet the needs of its consumers, the deficient

operating company can always draw on the excess ca-

pacity of the other companies on the system.’ This sys-

tem also benefits those companies that have built more

capacity than necessary to meet current demand. Such

companies generally find willing buyers of their surplus

among the other companies on the system.’

Under the system planning approach, it is inevitable

that an operating company will, from time to time, pro-

vide a proportionate share of the system’s investment in

generating capacity that is more or less than its propor-

tionate demand for the system’s energy. If a company’s

share of the system’s generating capacity is greater than

its share of the energy actually generated and distributed

by the system as a whole, the company is deemed to be

“long.” If the company’s share of the svstem’s generatine

capacity is Jess than its percentage of the svystem’s energy,

the company is deemed “short.” 26 FERC at 65,099.‘

* For example, in the 1960’s and 1970’s AP&L almost never

had enough capacity to service its native load, and frequently

drew on LP&L’s capacity to make up the deficiency. 26 FERC

at 65,098-99.

7 All energy on the system is dispatched from a central

office in Pine Bluff, Arkansas. 30 FERC at 65,142. The Svys-

tem Agreement establishes a schedule called MSS-3 setting

rates for the purchase of energy from the system pool. When

a company needs energy it is billed for the lowest cost energy

available in the pool. Companies owning the capacity that

generates such low cost energy have first claim to that energy.

483-R. 7151, VII JA 1603. When a company needs more

energy than its native capacity can produce it therefore must

stand in line behind the other companies for access to the

relatively cheapest kilowatts.

® The terms “long” and “short” do not refer to a company’s

ability to provide enough energy to meet its customers’ re-

quirements. Insteaa, they reflect a comparison of the share of

system capacity contributed by a particular company with

the share of the system’s energy utilized by that company.

It is entirely possible that a company could be “short” and

12a

Since 1951 the MSU system has sought to iron out the

inequities that would otherwise result where some com-

panies were long while other companies were short through

a system of “equalization payments.” Prior to 1973 each

“short” company made a payment to the “long” com-

panies based on a fixed dollar amount per kilowatt of

capacity that the company was short.® In 1973 the Sys-

tem Agreement was amended to provide for capacity

equalization payments calculated under the “participa-

tion unit” formula, a formula that based payments on the

ownership costs of the latest unit constructed by the

“long” company.” See id.; see also 30 FERC at 65,122-23.

Importantly, this new system did not call for equaliza-

tion payments based on the relative number of dollars

each company had invested in generating capacity. In-

stead, the relative number of kilowatts of generating ca-

pacity owned by each company formed the basis for the

payments. Because kilowatts can vary in cost, the system

potentially perpetuated the operating companies’ relatively

unequal investment in generating capacity.

For over twenty-five years, however, the system largely

avoided this potential inequity. Notwithstanding its limi-

tations, the equalization payment approach managed to

produce the effect of roughly equalizing the cost of invest-

ing in new canacity from the 1950’s through the 1970’s.

During the years in which the 1951 System Agreement

was in force the cost of creating such capacity was rela-

tively uniform and relatively constant. See 616-R. 1332-

still have more than enough capacity to meet its own needs.

26 FERC at 65,099.

® Specifically, the 1951 System Agreement provided for a

monthly payment of $1.10 pe~ kilowatt by which a company

was “short.” See 483-R. 7398, VII JA 1786.

10This approach also provided for the “short” company

receiving an entitlement to a proportionate share of the energy

generated by the “participation unit.” 26 FERC at 65,099.

13a

33, I JA 140-41; 30 FERC at 65,168.11 As a consequence,

the System Agreement’s allocation of equalization pay-

ments based on a constant dollar per kilowatt of short

capacity served to equalize investment costs. Although

in the 1970’s the cost of new units began to exceed that

of older facilities by a substantial margin, the 1973 Sys-

tem Agreement balanced this development by basing

equalization payments on the costs of the newest (and

more expensive) units of the “long” companies. 26 FERC

at 65,100.**

3. The shift to nuclear energy and its consequences.

In the 1950’s and 1960’s the MSU system tended to add

new generating units in the southern part of the system

to take advantage of cheap oil and gas reserves in

Louisiana. See 26 FERC at 65,100; 80 FERC at 65,143.

In the late 1960’s, however, the system began a program

of adding coal and nuclear generating capacity, 30 FERC

at 65,144, that eventually resulted in the collapse of the

investm nt equalization program.

AP&L was the first operating company to make such

an investment in nuclear power. AP&L had historically

been both a short company and one with insufficient ca-

pacity to meet the requirements of its customers. 30

FERC at 65,143. Moreover, AP&L had been losing its

long-term gas contracts while Louisiana and Mississippi

continued to have an adequate supply of gas and oil. 26

FERC at 65,101. In December 1974 AP&L brought on

11 See also 80 FERC at 65,143-44 (indicating that the units

added in the 1960’s and early 1970’s were priced between

$58 and $97 per kilowatt).

12 ALJ Liebman also credited testimony indicating that two

other factors promoted equalization of overall generation

costs. First, responsibility for adding new capacity generally

rotated among the operating companies, evening out invest-

ment costs over time. Second, the burden borne by companies

adding relatively more expensive new capacity was often

offset by the lower fuel costs associated with such units. See

26 FERC at 65,100.

l4a

line MSU’s first nuclear plant, Arkansas Nuclear One

(ANO) Unit 1.

Although ANO 1’s capacity was substantially more

expensive than that of non-nuclear generating units built

at the time," 26 FERC at 65,100-01, the lower fuel costs

of a nuclear unit made the total generation costs of ANO

1 comparable to those of other plants brought on line

in the 1970’s..* Thus it is fair to say that the basic sys-

tem of roughly equalizing the costs and benefits derived

from the system’s investment in new capacity remained

intact.*®

The picture changed radically with the development of

two new nuclear units—the Waterford 3 unit (assigned

to LP&L) and Grand Gulf 1 (initially assigned to

MP&L). Grand Gulf was initially projected to cost $1.2

billion for two generating units.%° Regulatory delays,

additional construction requirements, and severe inflation

ran up Grand Gulf costs to in excess of $3 billion for

one unit.'’ Similar cost over-runs marred the construc-

13 Capacity cost of ANO 1 was $276 per kilowatt, nearly

double that of the oil-fired units introduced by MP&L and

LP&L during the same period. 26 FERC at 65,101; 30 FERC

at 65,144.

1430 FERC at 65,144. The initia] cost was about 3 cents

per kilowatt hour. 26 FERC at 65,101.

15 Nor did this basic pattern change substantially with the

introduction of ANO 2 in 1980. Although ANO 2 had cost

substantially more per kilowatt than did ANO 1, AP&L’s

total nuclear capacity is still quite reasonably priced at $500

per kilowatt or 3-4 cents per kilowatt hour. See 30 FERC at

65,145.

16 Grand Gulf, for example, was originally projected to come

on line at a cost of approximately $500 per kilowatt, a price

comparable to that of the average price per kilowatt of the

two ANO units. 26 FERC at 65,103.

17 This figure was presented in the Commission’s initial

opinion. 81 FERC at 61,632. In determining the allocation

15a

tion of Waterford 3. See Middle South Energy, Inc.

and Middle South Services, Inc., 31 FERC { 61,305,

61,654 (1985). These units produce the most expensive

energy on the MSU system. Measured in dollars per

kilowatt of generating capacity, the new units were five

times costlier than the ANO units installed by AP&L."®

Most important, although these two plants have been

estimated to represent over 70% of the production costs

of the MSU system, they apparently will produce only

13% of the electricity used on the system. 30 FERC

at 65,121.

Under these conditions, continued application of a

capacity equalization scheme that only sought to equalize

kilowatts could no longer come close to equalizing invest-

ment dollars. Any operating company saddled with re-

of Grand Gulf capacity the Commission adopted the figures

used by ALJ Liebman in his initial decision. Jd. at 61,657.

ALJ Liebman relied on the following cost estimates: $2.5

billion for Grand Gulf 1 and £2.4 billion for Waterford 3.

See 26 FERC at 65,107. These figures represent the cost of

these units as of December 31, 1981, rather than on the date

of commercial operation (which was several years later).

Thus ALJ Liebman conceded that the projected cost of Grand

Gulf 1, as of 1984, was $2.8 billion. See id.

ALJ Head relied on a different, higher, and presumably

more recent, set of figures. His conclusion that the new

nuclear units would cost approximately $2,500 per kilowatt,

30 FERC at 65,121, was based on the testimony offered by

Mr. Louiselle, a witness for LPSC, who, in the portion of the

transcript cited by the ALJ, assumed that MSE’s 90% share

of Grand Gulf 1 would cost $2.92 billion and Waterford 3

would cost about $2.76 billion. See 483-R. 4124-26, VI JA 1452.

18 ALJ Head estimated that Grand Gulf 1 and- Waterford 8

would come on line at a cost of $2,500 per kilowatt. By con-

trast, he found that the two ANO units came on line at a cost

of about $500 per kilowatt. 30 FERC at 65,121. ALJ Liebman

estimated that Grand Gulf 1 would come on line at a cost

three to four times greater than that of any unit already on

the MSU system. /d. at 65,103.

16a

sponsibility for Waterford 3 and/or Grand Gulf would

likely find itself paying far more per kilowatt of capacity

than would an operating company that was free of such

a burden. 26 FERC at 65,100.

It is true that MSU filed a new System Agreement

in 1982 altering its previous equalization scheme. Un-

like the 1973 Agreement, which had pegged equalization

payments to the cost of the long company’s most recent

generating addition, the 1982 Agreement provided for

equalization payments based on the long company’s “in-

termediate” (i.e., oil and gas) units. 483-R. 7137-50,

VII JA 1589-96. This change reduced the burden on

any company that might he both short and have substan-

tial responsibility for the new nuclear plants.%® But, as

discussed below, this change did not eliminate the major

inequities that nuclear power introduced to the MSU

system.*°

4. The Grand Gulf plant. The Grand Gulf project was

initiated by MSU to meet the then projected demand for

electricity by the system as a whole. 26 FERC at 65,101-

02. By the late 1970’s, however, it became clear that

projected demand would fall well short of previous ex-

pectations.*? Nonetheless, MSU continued to build Grand

Gulf 1° on the assumption that the overall cost per

19 On the other hand, the new agreement did not provide for

an entitlement to the “intermediate” kilowatts of energy pro-

duced by the long company. Thus the short company might

still have to purchase expensive nuclear energy whenever it

lacked the capacity to meet its native load. 30 FERC at 65,140.

20 Moreover, the new equalization scheme actually made

matters worse for any company that was both long and re-

tained substantial responsibility for one of the new plants.

21 Indeed, as ALJ Head observed, the entire MSU system

now has much more capacity than it needs. 30 FERC at 65,169.

22 MSU, however, did halt construction of the second unit

in the project, Grand Gulf 2. 31 FERC at 61,668 n.2. The

Commission therefore did not decide on the allocation of

l7a

kilowatt hour would be less than that of alternative

energy sources. 26 FERC at 65,102.

Initially the plant had been assigned to MP&L.* It

soon became apparent, however, that MP&L did not have

the resources to finance the construction of the plant. As

a consequence, MSU made a system decision to form

Middle South Energy (MSE) in 1974 as a vehicle for

financing Grand Gulf. MSE acquired full title to Grand

Gulf. In June of 1974 all four Middle South operating

companies entered into an “Availability Agreement” un-

der which each operating company put its credit behind

Grand Guif.

Notwithstanding this initial agreement, at the time

MSE was first formed no clear plan existed to allocate

responsibility for Grand Gulf’s capacity to each of the

companies. Over the years various allocation plans were

put forward, ultimately resulting in the Unit Power Sales

Agreement (UPSA) at issue in this case.

Grand Gulf 2 costs, finding that issue to be purely specula-

tive at this time. Jd. at 61,669 n.20.

23 This assumption is now questionable. Through the 1990’s

Grand Gulf will not produce energy that is cheaper than

energy produced from alternative sources. Indeed, ALJ Lieb-

man estimated that by 1993 ratepayers will pay $3 billion

more for Grand Gulf energy than they would for energy

from comparable sources. As of 1984 MSU was still predicting

that Grand Gulf power would become economical at some

future date and that at some (even later) point the project

will represent a net benefit to consumers. 26 FERC at 65,102.

As ALJ Liebman noted, however, the decline in the price of

oil makes these projections appear rather dubious. /d.

24 Grand Gulf is located in Port Gibson, Mississippi. Under

the original plan each operating company in the system would

be responsible for the financing and construction of a major

nuclear facility. It was soon determined, however, that the

site for the NOPSI plant near New Orieans was unsuitable;

that unit was transferred to Mississippi. Responsibility for

construction of both units shifted to MP&L. 26 FERC at

65,102.

18a

At first it was contemplated that MSE would become a

party to the System Agreement. Under this plan all of

Grand Gulf would be a “participation unit” and responsi-

bility for the plant’s capacity would shift among the

operating companies to the degree they were short. 616-

R. 4122-23, II JA 505.

In 1979 MSU officials, having come to the conclusion

that a fixed dilocation of capacity was preferable to a

scheme of shifting responsibilities, recommended a plan

that would have allocated a share of Grand Gulf capacity

to all of the operating companies.** But by early 1980

the MSU officers were moving toward a scheme absolving

AP&L of all responsibility for Grand Gulf. In July of

1980 the CEOs of the MS\ operating companies signed

a Memorandum of Understanding, freeing AP&L of all

responsibility for Grand Gulf. Although this Memoran-

dum was never submitted to the Coordinating Committee,

and therefore never became final, its basic terms were

set forth in a “Reallocation Agreement” executed in July

1981. 616-R. 3275, I JA 26%. Under the Reallocation

Agreement AP&L assigned its entitlement to purchase

Grand Gulf power ». the other companies.** In addition,

>In 1979 the Operating Committee of the MSU system

recommended “Plan 4A” under which the operating com-

panies would have the following responsibilities:

Company Percentage

AP&L 11.11

LP&L 13.51

MP&L 49.60

NOPSI 25.78

26 FERC at 65,102. Although “Plan 4A” was tentatively

approved by the MSU Board of Directors in November of

1979, the Board soon retreated from this position and, in

January of 1980, approved an allocation plan quite similar

to the UPSA. Id. at 65,103.

26In 1981 AP&L’s share of Grand Gulf power under the

Availability Agreement was calculated to be 17.1%, with

19a

NOPSI, LP&L, and MP&L agreed to indemnify AP&L

for any obligation it might incur to MSE’s creditors.

The Reallocation Agreement thus relieved APE&L of any

responsibility for Grand Gulf capacity costs and provided

the basis for the Unit Power Sales Agreement. 26 FERC

at 65,103.

The Unit Power Sales Agreement was executed on June

10, 1982. Although all of the operating companies are

signatories to the UPSA, it only provides for sale of

Grand Gulf capacity and energy by MSE to three of the

operating companies: LP&L, MP&L, and NOPSI, but not

to AP&L. 26 FERC at 65,095.*"

B. The Proceedings Below

In April 1982 MSU filed with the Commission the 1982

System Agreement. which set the general rules govern-

ing transactions between the operating companies. includ-

ing capacity equalization payments and the rates govern-

ing the exchange of energy between the Operating com-

panies. FERC set the proceeding for hearing before ALJ

Head. In June 1982 MSU filed the Unit Power Sales

Agreement with the Commission, governing the sales of

Grand Gulf capacity and energy by MSE to the four op-

erating companies. This proceeding was set for hearing

before ALJ Liebman.** ALJ Liebman issued his opinion

LP&L responsible for 26.9%, MP&L responsible for 31.3%,

and NOPSI responsible for 24.7°¢. 26 FERC at 65,102.

27 UPSA assigns LP&L the entitlement to purchase 38.57

of the power available to MSE from Grand Gulf, MP&L

31.63%, and NOPSI 29.80. 26 FERC at 65,097 (excluding

Unit 2 percentages). MSE only owns 90° of Grand Gulf;

10° has been sold to South Mississippi Electric Power Associ-

ation. Jd. These figures therefore only refer to percentages

of MSE’s share of the Grand Gulf facility.

28 By order issued August 25, 1982 the Commission accepted

the UPSA for filing but found that it constituted a rate

change rather than an initial rate filing; FERC therefore

20a

on February 3, 1984, Middle South Energy, Inc., 26

FERC { 63,044 (1984), and ALJ Head issued his opin-

ion a year later, on February 4, 1985. Middle South

Services, Inc., 30 FERC {§ 63,030 (1985). Both decisions

touched on the allocation of Grand Gulf power, and

FERC reviewed both decisions in an opinion issued June

13, 1985. Middle South Energy, Inc. and Middle South

Services, Ine., 31 FERC § 61,305 (1985). It revisited the

issue following petitions for rehearing in an opinion is-

sued September 28, 1985. Middle South Energy, Inc.

and Middle South Services, Inc., 32 FERC { 61,425

(1983).

1. ALJ Liebman’s decision in the UPSA case (ERS82-

616). The principal issue ** in ER&2-616 was whether

the UPSA’s proposed allocation of Grand Gulf invest-

suspended the rates which were to become effective under the

UPSA, subject to refund. See Middle South Energy, Inc., 20

FERC *£ 61,206 (1982). On May 24, 1983 the Commission

recharacterized the UPSA as an initial rate, but held that it

had the authority to suspend initial rates. Middle South

Energy, Inc., 23 FERC © 61,277 (1983). In Middle South

Energy, Inc. v. FERC, 747 F.2d 763, 772 (D.C. Cir. 1984),

this court reversed the Commission, holding that the Federal

Power Act only permits suspension of changed rates.

On remand FERC determined that the Sales Agreement

rates were changed rates after all, giving it authority to

suspend them subject to refund. That decision was appealed

to this court, but the appeal has been held in abeyance pending

the outcome of this case. See Arkansas Power & Light Co.

v. FERC, No. 85-1504 (D.C. Cir., filed Aug. 14, 1985). As

matters stand, the rates filed in the UPSA were never sus-

pended because FERC issued its final decision in Order No.

234, amending the UPSA, before service from Grand Gulf

commenced. As we uphold FERC’s decision here, the ques-

tion whether the rates filed in the UPSA are subject to the

suspension power of the Commission is now moot.

2? ALJ Liebman, ALJ Head, and the Commission all ad-

dressed myriad issues that are not presented in the petitions

before this court. These issues are not discussed in this

opinion.

— a

2la

ment costs was reasonable and, if not, how such costs

should be allocated. As a threshold matter, however,

ALJ Liebman rejected a series of arguments suggesting

that FERC did not have jurisdiction or statutory author-

ity to amend this aspect of the UPSA.*°

Having found jurisdiction, ALJ Liebman found that

the UPSA was “unduly discriminatory” under Section

206(a) of the Federal Power Act, 16 U.S.C. § 824e(a)

(1982),"" because it failed to allocate any portion of

Grand Gulf’s capacity costs to AP&L. He based this de-

cision on his view of the MSU system as a highly inte-

grated operation that made critical decisions—such as

the decision to move into nuclear power—as a unit.

Under that view ALJ Liebman thought it only fair that

AP&L pay its share of the company’s decision to build

nuclear capacity. Having rejected the UPSA’s allocation

of Grand Gulf costs, ALJ Liebman was faced with three

alternatives:

(1) Making Grand Gulf a participation unit, with

floating responsibility among the short(er) com-

panies.**

(2) Allocating responsibility for Grand Gulf ca-

pacity proportionate to each operating companv’s

relative share of system demand, as fixed in 1982.*°

*° He rejected, inter alia, the following arguments: (1) the

reallocation of Grand Gulf costs violated the Mobile-Sierra

doctrine, 26 FEKC at 65,113-16; (2) the reallocation consti-

tuted a forced purchase of power barred by the Act, id. at

65,115-17; and (3) the PUHCA gives the Securities and Ex-

change Commission primary authority over the allocation of

Grand Gulf costs, id. at 65,117.

*1 Section 205(b), 16 U.S.C. §824d(b) (1982), similarly

bars any “undue preference” in wholesale rates.

*2 This proposal was put forth by the Mississippi Public

Service Commission.

*%* This proposal was put forward by the City of New

Orleans. On appeal CNO has abandoned this view and adopted

22a

(3) Allocating responsibility for Grand Gulf such

that each operating company bore a share of the cost

of all the nuclear units on the MSU system propor-

tionate to that company’s relative share of system

demand, as fixed in 1982.*

26 FERC at 65,109.

ALJ Liebman chose the last proposal. As the Com-

mission noted, this approach did not merely allocate the

cost of Grand Gulf. By including the total system invest-

ment in nuclear power in his formula, ALJ Liebman

effectively reallocated the costs of all nuclear capacity on

the MSU system. 31 FERC at 61,6338.

ALJ Liebman justified his exclusive focus on nuclear

capacity costs---rather than on equalizing the costs of all

that of ALJ Head, i.e., the allocation of Grand Gulf capacity

alone—and not that of all nuclear plants—but calculating

that allecation on the basis of each company’s relative demand

for system load in any particular year. See Brief of Petitioner

City of New Orleans, Louisiana at 48.

34 This proposal was originally put forward by the Louisi-

ana Public Service Commission and Occidental Chemical Cor-

poration. As the Commission suggested, this alternative can

be broken down into the following three-step process:

(1) Calculating each company’s nuclear responsibility

ratio. This ratio consists of each operating company’s

1982 share of the system’s total demand over the entire

system’s demand.

(2) Calculating each company’s share of total system

nuclear investment. This figure is derived from multiply-

ing the total system investment in nuclear power by a

company’s nuclear responsibility ratio.

(3) Calculating each company’s share of Grand Gulf

costs. This amount equals the shortfal! between the

operating company’s proportionate share of nuclear costs

(estimated in step 2 and that company’s own nuclear

investment.

Each company would then receive an entitlement to Grand

Gulf power corresponding to its relative contribution to Grand

Gulf investment costs. 30 FERC at 61,655.

23a

capacity investment or, even more sweeping, equalizing

all generating costs—by claiming that the differences

among non-nuclear base load*® generation costs were

minor compared to the cost differences among the nu-

clear generating facilities. 26 FERC at 65,110. He sug-

gested that even under his proposal AP&L would still

have the lowest total generation costs on the system. /d.

at 65,119. He justified his decision to reallocate costs of

Grand Gulf primarily by reference to the fact that the

UPSA perpetuated discrimination causéd by the timing

of nuclear units by forcing the Louisiana and Mississippi

ratepayers to pay about four times more for nuclear ca-

pacity than the Arkansas ratepayers would pay for their

nuclear kilowatts. 7d. at 65,107.

2. ALJ Head’s decision in the System Agreement case

(ER82-483). The principal issue in the System Agree-

ment proceeding was whether FERC should approve that

Agreement as filed or whether it should equalize ** all or

part of the production costs on the system. 30 FERC at

65,120. ALJ Head also considered a series of arguments

militating against FERC jurisdiction over the realloca-

tion of Grand Gulf costs and rejected them.*’

%> “Base load” units are those units that are in continuous

operation. By contrast, reserve units (oil and gas units)

can be fired up quickly to meet special surges in demand.

483-R. 7112, VII JA 1564.

%6 In this context “equalization” does not mean that each

operating company would pay the same absolute number of

dollars. Rather, it means that each operating company would

have to pay a share proportionate to its share of system

demand.

37 He rejected the following contentions: (1) that a reallo-

cation of Grand Gulf costs violates the Mobile-Sierra doctrine,

30 FERC at 65,146-47; (2) that such a reallocation violates

the ban on federal regulation of “generating” facilities con-

tained in § 201(b) of the FPA, 16 U.S.C. § 824(b) (1982), 30

FERC at 65,148-50; (3) that such a reallocation constitutes

a “forced sale” of power, barred by § 202(b) of the FPA,

24a

Having found that FERC had the authority to re-

allocate production costs, ALJ Head faced the following

alternatives:

(1) Adoption of the System Agreement as filed.

This would entail allocating none of the Grand Gulf

costs to AP&L and only equalizing the costs of ca-

pacity between “long” and “short” companies, with

equalization payments pegged to the cost of the long

companies’ oil and gas investment costs.*

(2) Equalization of production costs. The basic

concept,*® presented by the Louisiana Public Service

16 U.S.C. § 824a(b) (1982), 30 FERC at 65,154; (4) that

such a reallocation expands federal regulation of a utility’s

rate base in a manner that improperly limits the power of

the states over retail rates, 30 FERC at 65,149-51; (5)

that the Public Utility Holding Company Act, 15 U.S.C.

§ 79 et seq. (1982), bars FERC jurisdiction in this matter,

30 FERC at 65,152-54; and (6) that the reallocation of

Grand Gulf costs by FERC would present an obstacle to

state certification of new generating plants. 30 FERC at

65,154.

8830 FERC at 65,139. This proposal was supported by

AP&L and various Arkansas interests in the proceedings

before ALJ Head. The Arkansas parties continue to press

this position on appeal.

39 There were two variations on this theme:

(a) Base load equalization. This proposal would have

required each operating company to bear a share of the

system’s “base load” (coal and nuclear) capacity propor-

tionate to its share of system load. 30 FERC at 65,140.

This proposal was supported by the Commission staff in

the proceedings before ALJ Head and was before the

Commission. 31 FERC at 61,635 & n.5. No party, how-

ever, has pressed this position on appeal.

(b) Base load equalization combined with rough equali-

zation of intermediate capacity. This proposal would re-

quire base load capacity to be allocated in proportion to

relative system demand while all other capacity would

be equalized under the terms of the 1982 System Agree-

ment, i.e., short companies would compensate long com-

iil

25a

Commission, was to allocate responsibility for a share

of all production costs on the MSU system propor-

tionate to each company’s share of the system’s total

load.*°

(3) Making Grand Gulf a participation unit. This

proposal would allocate responsibility for Grand Gulf

capacity to each operating company to the degree

that the company in question was “short.” Under

this scheme responsibility for Grand Gulf capacity

would shift over time.

ALJ Head rejected all of these proposals. He rejected

the concept of making Grand Gulf 1 a participation unit

primarily because it would allow long companies (e.g.,

MP&EL) to avoid completely the high front-end costs asso-

ciated with that plant. 30 FERC at 65,166-67. He re-

jected the equalization proposals on the ground that over-

ali cost equalization would be inconsistent with the gen-

eral “pattern of autonomy * * * particularly as to * * *

specific plant site locations, fuel and financing” that he

found characterized the operating companies in the MSU

system. Jd. at 65,168.

ALJ Head found support for his finding of a “pattern

of autonomy” in two circumstances. First, he stressed

that the historic practice in the MSU svstem was to

equalize only excess capacity. Jd. at 65,167. Second, he

panies, with equalization payments pegged to the cost of

the long companies’ intermediate (oil and gas) units

30 FERC at 65,141. This proposal was put forward by

the City of New Orleans before ALJ Head and the Com-

mission. 31 FERC at 61,635 & n.6. It is not pressed

on appeal.

#°30 FERC at 65,141. This proposal was put forward by

the Louisiana Public Service Commission. It continues to

press this position on appeal.

4130 FERC at 65,141. This proposal was put forward by

the Mississippi Public Service Commission. MPSC continues

to press this position on appeal.

26a

insisted that “generation additions in almost every 1n-

stance (except for Grand Gulf) were made primarily to

satisfy individual company needs.” Id. at 65,168.*

ALJ Head, however, found that Grand Gulf constituted

an “anomaly” in the MSU system:

Grand Gulf from its inception was planned, pre-

sented to the licensing authorities and constructed

as a system plant not only to serve the needs of

MP&L but to serve the needs of all the operating

companies on the system.

30 FERC at 65,170.*

He therefore deemed it appropriate to reject the Sys-

tem Agreement as filed and to allocate the costs of the

Grand Gulf investment among all of the operating com-

panies. Unlike ALJ Liebman, however, he held that this

allocation should fluctuate from year to year to track

each company’s relative demand for the system’s energy.

30 FERC at 65,172.

3. FERC’s initial decision.** In Order No. 234 the

Commission summarily affirmed both ALJs on the thresh-

4° Even ALJ Head conceded, however, that all of the oper-

ating companies would benefit from the economies of scale

realized when an individual company built a plant providing

more capacity than that company could absorb at the time.

Moreover, he found that MSU was a “highly integrated sys-

tem” which sought to achieve such economies of scale through

“common planning.” 30 FERC at 65,168.

43 Specifically, ALJ Head was impressed by the following

facts: (1) the Grand Gulf project was an amalgam of the

nuclear units assigned to MP&L and NOPSI; (2) the plant

was planned on the basis of the combined load forecasts of all

of the operating companies; (3) it was clear all along that

the facility would produce much more energy than MP&L

could ever use; and (4) the Atomic Energy Commission ap-

proved the Grand Gulf license because the entire system had

placed its credit behind MSE. 30 FERC at 65,170-71.

44 FERC reviewed both ALJs’ decisions in issuing Order

No. 234, even though it had previously declined to consolidate

4h avaoeuinaaalll

27a

old issue of its own jurisdiction to amend the Sales

Agreement and the System Agreement. 31 FERC at

61,643-46.*%° On the merits, the Commission affirmed both

ALJs’ findings that MSU constituted an “integrated elec-

tric system.” 31 FERC at 61,645. The Commission, how-

ever, specifically rejected ALJ Head’s finding that the

MSU system displayed a “pattern of autonomy” with re-

gard to the planning and construction of generating units.

Id.

The Commission conceded that MSU’s system of over-

lapping officers and directors and the representation of

the operating companies on the System Operating Com-

mittee gave the operating companies substantial influence

in the development of the system’s plans. Jd. at 61,646.

FERC further observed that the individual companies

used their influence to seek the addition of generating

units that met their particular needs, and that Section

4.01 of the Svstem Agreement made each operating com-

pany responsible for financing the ownership or purchase

of the generating capacity necessary to service its cus-

tomers. Jd. at 61,649. The Commission nonetheless con-

cluded that “major critical decisions, including decisions

to build new generating units, are made by the Operating

Committee for the benefit of the system as a whole.” 7d.

at 61.646. See also id. at 61,650.

The Commission buttressed its conclusion with the fol-

lowing evidentiary support: (1) Section 4.01 of the 1982

System Agreement provides that the Operating Commit-

tee shall “determine” the system generation addition

plans; ** (2) at least five witnesses testified that new

the two cases. See 21 FERC { 63,039 (1982), aff'd, 22 FERC

45 The Commission rejected the jurisdiction arguments ALJ

Head had considered in the System Agreement case, see note

37 supra, with the exception of the state certification challenge

46 The 1973 System Agreement had stated that the Oper-

ating Committee “assigns” responsibility for new generating

28a

units were added to address the needs of the system as a

whole, id. at 61,646-48; and (8) the Operating Committee

minutes over a twenty-year period revealed that the Com-

mittee had the responsibility and the authority to make

the “critical decisions” concerning the addition of gen-

erating capacity. 7d. at 61,648-49.

The Commission’s review of the Operating Committee

minutes revealed that the Operating Committee did not

merely rubber-stamp the requests of the individual op-

erating companies concerning the addition of generating

capacity. 7d. at 61,649. The Commission found that the

Operating Committe» consistently based its generation

plans on the needs of the system as a whole. ZId. at

61,649-50. It found that the Operating Committee had

authority over the general timing, location, and size of

plant additions, while the individual operating compa-

nies retained authority to fill in the details of such funda-

mental decisions. Jd. Thus FERC stated that there was

no evidence in the record that an operating company had

ever built a new plant without a recommendation from

the Operating Committee or that one had ever refused tu

carry out such a recommendation. Jd. at 61,651.%7

In light of this finding, FERC rejected ALJ Head’s

contention that Grand Gulf was an “anomaly.” Instead

it agreed with ALJ Liebman that Grand Gulf, like every

other generating station, was built to serve the needs of

units to particular operating companies; the 1982 System

Agreement does not use the word “assigns.” Notwithstanding

this change, the Commission found the 1982 Agreement to

vest the same authority in the Operating Committee over

allocation vf responsibility for generating units as had existed

in previous System Agreements. 31 FERC at 61,646.

47 The Commission also noted that changes in the 1982

Acreement had enhanced the power of the Operating Com-

mittee to override the wishes of an individual operating com-

pany by providing for majority rule rather than a two-thirds

vote. This provision made it impossible for a single company

to block a Committee decision. 31 FERC at 61,651.

29a

the system as a whole and to attain the system-wide goal

of diversifying MSU’s fuel mix. Jd. at 61,653. MSE was

deemed a mere financing shell that the Commission hy-

pothesized would have been made available to any other

operating company that suffered the financial difficulties

encountered by MP&L. Id. at 61,654.

The Commission viewed the decision to move into nu-

clear power as a system-wide decision calculated to meet

system-wide needs. It found that MSU’s nuclear project

had run afoul of unforeseen economic difficulties that had

disrupted the system’s historic rough equalization of gen-

eration costs. FERC therefore adopted ALJ Liebman’s

scheme ** of allocating Grand Gulf costs so that each

operating company would contribute proportionately to

the system’s investment in nuclear capacity. /d. at

61,655.*°

4. FERC’s opinion on rehearing. In Opinion No. 234-

A FERC clarified its position on the various juris-

dictional arguments it had addressed in its initial de-

cision. 32 FERC at 61,943-52. The Comrnission also ad-

dressed—and rejected—the argument raised by various

Arkansas parties that FERC lacked jurisdiction as there

was no interstate sale of power. The Commission sug-

gested that, whatever the merits of such an argument

where a “monolithic” system is concerned. there was no

question but that the transfer of power among the MSU

operating companies constitutes a “sale for resale.” /d.

at 61,957.

48 The Commission declined to update the cost estimates

for the Grend Gulf and Waterford 3 units, stating that both

the cost and pertinent demand projections were constantly

changing. 80 FERC at 61,657.

*9 In its initial decision the Commission did not expressly

discuss the rationality of the alternatives to ALJ Liebman’s

approach presented in the record of ER-483. It implicitly

addressed these concerns by adopting the ALJ’s analysis.

31 FERC at 61,655.

30a

Indeed, a major portion of the Commission’s opinion on

rehearing was dedicated to clarifying the Commission’s

essential finding concerning the “integrated” character of

the MSU system. The Commission rejected any attempt

to mischaracterize its decision as based on a view that

MSU is a “monolith.” Jd. at 61,952. FERC simply in-

sisted that, whatever the powers of the individual operat-

ing companies, the MSU Operating Committee makes the

“major critical decisions on the System, primarily for the

System as a whole.” Jd. at 61,953 (emphasis in origi-

nal).°° The Commission emphasized that its opinion

hinged on “a variety of factors including the manner in

which decisions are made by the commonly owned affili-

ates, and for whose primary benefit those decisions are

made.” Jd. at 61,956.

Turning to the merits, the Commission addressed three

challenges to the rationality of its allocation of Grand

Gulf costs. It disputed the contention of the Arkansas

parties that the allocation violated the spirit and practice

of the MSU system, the Svstem Agreement, and the .:n-

tent of the parties te that Agreement. FERC responded

that the clear intent of the System Agreement was to

correct maior cost imhalances while moving toward a

mixed fuel base including nuclear and coal-fired facilities.

The Commission insisted that it need not measure the

rationality of its allocation from the vantage point of the

parties at the time the UPSA was first negotiated. /d.

at 61,957-59.

The Commission also addressed the argument of MP&L

that the Commission’s order had only exacerbated the

50 FERC also disputed AP&L’s contention that at least on

one occasion an operating company had refused to build a unit

despite a “recommendation” by the Operating Committee

that it do so. FERC noted that although it was true that

LP&L had never built coal units in northern Louisiana in the

early 1980’s, there was no record evidence suggesting actual

defiance of the Operating Committee. 32 FERC at 61,953-54.

TRC tend ec

3la

discrimination it would have suffered under the original

UPSA scheme. MP&L noted that under the UPSA it

would have been responsible for 31.63% of Grand Gulf,

but under the Commission’s scheme it would be responsi-

ble for a full 38%. 31 FERC at 61,959. Under the new

scheme Mississippi would receive only 9.5% of the sys-

tem’s nuclear capacity while paying for 15% of the

system’s nuclear investment. 82 FERC at 61,964 n.26.

The Commission responded by asserting that the mere

fact that FERC’s order increased MP&L’s burden did

not make it more discriminatory. It is completely ra-

tional, argued the Commission, that a smaller burden can

be discriminatory and, with a change in the relative

standing of the parties, a larger burden can be fair.

The original allocation was discriminatory, in the Com-

mission’s view, because AP&L had failed to share the

burden of Grand Gulf. Although the Commission’s order

would increase MP&L’s allocation somewhat, it would

spread the overall burden of Grand Gulf more equitably

by making AP&L carry a portion of the burden.

The Commission suggested that its refusal to reallocate

the capacity of all nuclear units (as well as their costs)

was justified bt: the MSU system’s histcric aversion to

equalizing all costs per kilowatt. 7d. at 61,959. It stressed

the same point in responding to the arguments of various

Louisiana parties that it should have adopted full cost

equalization. Jd. at 61,961. Thus the Commission de-

picted its opinion as an attempt to balance

the need to provide an equitable sharing of the in-

vestment costs of units that have (or could have)

become unforeseeably high due to the unique prob-

lems associated with nuclear construction, and the

need to recognize the efforts of individual companies

on the System and allow them to retain the benefits

of units they own to the fullest extent possible.

ld.

32a

Dissatisfied with this rationale, petitioners sought re-

view in this court.

II. JURISDICTION

The petitioners from Arkansas, Missouri and Missis-

sippi raise certain threshold challenges to the Commis-

sion’s decision. They contend that FERC lacks jurisdic-

tion to modify the allocation of the capacity costs of

Grand Gulf embodied in the Unit Power Sales Agree-

ment (“UPSA”). We disagree, and hold that the Fed-

eral Power Act (“FPA” or “the Act”) provides FERC

with authority to issue the orders in question. Initially,

we will set forth the affirmative basis of FERC’s juris-

diction; thereafter, we will address (and reject) each

individua] counterargument raised by petitioners.

A. The Jurisdiction of the Commission

Section 201 of the Act contains the Commission’s basic

jurisdictional grant.** It provides that “[t]he provisions

of this subchapter shall apply to the transmission of elec-

tric energy in interstate commerce and to the sale of

electric energy at wholesale in interstate commerce” and

that “(t]he Commission shal] have jurisdiction over all

facilities for such transmission or sale... .” This sec-

‘ton also defines “public utility” as “any person who owns

or operates facilities subject to the jurisdiction of the

Commission under this subchapter.” ** The facts here

reveal that MSE sells Grand Gulf’s energy to the affil-

iated operating companies of the MSU system at whole-

sale in interstate commerce. Thus, under section 201 of

the Act, MSE is a “public utility” and FERC retains

jurisdiction over its sales and facilities.

Sections 205 and 206 of the Act set forth the Commis-

sion’s remedial authority. Section 205(a) establishes a

*1 16 U.S.C. §§ 824 et seq. (1982).

52 Jd. § 824. The states retain jurisdiction over retail rates.

83 Jd. § 824(e).

33a

threshold requirement that all “rates and charges” made

by a public utility, and “all rules and regulations affect-

ing or pertaining to such rates and charges,” must be

“just and reasonable,” or they will be deemed “unlaw-

ful.” ** Most significantly for our purposes, section 206

provides that when the Commission, after a hearing, de-

termines that

any rate, charge, or classification, demanded, ob-

served, charged, or collected by any public utility for

any transmission or sale subject to the jurisdiction of

the Commission, or that any rule, regulation, prac-

tice, or contract affecting such rate, charge, or classi-

fication is unjust, unreasonable, unduly discrimina-

tory or preferential, the Commission shall determine

the just and reasonable rate, charge, classification,

rule, regulation, practice, or contract to be there-

after observed and in force, and shall fix the same

by order.**

The combined force of these provisions leads inexorably

to the conclusion that, under the circumstances presented

in the instant case, FERC had jurisdiction to modify the

Grand Gulf allocation set forth in the UPSA.

The distribution of Grand Gulf costs and capacity in

the UPSA inevitably affects each operating company’s

generation costs and, by extension, their wholesale rates.

When, as here, generation capacity has been built and

planned on a profoundly integrated basis, the Commis-

sion properly may examine its allocation as a cost com-

ponent affecting wholesale rates. For this purpose, the

UPSA cannot be examined in isolation. As the Commis-

sion stated, the UPSA is “an agreement which ‘supple-

**16 U.S.C. § 824d(a) (1982). Section 205(b), 16 U.S.C.

§ 824d(b) (1982), further provides that no public utility

shall, with respect to any jurisdictional sale, “maintain any

unreasonable difference in rates, charges, service, facilities, or

in any other respect, . . . between localities ... .”

®3 Jd. § 824e(a) (emphasis supplied).

34a

ments or supersedes’ the coordination arrangements

among the MSU utilities, and . . . is a contract ‘affecting’

rates under the 1982 System Agreement.” **

The UPSA serves to distribute the Grand Guif capacity

available to MSE—and its cost—among the MSU oper-

ating companies. When the Commission acted to modify

the UPSA and reallocate the capacity of Grand Gulf, it

altered the relative amount of system capacity ultimately

paid for by each affiliate. Concurrently, the 1982 System

Agreement (Service Schedule MSS-1) established the

terms of reserve capacity cost-sharing among the same

group. Any change in the allocation of the capacity costs

of Grand Gulf in the UPSA will change the relative .

“longness” or “shortness” of each company under the )

System Agreement, thus altering the equalization pay- |

ments made and received for capacity under Service

Schedule MSS-1. In the instant case, the cost burden of

system generating capacity has been shifted among the

affiliates, by virtue of Commission action and system

agreement, in order to insure an equitable distribution.”

th Bs

5°32 FERC ‘ 61,425, at 61,949-50 (quoting 31 FERC

5? The Commission explained the effect of the intersection of

the UPSA and the 1982 System Agreement as follows:

The impact of these Grand Gulf allotments (or any

other Grand Gulf allotments) on reserve equalization

under Service Schedule MSS-1 of the 1982 System Agree-

ment will likely be a change in the shortness or longness

of each member. For example, when Grand Gulf 1 be-

comes commercially operable, to the extent that the fixed

Grand Gulf allotment ratio exceeds (or is exceeded by)

the monthly 1982 System Agreement responsibility ratio

for a given pool member, that member will become either

more long (or short) or less long (or short) for pool

reserve equalization purposes. The excess capacity of the

long members will be equalized in accordance with the

1982 Agreement, i.e., to the extent a member having

excess capacity cannot reach voluntary agreements to

sel] its excess capacity and energy under Service Schedu!e

ee |

35a

This equitable distribution is mandated by the FPA be-

cause of the historical integration of the MSU system.

Capacity costs are a large component of wholesale rates.

Thus, the capacity costs of the system carried by each

affiliate will significantly affect the wholesale price it

pays for energy on the MSU system. In the Commis-

sion’s view, the UPSA’s allocation of Grand Gulf, com-

bined with the provisions of the 1982 System Agreement,

created serious inequities in the division of costs of power

resources among the operating companies in light of the

integrated planning for generating capability on a system

basis. Unreasonabdle disparities in the shares borne by

affiliates of the total costs of the system’s generating ca-

pacity plainly “affect” the wholesale rates at which the

operating companies exchange energy, and therefore re-

quire remedial action by the Commission pursuant to

section 206.

A case involving the Northern States Power (“NSP”)

Companies, State of Minnesota v. FERC," provides a

helpful illustration of how agreements among affiliates

can “affect” rates. The NSP Companies develop and op-

erate both generation and transmission facilities on an

integrated basis through perticipation in a Coordinating

Agreement which, txter alia, establishes procedures for

sharing costs on the system. In 1982, the Companies

filed an amendment to that Agreement with FERC pro-

posing a methodology for determining the rate of return

on investment as a component of the fixed costs shared

MSS-4 (Unit Power Purchase), its excess capacity will

be equalized among the short members based on the costs

of the long member's intermediate generating units under

Service Schedule MSS-1 (Reserve Equalization). Any

excess energy will be shared with the pool under Service

Schedule MSS-3 (Exchange of Electric Energy Among

the Companies).

31 FERC { 61,305, at 61,656.

734 F.2d 1286 (8th Cir. 1984).

36a

under that Agreement. The Minnesota Public Utilities

Commission (““MPUC”) intervened and contended that

FERC lacked jurisdiction to review the amendment be-

cause the Coordinating Agreement does not establish a

wholesale rate. Specifically, MPUC argued that FERC

“exceeded its authority under the Federal Power Act and

intruded upon retail ratemaking functions by accepting

a filing that sets a rate of return on capital as part of a

cost allocation agreement between affiliated power com-

panies.” *°

The Eighth Circuit observed that “MPUC’s challenge

to the Commission’s jurisdiction rests on its contention

that the Coordinating Agreement serves simply as a

mechanism for allocating costs among the NSP Compa-

nies and does not establish a wholesale rate for the resale

of electricity.” °° However, the court agreed with the

Commission that the Coordinating Agreement “con-

tained] numerous provisions authorizing the NSP Com-

panies to exchange electric power among themselves in

return for payment,” i.e., interstate wholesale transac-

tions. Thus, the Eighth Circuit held that the Coordinat-

ing Agreement established a wholesale rate and that,

‘“!b]ecause a change in the rate of return on investment

affects the wholesale rate under the Coordinating Agree-

ment, the Commission possessed jurisdiction to review

and approve the proposed amendment.” “

We are in total accord with the Eighth Circuit’s view

of FERC’s jurisdiction as enunciated in State of Minne-

sota. In the instant ease, the petitioners concede that

wholesale rates are established in the disputed contracts

governing the MSU system; but petitioners nonetheless

contend that the Commission does not have jurisdiction

here because other portions of these same agreements

5° Jd. at 1287.

©) Jd. at 1289.

37a

allocate generation costs among the MSU companies and

these particular provisions do not themselves establish a

wholesale rate. However, the petitioners ignore the crit-

ical point here that, while these provisions do not fix

wholesale rates, their terms do directly and significantly

affect the wholesale rates at which the operating compa-

nies exchange energy, due to the highly integrated nature

of the MSU system. We conclude that, because the allo-

cation of Grand Gulf capacity and costs, like the rate of

return on capital in State of Minnesota, significantly

affects the wholesale rates at which the operating com-

panies exchange energy due to the combined effect of the

UPSA and the 1982 System Agreement, that allocation

is plainly within Commission jurisdiction.”

The Supreme Court quite recently confirmed the pro-

priety of this analysis in Nantahola Power & Light Co.

v. Thornburg. In that ease, FERC examined an agree-

ment between two affiliated power companies, which allo-

cated certain low-cost entitlement power between them.

* In South Dakota Public Utilities Comm'n v. FERC, 690

F.2d 674 (8th Cir. 1982), a case also involving the NSP

Companies, an amendment to the Coordinating Agreement

allocated costs arising from the cancellation of a system

nuclear plant project in Wisconsin. The court upheld FERC'’s

decision that the NSP Companies would share the cancellation

costs on the basis of a pre-existing arrangement equalizing

generating costs in the Coordinating Agreement and quoted

with approval the following language from the FERC order:

The Amendment to the Coordinating Agreement of

Northern States Power Company (Minnesota) and

Northern Power Company (Wisconsin) filed with the

Commission . . . is just and reasonable. It is approved

as a rate schedule change pursuant to § 205 of the Fed-

eral Power Act subject to the modification ordered in

Paragraph (B) below.

Id. at 677. It is noteworthy that no question was raised as

to the Commission’s jurisdiction to review this amendment

to the Coordinating Agreement.

54 U.S.L.W. 4676 (U.S. June 17, 1986).

38a

FERC found that the agreement was unfair to one of

the companies, Nantahala, and increased the percentage

of low-cost entitlement power that it should receive. Al- ;

though FERC did not specifically “reform” the agreement,

Nantahala was required to file revised rates, reflecting its |

increased entitlement to low-cost power. The North Caro-

lina Utilities Commission (““NCUC”) not only rejected

the actual apportionment agreed to by the companies, but

also “employed an allocation of entitlement power that

nowhere [took] into account FERC’s allocation of that

same power.” °

The Supreme Court held that the NCUC orders were

inconsistent with preemptive federal law. The Court ob-

served that

fallthough the [companies’ agreements] do not pur-

port explicitly to set a sales price for power, FERC’s

decision on how Nantahala may treat these agree-

ments in determining its wholesale rates obviously

does affect Nantahala’s costs directly, and thus Nan-

tahala’s wholesale rates.”

FERC’s allocation of Grand Gulf’s costs and capacity,

like the setting of entitlement percentages in Nantahala

Power & Light, does not set a sales price, but does di-

rectly affect costs and, consequently, wholesale rates.

We cannot disregard the Supreme Court’s clear and

timely message that FERC’s jurisdiction under such cir-

cumstances is unquestionable.

Having determined that all MSU generating capacity,

including Grand Gulf, had been built and planned on an

integrated basis by the MSU system to meet its collec-

tive needs and that the allocation of Grand Gulf would

affect wholesale rates within the system, the Commission

decided that the affiliated operating companies’ arrange-

** Jd. at 4678.

* Jd. at 4681.

a ee

39a bs

ment for sharing of capacity costs—as set forth in the

UPSA and the 1982 System Agreement—was unjust, un-

reasonable and unduly discriminatory. Under these cir-

cumstances, sections 205 and 206 of the FPA plainly

provide FERC with authority to modify the Grand Gulf

allocation agreed to by the operating companies.

B. Arguments Opposing Jurisdiction

The petitioners advance various theories to support

their contenticn that FERC lacks jurisdiction to impose

the remedy selected in this case. They maintain that:

(1) FERC has unlawfully exercised jurisdiction over a

generating facility; (2) FERC has unlawfully compelled

a purchase of power and generating capacity; (3) FERC

has impermissibly intruded on areas subject to state ju-

risdiction; (4) FERC has contravened the purposes of

the Public Utility Holding Company Act (“PUHCA”)

and infringed upon the authority of the Securities and

Exchange Commission (“SEC”); and (5) FERC has

violated the Mobile-Sierra doctrine. As set forth below,

none of these attempts to displace FERC’s jurisdiction

succeed.

1. Jurisdiction Over Generating Facilities

The Arkansas-Missouri petitioners contend that, in

allocating the cost and capacity of Grand Gulf, the Com-

mission has asserted jurisdiction over a generating facil-

ity in contravention of section 201(b) of the FPA. They

reallocating generation costs falls outside of FERC’s rate

making jurisdiction and instead falls solely within state

authority over generation.

In pertinent part, the statute states:

T Commission shall have jurisdiction over all

‘ies for such transmission or sale of electric

nergy. but shall not have jurisdiction, except as spe-

ett

40a

cifically provided in this subchapter and subchapter

III of this chapter, over facilities used for the gen-

eration of electric energy... .*

In the same section, the statute provides for

Federal regulation of matters relating to gé neration

to the extent provided in this subchapter a id sub-

chapter III... .*'

The Conference Report on the FPA instructs thatthe

italicized phrases were “added ~a remove any doubt as

to the Commission’s jurisdiction over facilities used for

the generation . . . of electric energy to the extent f

vided in other sections . . .”® The Commission con-

cluded that, in the course of exercising its undisputed

jurisdiction over interstate sales of electric energy at

wholesale, it lawfully could reallocate the costs of Grand

Gulf across the integrated system. Hence, the Commis-

sion reasoned that although allocating cost does, to some

extent. result in the “regulation of —— relating t

generation,” such regulation is valid under the FPA

when it is the byproduct of a legitimate exercise 01

FERC’s nower to regulate *holezale rat

FERC’s power to reguiate wholesale rates.

OY roY no 7 b S y eae Fr y

“ t 4 2A 44404 .< c y Ve c

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y | tr ) Yr © ? ‘vy y +

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4la

erating facilities,*° they assert that the statutory prohibi-

tion of federal regulation of such facilities in section 201

(b) becomes meaningless if FERC is permitted to allo-

cate the costs of a plant.

This analysis is flawed. As FERC correctly reasoned:

the first sentence of Section 901(b) (1), in situations

would be inconsistent with the declaration in Section

201(a) that Federal regulation of the sale of energy

at wholesale in interstate commerce is,necesSary 1n

the public interest."

Nor could such an interpretation be reconciled with th

Commission’s statutory authority to revise contracts al-

23%. ars Wouililu ait UlliUSL., ULIICAG

Laac

The petitioners’ general Assertion that FERC has im-

. , : ; =

sw + ++ ; +7 (Cf 7 + “Of ~ 1° “of n+ a

t Inirigea UPON asr.ale reaim DY Yrealiocday é

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~te (; < G 4 \ he Gt a Vv oc are c

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e present purpos suffices to note that FER’

‘ + + + * +

a4 iAL TL Ga ac i DU rs ney he SW GLE 75 amare Sh: Ya Cc.

‘ 27) . strain : ~2 8 | — — + : _ ’

ite sajles” witnin the MSI system, ] is WéEll-

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accented that FERC must allow the recovery o!

f generating facilities in setting wh lesale rates. He

"lpm hace etmniv ee a, © anneal mua sath —

FERC has simply exercised its undisputed authorit

, ; : ° ; mies a ,

ie Whnoolesaile ites I electric generating faci tes 1n 1Nn-

‘<ctate ecommerce V hict imeliges smaar the

a Mine ce, ‘) cn INCIUQESS, MiUC! LTit 4 ~ -

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r , ; .

FERC’s control here is exclusive. The Jur sdict I

tt.

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awn by Congress is bright, and rr

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Mt , natitianare

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The cases cited by the Arkansas-Missour petutionel

i fit Cases CsIlcu Y AIAdaIi: }

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; in S1c¢ LT ( A. al 4tyu a:

t | aa 4 ss te ys

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, a eye, ” Ps . the contex

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re ii — * . . ,

t xclusively in tne

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{ 4 r ( ted LNne

< t Connecticut in 1tS decisio! cine Ourt cit

;

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nguage o! tior 1(a) of the FPA, “but shall not nave

s ~~) : | - - ca ‘ > ~4e .

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7: “ao4méT, 2 - “ on.

{ over Taciiities used ill ihe aistriouvlol

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tal c ne supreme ‘° vu =Fre-

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terpretation of the “but” clause and held

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43a

interstate wholesale sales.** In the instant case, the MSE

generating facilities are utilized solely for interstate

wholesale sales, thus satisfying the Court’s test

2. Compelled Purchases of Power and Capacity

The Arkansas-Missouri petitioners also argue that

FERC has exceeded its jurisdiction by forcing inc lepend-

ent companies—AP&L, for example—to purchase powe

from Grand Gulf in quantities beyond het agreed to in

the UPSA. The Commission found that, as a factual mat-

ter, there would be no “forced purchase” due to the inte-

grated nature of the Grand Gulf project and the yt

system and AP&L’s individual longstanding, in-de}

commitment to Grand Gulf. We agree with the Cor

sion that “the issue here is not whether a company should

be forced to purchase or sell power, but rather is the

4 U.S. at 528 n.6. (The Court rejected the holding of a

meevi iou bape decision in Hartford Electric Co. v. FPC, 131

F.2d 95 3 (2d Cir. 1942), cert. denied, 319 U.S. 741 (1949),

but cited witk approval the alternative rationale for that

decision.)

7 The Arkansas-Missouri “greener pie ls ¢ ses pl

hibiting FERC from ordering the wheeling of power, F!

Power & Light Co. v. FERC 660 F.2d ¢ R (5th r. 198]

cert. denied, 459 U.S. 1156 (1983 ); Ne y rk State Elect

& Gas Corn. v. FERC, 638 F.2d 388 (2d Cir. 198

nied, 454 U.S. 821 (1981) ; Ric? | F

574 F.2d 610 (D Cir. 1978 r

rates, FPC Conway Corp., 426 U.S. 271, 276-77 7¢

he mainta - +F + +hoe XS ~ y _ ¢ ¢ .

the FPA grants ¢ : .

wholesale sales of electric energy—"jhat grant n

ciled with [the Act s rr n ®

of jurisdictior f g f Arkans

Service Commiss APS Br at 28. T

inapposite here because, uncer ar tern Ste

the Cammicc " * 3 een av r urs r

facilities “‘to the nt provi I rs

jurisdiction 1 Sar ef reg

wh € raves

44a

appropriate allocation of costs among integrated com-

panies owned by the same parent.” ** The Commission

has made detailed findings on the highly integrated na-

ture of the MSU system and on the coordinated planning

of the Grand Gulf project. The depth of the operating

companies’ histcrical involvement in both the system end

the project allows the Commission to step in and reallo-

cate costs under section 206(a) of the FPA so that each

of the operating companies is treated fairly.

A consistent line of judicial precedent supports FERC’s

authority to approve and/or modify the terms of the

pooling and coordination agreements of closely integrated

power systems when it deems those arrangements unlaw-

ful as filed. Over thirtv vears ago, in Pennsylvania

Water & Power Co. v. FPC,** the Supreme Court con-

sidered the Commission’s authority to order continued

integrated operations by two utilities. For more than 20

vears, the companies had been interconnected and had

bought and sold power in a conrginates fashion. The

FPC ordered a significant reduction in the rates charged

by one utility to the other, and the selling utility refused

to comniy. As a result, the Commission itself prescribed

rate schedules to comply with its rate order, requiring

the utility to “eontinae to buy, sell, and transmit power

at the eed | rates. Th é néility objected, but the Su-

preme Court sustained the order, observing that the in-

tegration of utilities is a “practi ithi

of section 206 and that the Commission could erder its

7531 FERC * 61,305, at 61,643. an Commission suggests

upon reconsideration that its authority is unchanged whether

“the central issue is viewed as one of cost allocation or as

‘forced’ purchases.” 32 FERC © 61,425, at 61,949. We do not

interpret this comment as an 2ssertion by FERC that it may,

under any circumstances, force a purchase among nonaffiliates.

76343 U.S. 414 (1952). See also discussion of Nantahala

Power & Light, supra text at notes 63-65.

45a

continuation and determine contract terms suitable to

achieve that end:

The Act gives the Commission ample statutory power

to order Penn Water and Consolidated to continue

their long-existing operational “practice” of integrat-

ing their power output. ... In ordering such “prac-

tice” continued, the Commission was furthering the

expressly declared policy of [section 206 of] the

Act.”*

This case provides a solid foundation for the Commis-

sion’s authority to order a purchase or sale of power

when, as here, such an order is consistent with the his-

torical integration of a power pool or network.

This conclusion is further confirmed by the decision of

this cireuit in Central Iowa Power Cooperative v. FERC."

services offered by pooling arrangements established

emong other electric systems. Because of the voluntary

nature of pooling arrangements under section 202(a) of

the FPA, the court held that FERC could not order an

expansion of pool services merely upon a showing “that

a particular pool does not offer the same range of services

as another pool.” The court, however, went on to

determine that FERC did have “specific responsibility in

this proceeding to decide whether a particular voluntary

pool agreement was unjust, unreasonable, or unduly dis-

Id. at 422-23. The Court specifically noted that the

Commission’s order was based on authority derived from

section 206 of the FPA, and not from the underlying contract

between the parties. Jd. at 422.

8 606 F.2d 1156 (D.C. Cir. 1979).

Jd. at 1167 (quoting with approval the Decision of the

Commission).

46a

criminatory,” ®° and, in the event of such a finding, that

FERC had authority to order expanded services:

The Commission had authority . . . under section 206

of the Act... to order changes in the limited scope

of the Agreement, including the addition of pool

services, if, in the absence of such modifications, the

Agreement presented “any rule, regulation, practice

or contract [that was] unjust, unreasonable, unduly

discriminatory or preferential.” ©

Having found that the agency may exercise authority un-

dey section 206 to modify an unlawful voluntary power

pool arrangement negotiated by nonaffiliates, a fortiori

we must conclude that FERC may intervene to reform

an unlawful agreement made by affiliates in a fully in-

The casex relied upon by the Arkansas-Missouri peti-

tioners are easily distinguishable. In Southern Co. Serv-

ices, Inc..°- Southern Company filed a contract with the

Commission to increase sales to Florida Power & Light

(“FP&L”). Seminole Electric Cooperative intervened in

the preceeding and argued that FP&L should be required

) purchase energy from it. Seminole was a stranger to

the UPSA ntMfcsue in Southern, was not affiliated with

either Southern or FP&L, and did not contend Southern’s

rates were unjust or unreasonable under the FPA. Given

the entirely inapposite factual setting of Southern,

FERC’s refusal to reject the Southern-FP&L contract or

to order FP&L to purchase power from Seminole is irrele-

vant to the present case.

‘

The Arkansas-Missouri petitioners also maintain that

tter Tail Power Co. v. FPC,® establishes that compul-

6° Jd. at 1167 n.33.

*: Jd. at 1168 (emphasis supplied).

82 20 FERC © 61,332 (1982).

83 473 F.2d 1253 (8th Cir. 1973).

47a

sory purchases of power may be characterized as a com-

pelled expansion of generating facilities, forbidden by sec-

tion 202(b) of the Act. In that case, FERC ordered a

utility to interconnect with a municipality and to assume

the costs of the municipality’s generating plant in ex-

change for energy from the plant. The court determined

that this transaction forced the utility to assume benefi-

cial ownership of the plant, i.e., to enlarge its fecilities. In

the present case, FERC has ordered the operating com-

panies to pay a certain percentage of the cayacity costs

of Grand Gulf—an entity constructed for system benefit

and already within the beneficial ownership of the parent

holding company, MSU. The Commission decision does

not add any capacity to the MSU system. Nor does it

modify the percentage of generating capability for which

each company will ultimately bear responsibility under

ine 1982 System Agreement; it simply alters the com-

position of each individual company’s share.

In relying on Otter Tail Power, the parties once again

seek to ignore AP&L’s role as an affiliated company in an

historically integrated system and Grand Gulf’s status as

a system project. In the factual context of the instant

case, the reallocation of capacity costs among the parties

cannot be described as a compelled purchase of either

power or additional generating facilities.

8. Intrusion on State Jurisdiction

The Arkansas-Missouri petitioners and the Mississippi

Public Service Commission (“MPSC”) separately contend

that FERC’s orgers unlawfully interfere with the juris-

diction of the state regulatory authorities. We will treat

the arguments individually.

a. The Arkansas-Missouri Arqument

Section 201/a) of the FPA provides that FERC’s reg-

ulation of interstate wholesale sales of electricity extends

“only to those matters which are not subject to regulation

48a

by the States.” The petitioners assert that the FERC

orders interfere with local authority over matters in-

tended to be within the province of state regulators. They

reason that FERC’s cost allocation has such an extensive

impact on the rate base in the state jurisdictions that it,

in effect, removes regulation of retail rates and capacity

construction from the hands of the state commissions.

These assertions are unfounded. FERC has exercised its

jurisdiction in order to regulate the sale of electricity at

wholesale in interstate commerce in the context of ex-

changes within a multi-state power pool, an area exclu-

sively subject to FERC control. The fact that FERC’s

assertion of jurisdiction has some impact on state regu-

lation does not make it unlawful.

As the Supreme Court made clear in Public Utilities

Comm’n of Rhode Island v. Attleboro Steam & Electric

Co.,** the states are constitutionally prohibited from ex-

ercising jurisdiction over wholesale rates for electricity

transmitted and sold in interstate commerce. In the ab-

sence of federal action. this holding created a regulatory

gap. and Congress enacted Title II of the FPA to fill thet

gap and provide for federal authority over interstate

wholesale rates:

Congress meant to draw a bright line easily ascer-

tained, between state and federal jurisdiction, mak-

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

done in the Power Act by making FPC jurisdiction

plenary and extending it to all wholesale sales in

interstate commerce except those which Congress has

made explicitly subject to regulation by the States.*’

This holding was confirmed in Pacific Gas & Electric

Co. v. State Energy Resources Conservation & Dewvelop-

8+ 273 U.S. 83 (1927).

85 F PC v. Southern California Edison Co., 376 U.S. 205,

215-16 (1964).

49a

ment Comm’n,*° in which the Supreme Court observed

that states have retained “their traditional responsibility

in the field of regulating electrical utilities for determin-

ing questions of need, reliability, cost, and other related

state concerns” “[w]Jith the exception of the broad au-

thority of the .. . Federal Energy Regulatory Commis-

sion over the need for and priciag of electrical power

transmitted in interstate commerce... .” *

86 461 U.S. 190 (1983).

87 Jd. at 205-06. The Arkansas parties accuse FERC of

contravening the Supreme Court’s decision in Arkansas Elec-

tric Cooperative Corp. v. APSC, 461 U.S. 375 (1983). In

that case, the Court upheld state jurisdiction over the whole-

sale rates of a rural power cooperative, in part because the

FPC had previously determined that it lacked jurisdiction to

reculate these entities which fall under the supervision of the

Rural Electrification Administration. The Court, therefore,

rejected the old “bright line” between state and federal juris-

diction, ie., the distinction drawn between regulation of

retail or wholesale rates under the commerce clause. Simul-

taneously, however, the Court emphasized that a new “bright

line’ between state and federal jurisdiction had been drawn

by Congress in the FPA. We hold that the Commission's

actions fall within a domain assigned to feceral control by

the FPA.

Petitioner Arkansas Industries accuses FERC of conclud-

ing that federal and state jurisdictions are overlapping and

of performing a balancing of the relevant federal] and state

interests under the commerce clause—a course of action

eschewed by the “bright line” test as articulated in Arkansas

Electric—in its decision to allocate Grand Gulf. As detailed

above, we have decided that FERC’s allocation of Grand Gulf

costs is within its exclusive authority over wholesale rates in

interstate commerce under the FPA. The Commission's ex-

plicit sensitivity to state concerns in determining the extent

to which it would exercise its authority to remedy the unlaw-

fulness of the UPSA is not equivalent to an inquiry under the

commerce clause to determine whether a state may regulate

in this realm.

50a

As explained above, there is no clash between state

and federal jurisdiction in the instant case. FERC’s

allocation of Grand Gulf was simply an exercise of its

authority to regulate wholesale rates in interstate com-

merce—an area within its exclusive jurisdiction.

The Arkansas-Missouri petitioners contend that the

FERC orders deprive state commissions of their control

over retail rates. The Supreme Court has recently con-

firmed that

[o]nce FERC sets... a rate, a State may not con-

clude in setting retail rates that the FERC-approved

wholesale rates are unreasonable. A state must rather

give effect to Congress’s desire to give FERC plenary

authority over interstate wholesale rates, and to en-

sure that the States do not interfere with this

authority.®*

Thus, once FERC permits a utility to charge a rate re-

flecting investment in a particular plant, a state commis-

sion may be obliged to reflect such an investment in the

retail rate base. Under these circumstances, the petition-

ers argue, state regulatory authorities confronted with a

FERC cost allocation will virtually lose control over re-

tail rates.

In Nantahala Power & Light, the Supreme Court made

clear that, in setting wholesale rates, the NCUC was re-

quired to give binding effect to the interstate wholesale

rate that had been fixed by FERC. The Court further

determined that the realm of preemption was “not limited

to ‘rates’ per se” and stated:

Here FERC’s decision directly affects Nantahala’s

wholesale rates by determining the amount of low-

cost power that it may obtain, and FERC required

Nantahala’s wholesale rate to be filed in accordance

with that allocation. FERC’s allocation of entitle-

88 Nantahala Power & Light Co. v. Thornburg, 54 U.S.L.W.

at 4680.

5la

ment power is therefore presumptively entitled to

more than the negligible weight given it by NCUC.®

Similarly, in the present case, the Commission’s allocation

of Grand Gulf’s costs and capacity affects wholesale rates

and, therefore, the state commissions may not “interfere”

with FERC’s “plenary authority.”

Moreover, the petitioners’ argument would apply to the

costs embodied in any wholesale rate approved by FERC

and, therefore, proves too much. In any wholesale rate

proceeding, the state commissions may protect their in-

terests, as here, by intervening and presenting evidence

before the Commission, a neutral body. The main point

here is that FERC plainly had authority to approve or

reject the cost allocation pursuant to its jurisdiction over

wholesale interstate rates despite its inevitable impact on

retail rates.*°

Moreover, when, as here, affiliated operating companies

in an integrated regional system enter into agreements

for wholesale power sales in interstate commerce which

allocate costs, FERC jurisdiction has additional merits.

As ALJ Head observed, “the Commission is perhaps in

the best position to reach the most equitable result and

to act in the public interest, rather than to be controlled

by the necessarily parochial concerns of the States.” ™

The basis of this conclusion has been discussed by FERC

in another context:

89 Jd.

*°In Northern States Power Co. v. Minnesota Public Utili-

ties Comm’n, 844 N.W.2d 374 (Minn.), cert. denied, 104 S. Ct.

8546 (1984), and Northern States Power Co. v. Hagen, 314

N.W.2d 32 (N.D. 1981), two state supreme courts determined

that their respective state regulatory commissions had to

accept and collect the allocated costs of an abandoned nuclear

plant project in the retail rates charged for NSP Company

power. We endorse the state courts’ conclusion that FERC

had authority to approve or reject the cost allocation.

*1 30 FERC { 63,030, at 65,151.

52a

If State Commission A orders a change to be made

in a wholesale rate filing, presumably because it

would benefit the ratepayers in State A, then State

Commission B might well retaliate by ordering a

counter rate filing that would benefit the ratepayers

in State B... . It was to protect against such com-

peting local state interests that a Federal Commis-

sion was given jurisdiction to protect the national

interest in transmission and sales for resale in inter-

state commerce.**

92 Western Massachusetts Electric Co., 23 FERC {% 61,025,

at 61,064 (1983). Most recently, the Eighth Circuit spoke to a

similar question in the same factual context involved in the

instant case. In Middle South Energy, Inc. v. APSC, 593

F. Supp. 863 (E.D. Ark. 1984), aff’d, 772 F.2d 404 (8th Cir.

1985), cert. denied, 106 S. Ct. 884 (1986), the APSC sought

to require AP&L to show cause why the UPSA and the other

Grand Gulf allocation agreements were not void ab initio

because the utility had failed to obtain the APSC’s prior

approval. The district court enjoined the inquiry, holding that

it constituted a collateral challenge to the FERC proceedings

and an intrusion into a preempted area. On appeal, the Eighth

Circuit affirmed, but rested its decision on an alternative find-

ing that APSC’s inquiry was an unwarranted burden on inter-

state commerce. The Eighth Circuit’s characterization of

APSC’s purpose is instructive and highlights the merit of

federal regulation in the present case:

The APSC seeks to cancel the Grand Gulf agreements

ostensibly because they have not received the necessary

state regulatory approval. Its apparent concern, which

has been made abundantly plain in its orders and its

arguments before the SEC and FERC, however, is the

economic impact on Arkansas citizens caused by AP&L’s

participation in Grand Gulf. It seeks to deflect what it

has estimated to be rate increases of more than $3.5 bil-

lion over the next ten years. Given free rein, the APSC

would shift this burden to the citizens of Mississippi and

Louisiana, citizens who are powerless to directly influence

Arkansas’ internal affairs.

772 F.2d at 416-17 (footnote omitted}.

53a

This same reasoning applies with equal force to a cost

allocation among affiliates who exchange power at whole

sale in interstate commerce.”

b. The Mississippi Argument

The MPSC argues that the Commission’s orders unlaw-

fully disregard the considerations upon which that state

agency relied in certificating construction of Grand Gulf

in Mississippi. We find the Commission’s analysis and

rejection of this argument entirely correct.

MPSC asserts that the utilization of any allocation

procedure other than that accepted by it in the Grand

Gulf certification proceedings would impermissibly usurp

its certification authority. As the Commission found,

this assertion is incorrect for several reasons. First, as

has been detailed above, state regulatory authorities, in-

*’ The Arkansas-Missouri petitioners further maintain that

FERC’s orders usurp state jurisdiction by imposing costs on

AP&L for capacity it does not need. This argument appears

ludicrous in light of the integrated planning and construction

of generating capacity on a system-wide basis. Moreover,

none of the operating companies seek Grand Gulf capacity at

the present time.

Equally fallacious is the APSC’s argument that FERC’s

orders have unlawfully “remove[d] low cost facilities from

AP&L by forcing a sale from those facilities to consumers in

Louisiana and Mississippi.”” APSC Brief at 41. The realloca-

tion of Grand Gulf simply adjusts AP&L’s share of MSU’s

generation capacity costs—costs incurred jointly by the

system.

APSC also asserts that it issued certifications for Arkansas’

nuclear and coal plants based upon its perception of the needs

of AP&L’s customers and that it carefully supervised con-

struction of these plants to insure low costs. Hence, the state

regulatory authority contends that it would be unfair to im-

pose upon Arkansas generating capacity not subject to similar

prior scrutiny. This argument, too, fails; AP&L’s supporters

are not free to ignore the historical integration of the MSU

system and AP&L’s continuous involvement and responsibility

in planning generation capacity for that system.

54a

cluding the MPSC, do not have authority, as a threshold

matter, to approve any allocation of Grand Gulf’s cost or

capacity among the system operating companies. Such

decisions were subject to review and approval by the

Commission.

Moreover, the MPSC argument, which it quite properly

characterizes as one of equitable estoppel, is untenable

under the circumstances. As FERC correctly observed,

the Commission itself made no representations to the

MPSC; its hands could not be tied by the doctrine, par-

ticularly here where its application would lead to “an

inequitable result.” *

Finally, it is noteworthy that the MPSC “did not spe-

cifically approve any particular allocation or allocation

methodology for Grand Gulf or establish any particular

allocation or allocation methodology as a condition of the

certificate.” ** This factual prerequisite to the application

of the doctrine of equitable estoppel, too, is absent.

For all of these reasons, the MPSC’s arguments were

properly rejected by FERC.

4. Intrusion on the SEC’s Jurisdiction

The Arkansas-Missouri petitioners contend that FERC

has impermissibly infringed upon the authority of the

SEC to regulate the MSU syscem as a registered holding

company under the PUHCA.*® They further maintain

that, by statutory mandate, any conflict between the

SEC’s authority under the PUHCA and FERC’s author-

ity under the FPA must be resolved in favor of the

**30 FERC { 63,030, at 65,166, cited in 31 FERC { 61,305,

at 61,645.

*% 26 FERC { 63,044, at 65,111-12. See also 80 FERC

§ 63,030, at 65,166, cited in 31 FERC { 61,305, at 61,645.

96 15 U.S.C. §§ 79 et seg. (1982).

55a

former.** We find no inconsistency in the actions taken

by FERC and the jurisdiction of the SEC.

The SEC has correctly explained the division of re-

sponsibility between itself and FERC:

The jurisdiction of this Commission [the SEC] with

respect to the availability agreement existed under

Section 12{b) of the Act as to the indemnity obliga-

tions of the four operating companies to MSE and

as to the indemnity that three of the companies gave

to APL. The contracts for the sale of electric energy

among the subsidiaries of MSE [sic] are subject to

the exclusive jurisdiction of FERC. Generally 2 con-

tract for sale of goods and services to an associate

company is governed by Section 13(b) of the Act,

but Section 2(a) (20), which defines “Sales contract,”

expressly excludes sale of “electric energy or natural

or manufactured gas.” °°

The SEC thus explicitly acknowledged FERC’s control

over wholesale rates and sales among the operating com-

panies and its statutory authority over the rates and

rate-related terms of the UPSA.®® Moreover, when the

*7 See 16 U.S.C. § 825q (1982).

% In the Matter of Middle South Utilities, Inc., Middle

South Energy, Inc., SEC PUHCA Release No. 23,579, 32 SEC

Docket 416, 419 n.15 (Jan. 23, 1985) (Memorandum Opinion

and Order Authorizing Common Stock Sale and Acquisition

and Denying Request for Hearing) (emphasis supplied).

®° The SEC has also observed that

[t]he operating subsidiaries in the Middle South system

have been an integrated system since 1930. As an inte-

grated system, the operating companies have been parties

to a series of system agreements governing intercompany

sales of electric energy, as well as the planning, construc-

tion and operation of generation and transmission facili-

ties. These agreements are regulated by [FERC] under

the Federal Power Act.

Id. at 417-18 (footnote omitted) (emphasis supplied).

56a

SEC approved the Reallocation Agreement among the

system operating companies,’ it recognized that a rate

schedule for the sale of energy would be filed with FERC

—a schedule plainly subject to modification pursuant to

FERC’s authority under the FPA. The SEC itself per-

ceives no conflict between its jurisdiction and that of

FERC. Similarly, having determined that the allocation

of Grand Gulf is well within FERC’s authority over

wholesale rates for electric energy in interstate com-

merce, we, too, have little trouble concluding that there

is no conflict with SEC jurisdiction.

Nor do we find merit in the claim that FERC’s action

is at odds with the goals of the PUHCA. We agree that

an important aim of the PUHCA was the elimination of

control of some holding companies so that local utilities

might be regulated by local authorities. However, the

PUHCA itself permits holding companies to own subsidi-

ary utilities when its purposes are best served by focus-

ing on regional rather than state interests, so long as

the effectiveness of regulation is not impeded.’ The

PUHCA permits the continued existence of a holding com-

pany if its operations are limited “to a single integrated

public-utility system,” }°* which is defined as follows:

a system consisting of one or more units of generat-

ing plants and/or transmission lines and/or dis-

tributing facilities, whose utility assets, whether

owned by one or more electric utility companies, are

physically interconnected or capable of physical in-

terconnection and which under normal conditions may

be economically operated as a single interconnected

and coordinated system confined in its operations to

a single area or region, in one or more States, not

100 Middle South Energy, Inc., SEC PUHCA Release No.

22,280 (Nov. 18, 1981).

101 See 15 U.S.C. § 79k (b) (1982).

102 Jd,

57a

so large as to impair (considering the state of the

art and the area or region affected) the advantages

of localized management, efficient operation, and the

effectiveness of regulation... .*°

The SEC has determined that the MSU system consti-

tutes an “integrated public-utility system.” ?%* Thus, the

regional integration embodied in the structure of the

MSU system was clearly contemplated by Congress when

it enacted the PUHUA.

Moreover, in the PUHCA itself, Congress recognized

“that affiliate power transactions ‘are not susceptible of

effective control by any State.’” > Transactions, such

as this one, between affiliated power companies appear

to be precisely the type of transactions that Congress

sought to regulate by enactment of the Federal Power

Act and the Public Utility Holding Company Act of

1935.” 3

5. The Mobile-Sierra Doctrine

The APSC maintains that FERC’s orders disregard

the Mobile-Sierra doctrine,’ which requires the Com-

mission to respect certain private contract rights in ex-

ercising its regulatory powers. We find that, in the in-

stant case, this doctrine does not bar the exercise of

FERC’s power under section 206 of the FPA to reform

103 Jd. § 79b(a) (29).

104 Middle South Utilities, Inc., 35 S.E.C. 1, 10 (1953).

105 State of Minnesota, 344 N.W.2d at 382 n.17 (quoting 15

U.S.C. § 79a(a) (1982) ).

106 Id,

107 This doctrine is based on the companion cases of United

Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332

(1956), and FPC v. Sierra Pacific Power Co., 350 U.S. 348

(1956).

58a

a practice or contract affecting a rate charged by a pub-

lie utility for wholesale service in interstate commerce.

In the Mobile case, the Mobile Gas Service Corpora-

tion (“Mobile”), a natural gas distributor, had entered

into a long-term contract with the United Gas Pipe Line

Company (“United”) to purchase gas for resale to an

industrial customer, Ideal Cement Company (‘Ideal’).

Ideal had a reciprocal contract to buy the gas from Mo-

bile. The Mobile-United agreement had been filed with

the Commission and was part of United’s filed schedule

of rates. Subsequently, United, acting without the con-

sent of Mobile, altered the rates specified in its contract

with Mobile by filing with the Commission a new rate

schedule purporting to increase the rate on gas sold to

Mobile for resale to Ideal. Mobile challenged United’s

action, and the Supreme Court held that the Natural

Gas Act does not permit natural gas companies to change

their rate contracts by unilateral action.

Thereafter, in Sierra, the Court applied its holding in

Mobile to cases arising under the FPA. Thus, neither

the filing of a new rate nor a finding that it is reason-

able may abrogate a utility’s contract with a distributor.

“Together, the two cases make it crystal clear that a

heavy burden must be met before a customer who has

negotiated a fixed-price contract can be deprived against

his will of the benefits of his bargain.” *%

APSC suggests that, in reforming the UPSA, FERC

has snatched from AP&U the favorable result of its con-

tractual escape from responsibility for Grand Gulf in

contravention of the Mobile-Sierra holdings. We disagree.

Initially, we note that the UPSA itself expressly permits

unilateral changes in the contract by MSE:

108 Town of Norwood v. FERC, 587 F.2d 1306, 1310 (D.C.

Cir. 1978).

59a

Nothing contained herein shall be construed as af-

fecting in any way the right of MSE to unilaterally

make application to FERC for a change in the rates

contained herein or any other term or condition of

this Agreement under Section 205 of the Federal

Power Act and pursuant to FERC Rules and Regu-

lations promulgated thereunder.’

Moreover, the UPSA makes no mention of any restric-

tion on the Commission’s authority to reform agreements

under section 205 or section 206 of the FPA.’”® This cir-

cuit has made it clear that parties may agree to unilat-

eral rate filings’ and that parties may agree to “leave

unaffected” the Commission’s power to replace rates, and

terms affecting rates, tha. are either contrary to the

public interest or unjust, unreasonable, unduly discrim-

inatory or preferential to the detriment of the contract-

ing parties.’- The signatories to the UPSA elected to

1 616-R. 2982, I J.A. 246.

110 Tn fact, the record suggests that the parties contemplated

FERC review of the terms of the UPSA. See Reallocation

Agreement, July 28, 1981. 616-R. 3275, I J.A. 268 (“2. An

agreement between LP&L, MSE, MP&L and NOPSI will be

executed in form for filing with the Federal Energy Reguia-

tory Commission in accordance with Part 35 of the Commis-

sion’s Regulations establishing the terms, conditions and rates

for the sale of capacity and energy from MSE to LP&L,

MP&L and NOPSI.... 7. The effectiveness of this Agree-

ment is subject to the receipt of all necessary regulatory

approvals.’’).

111 See Papago Tribal Utility Authority v. FERC, 723 F.2d

950, 953 (D.C. Cir. 1983), cert. denied, 104 S. Ct. 3511

(1984) ; Kansas Cities v. FERC, 723 F.2d 82, 87 (D.C. Cir.

1983).

112 Papago Tribal Utility Authority, 723 F.2d at 953. The

APSC incorrectly suggests the Supreme Court’s holding in

Sierra made the public interest standard the sole criteria for

contract revision in section 205 or section 206 proceedings.

60a

permit unilateral rate filings and not to restrict the Com-

mission’s power."* The parties’ bargain itself contem-

plates the Commission’s review, and potential reform

of their agreement; the Mobile-Sierra doctrine requires

no more.***

Finally, even if the contracts fall within the scope of

the Mobile-Sierra decisions, the Supreme Court has em-

phasized that the relevant agency, here FERC, may al-

ways reform a contract found to be “unlawful” or “con-

trary to the public interest,” i.c., that “contracts remain

fully subject to the paramount power of the Commission

to modify them when necessary in the public inter-

est.” "5 The Court stated in Sierra that the Commission

“has undoubted power under § 206(a) to prescribe a

change in contract rates whenever it determines such

rates to be unlawful”? and indicated three circum-

stances under which the Commission might conclude that

a rate or a contract term affecting a rate could be found

In fact, as this covrt has made clear, either the interest of

the public ov the interest of the parties in nondiscriminatory

rates will suffice to justify the Commission’s decision to re-

form rates, id. at 954 n.5, so long as the parties’ contract does

not eliminate the Commission’s authority over discrimination

or preference that operates only against the signatories. Such

discrimination may be waived “up to the point where it pro-

duces some independent harm to the public interest,” id. at

953 n.4, but no such waiver took place in the instant case.

113“TCjourts and the Commission have almost universally

construed contractual references to future rate changes to

authorize § 206 proceedings with a just-and-reasonable stand-

ard of proof.” Kansas Cities, 723 F.2d at 88.

114 See Richmond Power & Light v. FPC, 481 F.2d 490, 493

(D.C. Cir.) (describing the Mobile-Sierra doctrine as “re-

freshingly simple: ... Rate filings consistent with contractual

obligations are valid; rate filings inconsistent with contractual

obligations are invalid.”), cert. denied, 414 U.S. 1068 (1973).

115 Mobile, 350 U.S. at 344.

116 Sierra, 350 U.S. at 353.

6la

contrary to the public interest and therefore subject to

revision: “where it might impair the financial ability

of the public utility to continue its service, cast upon

other consumers an excessive burden, or be unduly dis-

criminatory.” "’ Here FERC expressly adopted the find-

ings of ALJ Liebman who found the level of discrimina-

tion in the UPSA “profound” and agreed that its impact

on customers in Louisiana and Mississippi would be “dra-

matic[].”"* The Commission’s specific determination

of unlawfulness provides the “unequivocal public neces-

sity” “* for reformation of the UPSA under section 206

of the FPA.

For each of the foregoing reasons, the Mobile-Sierra

doctrine does not preclude FERC’s actions in the instant

case.

C. Conclusion

For all of the foregoing reasons, we reject petitioners’

principal contentions with respect to FERC’s jurisdiction.

We have also considered all other arguments suggesting

that the Commission is without jurisdiction in this case,

and we find them to be without merit. The Federal

Power Act clearly provides FERC with authority to issue

the orders here in question. We now turn to the merits

of this case.

III. MERITS

Petitioners challenge FERC’s decision to reject the

Unit Power Sales Agreement and to equalize nuclear

capacity among the MSU operating companies. In the

process, many advocate adoption of a particular, alter-

nate allocation. We reject these challenges because we

conclude that FERC’s action was both rational and within

117 Jd. at 355.

118 26 FERC 63,044 at 65,108 & 65,104.

1° Permian Basin Area Rate Cases, 390 U.S. 747, 822

(1968).

62a

the Commission’s range of discretion to remedy unduly

discriminatory rates. We first examine the workings of

the UPSA and the 1982 System Agreement and then

review the evidentiary basis for FERC’s determination

that the Agreements as filed were unduly discriminatory.

We then address petitioners’ claims that FERC was re-

quired to adopt a remedy other than the one it chose.

Finally, we consider several remaining issues such as

Commissioner Richard’s refusal to recuse himself and

FERC’s refusal to reopen and update the record.

Under section 206 of the Federal Power Act (“FPA”),

FERC must determine whether an agreement as filed is

“unjust, unreasonable, unduly discriminatory or preferen-

tial.” 16 U.S.C. § 824e(a) (1982). If the agreement is

just and reasonable, then it is approved as filed. If, on

the other hand, the agreement is unduly discriminatory,

then FERC is required to “determine the just and reason-

able. . . contract to be thereafter observed and in force,

and shall fix the same by order.” /d.

In this case, FERC reviewed “two initial decisions in

dockets which are not consolidated but which have over-

lapping issues concerning the appropriate allocation of

capacity costs incurred on the... (MSU) system.” 31

F.E.R.C. (CCH! at 61,631. Thus, FERC considered

whether the UPSA and the 1982 System Agreement,

taken together, were just and reasonable.

To understand the Commission’s decision, it is neces-

sary to examine the workings of the UPSA and the Sys-

tem Agreement in detail. The UPSA resulted from nego-

tiations among the four operating companies and MSE in

1979. These negotiations produced the 1981 Reallocation

Agreement in which the companies agreed that all Grand

Gulf power would be purchased by LP&L, MP&L and

NOPSiI in definite percentage shares. AP&L relinquished

all interest in Grand Gulf, and the other operating com-

63a

panies agreed to indemnify and hold AP&L harmless

for its obligations to lenders under the 1974 Availability

Agreement.

Pursuant to the Reallocation Agreement, the parties

executed the UPSA in June 1982 to be filed with FERC.

The UPSA provides in pertinent part:

1.2 The Purchasers shall, subject to the terms and

conditions of this Agreement, be entitled to receive

all of the Power which shall be available to MSE

at the Project in accordance with their respective

Entitlement Percentages. The Entitlement Percent-

ages are as follows:

Entitlement

Percentages

Unit No.1

LP&L 38.57 %

MP&L 31.63%

NOPSI 29.80 %

100.00 %

26 F.E.R.C. (CCH) at 65,097. The UPSA further pro-

vides that LP&L, MP&L and NOPSI shall pay MSE the

same proportionate shares of the total capital and op-

erating costs of the Grand Gulf unit. Jd. Thus, the

UPSA allocates Grand Gu'f capacity and energy in iden-

tical shares.

Meanwhile, in April 1982, MSU filed the 1982 System

Agreement with FERC to create a new rate schedule for

the generation and consumption of the System’s energy.

A critical aspect of the 1982 System Agreement, for our

purposes, is that it does not apply to Grand Gulf. That

is, it assumes the existence of the UPSA and its allocation

of Grand Gulf capacity and energy. Thus, the 1982 Sys-

tem Agreement may be read and apylied properly only by

recalling the Grand Gulf allocations fixed by the UPSA.

Under the 1982 System Agreement, capacity and energy

costs are allocated separately. As for energy, each com-

64a

pany is entitled to first call on the lowest cost energy

generated by the plants located within its service area

(and by Grand Gulf up to its UPSA percentage entitle-

ment). The energy generated by a company’s plants in

excess of that company’s demand goes into a pool of

energy available to companies whose plants produce less

energy than they demand. Such companies may purchase

the lowest cost energy available in the pool.

The 1982 System Agreement also establishes a formula

to equalize roughly the costs of capacity to generate

energy. This is achieved by equalizing capacity among

the operating companies with corresponding capacity

equalization payments. Companies that are “long” on

capacitvy—i.e., those whose percentage of total System ca-

pacity exceeds their percentage of total System demand—

contribute their excess capacity to “short” companies—

7.e., companies whose percentage of total System capacity

is less than their percentage of total System demand. In

return, the “short” companies make capacity equalization

payments to the “long” companies. Under the 1982 Sys-

tem Agreement, these payments are based on the invest-

ment costs of “intermediate” oil and gas fired generation

facilities, which are much lower than the investment

costs of newer coal and nuclear units. In determining

whether, and to what extent, a company is long or short,

the System considers not only the capacity of units lo-

cated in that company’s service area, but also the share

of Grand Gulf capacity to which that company is entitled

under the UPSA.

The operating companies intended to roughly equalize

the Svstem’s capacity costs among themselves by execut-

ing the UPSA and the 1982 System Agreement. And,

indeed, at the time they were negotiated, these agree-

ments appeared to achieve that objective. When the

UPSA was negotiated in 1979, Grand Gulf capacity ap-

peared to be a good buy. The initial cost estimate for

building both Grand Gulf units was $1.3 billion; by the

65a

time the first unit began operations in 1985, however, the

final cost for that unit alone was $2.7 billion. It seems

unlikely that, in 1979, the companies could have foreseen

that the cost of completing Grand Gulf would quadruple

because of the lengthy regulatory delays that would occur

in the aftermath of the Three Mile Island accident. The

System Agreement’s formula for roughly equalizing ca-

pacity costs among the companies also appeared reasou-

able when negotiated. Capacity equalization payments

were based on the costs of oil and gas fired units, rather

than the more costly nuclear and coal fired units. His-

torically, a company’s ability to construct oil and gas

fired units depended on the existence of sufficient natural

resources within its service area. By contrast, the ability

to build coal and particularly nuclear units was less

restricted. Thus, when the System decided to shift to coal

and nuclear capacity, each of the operating companies

Was assigned to build nuclear capacity: AP&L was as-

signed ANO [I & II; LP&L was assigned Waterford III;

MP&L was assigned Grand Gulf I; and NOPSI was as-

signed Grand Gulf II. The cost of nuclear capacity was

assumed to be roughly equivalent. Thus, each company

would share in the cost of the older oi] and gas capacity—

either by having constructed it or by making capacity

equalization payments—and each company would share

in the cost of the System’s newer capacity—by construct-

ing nuclear and/or coal fired units.

By the time the Commission reviewed the UPSA and

the System Agreement, however,\conditions had changed

radically. Though AP&L had successfully completed the

ANO units without substantial cost overruns,’ sce 31

F.E.R.C. (CCH) at 61,669 n.17, the cost of constructing

Grand Gulf I and Waterford III approached three to four

times original estimates. As ALJ Liebman recognized,

“(djisparate rates are legitimate under section 205(b)

of the FPA if sufficient factual bases exist to justify the

difference.” 26 F.E.R.C. (CCH) at 65,106 (citing Metro-

politan Edison Co. V. FERC, 595 F.2d 851, 857, 858

66a

(D.C. Cir. 1979) ). Upon reviewing the nature and op-

eration of the MSU System, Judge Liebman concluded

that the facts were insufficient to outweigh “the profound

undue discrimination cavsed by [the UPSA] allocation.”

Id. at 65,108. The Commission affirmed, concluding that

“the 1982 System Agreement and the UPSA, as filed,

together will [not] achieve proper cost allocation,” and

that “the 1982 System Agreement in conjunction with

Judge Liebman’s allocation of nuclear capacity will

achieve just and reasonable results.” 31 F.E.R.C. (CCH)

at 61,655.

The Commission based its decision primarily upon two

findings: (1) “the fact that all Middle South System

nuclear units have been planned to meet overall System

needs and objectives,” and (2) “the unforeseen problems

unique to constructing nuclear units.” 31 F.E.R.C.

(CCH) at 61,655 (footnote omitted). The Commission’s

first finding is more than adequately supported by the

record. The Commission began by discussing the composi-

tion of, and key role performed by, the System Operating

Committee. The Operating Committee is composed of five

members: one representative from each of the four op-

erating companies and one from the System’s wholly-

owned service company, Middle South Services, Ine.

(“MSS”). See 31 F.E.R.C. (CCH) at 61,646; 30 F.E.R.C.

(CCH) at 65,143. The Commission undertook a thorough

review of the record testimony of current and former

System executives, see 31 F.E.R.C. (CCH) at 61,646-48,

as well as various sets of minutes of the System Operat-

ing Committee from 1961 to 1980, see id. at 6§1,648-50.

This evidence amply supports the Commission’s conclusion

that although individual operating companies were inti-

mately involved in the planning stages of new generation

units and sought to promote their own interests, “the

Operating Committee nevertheless made the major deci-

sions concerning general timing, location and size of plant

additions, in view of the overall needs of the system,

67a

while accommodating individual company needs wherever

possible.” Jd. at 61,650. For example, Mr. Trumps, an

MSS official, testified that “generation planning has been

done on a systemwide basis, but with due consideration

of the needs of the individual companies as to the location

of new facilities.” Jd. at 61,647. Mr. Trumps also testi-

fied that under the 1973 System Agreement, an individual

operating company could not block an Operating Commit-

tee decision since that body acted by two-thirds vote,

and that the 1982 System Agreement further strengthened

the Committee’s position by authorizing decisions to be

made by majority vote. See id. at 61,651.

In making its findings about the System’s planning and

operations, FERC expressiy rejected ALJ Head’s con-

trary findings as unsupported by the evidence. First, the

Commission rejected Judge Head’s conclusion that there

is “a pattern of autonomy on the part of the individual

operating companies, particularly as to specific plant site

locations, fuel and financing.” 80° F.E.R.C. (CCH) at

65,168. The Commission acknowledged that the operating

companies “exercise[] their authority to decide details

such as specific location, timing, and sizing of [an as-

signed! unit,” 31 F.E.R.C. (CCH) at 61,650, but rightly

concluded that this fact does not affect the finding that

“decisions on the MSU System are made based on an

overall System plan and primarily for the System as a

whole,” id. (emphasis in original).

Second, and more important for our purposes, the Com-

mission rejected ALJ Head’s determination that Grand

Gulf is “an anomaly to the regular planning and con-

struction of generating facilities by the operating com-

panies of the Middle South system.” 30 F.E.R.C. (CCH)

at 65,172. Again, the Commission’s conclusion is sup-

ported by the record. Relying on the testimony of Mr.

Lupberger, an officer of MSU, MSE and MSS, the Com-

mission began by recalling that in the late 1960’s and

early 1970’s, the System decided to change its fuel mix

68a

by shifting away from oil and gas generation in favor

of nuclear and coal capacity. See 31 F.E.R.C. (CCH) at

“61,651. Pursuant to that decision, AP&L was assigned

to build the ANO units and MP&L was assigned to con-

struct Grand Gulf I. After reviewing the relevant testi-

mony, FERC concluded that “[t]he evidence supports a

finding that the Grand Gulf units were originally planned

in the same manner as the other nuclear units, 7.e., to

meet MP&L’s needs, to meet System needs, and to meet

the System goal of diversifying fuel mix.” 31 F.E.R.C.

(CCH) at 61,653. The Commission recognized that the

way in which Grand Gulf had to be financed, see supra

pp. 17-18, resulted in differences between Grand Gulf and

other system units, all related to the fact that MSE,

rather than an individval operating company, owns and

operates the plant. See id. But, as FERC correctly ob-

served, these differences “arose solely from the fact that

MP&L became unable to finance the Grand Gulf units on

its own. They do not contradict the fact that Grand

Gulf 1 and 2 were planned in the same manner as the

other nuclear units on the system.” Jd. at 61,653-54.

Indeed, ,Mr. Lupberger’s testimony was that the system

employed the same general process in deciding to build

Grand Gulf as it did in deciding to build the ANO units.

See id. at 61,654.

Having determined that “all Middle South System

nuclear units have been planned to meet overall System

needs and objectives,” 31 F.E.R.C. (CCH) at 61,655, the

Commission’s conclusion that the UPSA and the 1982

System Agreement, as filed, were unduly discriminatory

follows almost as a matter of course. Under the Agree-

ments as filed, the cost of nuclear capacity varied widely

from company to company. For example, the cost to

AP&L for its 1694 megawatts of nuclear capacity was

$900 million, while the cost to LP&L for 1538 megawatts

was $3.4 billion, approximately four times as much. Sce

26 F.E.R.C. (CCH) at 65,107. Similarly, the cost to

MP&L for 356 megawatts and to NOPSI for 335 mega-

69a

watts was $800 million and $700 million, respectively,

while AP&L received 1694 megawatts, approximately five

times the capacity of either, for just $900 million. See

id. As already discussed, the 1982 System Agreement’s

provision for capacity equalization payments does little,

if anything, to reduce these vast nuclear capacity cost

disparities. That is because AP&L is currently a “long”

company, see 30 F.E.R.C. (CCH) at 65,166, and, in any

event, capacity equalization payments are based on the

costs of oil and gas fired units rather than more costly

nuclear units such as Grand Gulf and Waterford III.

Given the degree of integration on the MSU System,

FERC could properly conclude that the tremendous dis-

parities in nuclear capacit:’ costs among the operating

companies disrupt the System’s historical pattern of

roughly equalizing capacity costs and thus constitute un-

due discrimination under section 206 of the Federal

Power Act.

The second finding upon which the Commission’s deci-

sion rests—the existence of “unforeseen problems unique

to constructing nuclear units,” 31 F.E.R.C. (CCH) at

61,655—relates primarily to FERC’s choice of means to

remedy the undue discrimination on the system. Peti-

tioners do not seriously dispute the existence of this find-

ing; rather, they challenge the use to which it was put

by the Commission. For example, the Arkansas-Missouri

parties argue that FERC erred by considering facts and

circumstances that arose after the execution of the UPSA

in evaluating the reasonableness of that agreement.

Rather, they assert that the Commission could do no more

than “examin[e] the factual circumstances that prevailed

at the time the UPSA was formulated in 1979-80.” Brief

of Petitioners Arkansas Public Service Commission, Mis-

souri Pubiic Service Commission, Arkansas-Missouri Con-

gressional Delegation and State of Arkansas (‘“Arkansas-

Missouri Pet. Br.) at 66; accord Brief for Petitioner

Arkansas Power & Light Company (“AP&L Pet. Br.’’) at

70a

45. We find this contention to be completely without

merit.

Under the FPA, the Commission has a statutory duty

to reform unlawful rates and establish just and reason-

~ able ones, see 16 U.S.C. § 824e(a) (1982), and a statu-

tory right to order production of, and to examine, “all

accounts, records, and memoranda of ‘licensees and pub-

lic utilities,” id. § 825(b), in performing that duty. This,

in effect, was the Commission’s response on rehearing:

“The salient issue here is not whether the agreement was

reasonable when made, or whether it met the System

ovjectives at the time it was made. Rather, the principal

inquiry is whether the allocation is appropriate based on

the evidentiary record that was subsequently developed.”

32 F.E.R.C. (CCH) at 61,957.

The Arkansas-Missouri parties appear to ignore this

rationale and argue simply that FERC’s evaluation of

the UPSA in light of subsequent events conflicts with

prior Commission precedent. See Arkansas-Missouri Pet.

Br. at 67-68; AP&L Pet. Br. at 46-48. The cited cases

are inapposite to the Commission’s review of the UPSA.

They establish only that the prudence of power supply

arrangements and generation construction activities must

be evaluated on the basis of circumstances prevailing at

the time the activity was undertaken, and are thus

limited to “prudence review”—examinations of utilities’

decisions to incur costs. The Commission’s inquiry is

quite distinct. A system’s allocation of nuclear capacity

costs may not be imprudent on the part of the parties

at the time they agree to incur them, but might never-

theless result in present undue discrimination. Accord-

ingly, the cases present no bar to the Commission’s reli-

ance on the record to perform its statutory duty under

section 206 of the FPA.

AP&L advances an additional argument against the

Commission’s second finding: “there is no substantial

evidence of record put forth by the agency to support its

Tla

» 9)

conclusion that the alleged problems were ‘unforeseen.

AP&L Pet. Br. at 45-46. Besides erroneously placing the

burden of proof on the Commission, see San Luis Obispo

Mothers for Peace v. NRC, 789 F.2d 26, 37 (D.C. Cir.)

(en banc) (Commission’s failure to “include citations to

specific pages of the record . . . provides no basis for

overturning the Commission’s decision”), cert. denied, 107

S. Ct. 330 (1986), this objection is simply irrelevant.

Even if we assume that the problems were foreseen when

the UPSA was negotiated and that the parties intention-

ally entered into an unduly discriminatory agreement, the

Commission’s duty to reject the agreement as filed would

not be diminished.

The Commission’s second finding supports the Com-

mission’s choice of means tu remedy the undue discrimi-

nation created by the UPSA and the 1982 System Agree-

ment. That choice was to adopt ALJ Liebman’s allocation

of Grand Gulf and approve the 1982 System Agreement

as filed. We hold that this choice was within the Com-

mission’s discretion to remedy the undue discrimination

it identified on the System. We first examine the Com-

mission’s remedy in more detail and then consider the

various petitioners’ objections and alternate proposals.

The Commission allocated Grand Gulf responsibility as

follows:

SE iii dpdntbiceribansihhntenaniefiemicaaminemmanciniengaten 36%

SI: sibeiistnpaidieninksanmncsatcheamensoatnninnonnctinaoee 14%

SII Uihatuisgteiapsinesaineniqnennremanmeeninnaninene 33 %

SE» Sila deieldeceenciniuninninasidiniincnnmanistemnnsien 17%

See 31 F.E.R.C. (CCH) at 61,633. The effect of this al-

location is “not just to allocate Grand Gulf costs, but to

allocate the costs of all nuclear capacity on the MSU

system.” Jd. This can be seen by following the steps

necessary to arrive at this allocation. The System’s total

nuclear capacity costs are determined by summing the

investment costs of all nuclear units on the System, ANO

I & Il, Waterford III and Grand Gulf. Multiplying this

72a

figure by each company’s relative share of total system

demand yields each company’s total cost responsibility in

dollars. The amount of each company’s prior nuclear in-

vestment costs is then subtracted to yield each company’s

Grand Gulf cost responsibility. Finally, these figures are

divided by Grand Gulf’s total investment cost to yield

the percentage of Grand Gulf capacity for which each

company is responsible. See 31 F.E.R.C. (CCH) at

61,655. “The result of this allocation of Grand Gulf is

to give each operating company a share of the ccst of

nuclear capacity roughly proportionate to that company’s

relative share of system demand... .” 26 F.E.R.C.

(CCH) at 65,109. The Commission’s rationale for adopt-

ing this allocation is considered in the context of the

various objections and alternate allocations advanced by

the petitioners.

Petitioners advance numerous arguments in opposi-

tion to the Commission’s decision and propose various

alternate allocations. We address these arguments in the

context of reviewing each proposed alternate allocation.

1. The UPSA and the 1982 System Agreement

AP&L and the Arkansas-Missouri parties advocate ap-

proval of the UPSA and the 1982 System Agreement as

filed. In so doing, they attack the Commission’s decision

on several grounds. We have already considered and re-

jected two of these grounds in the preceding section. See

supra pp. 69-72. The remaining grounds are considered

here.

First, AP&L argues that in reforming the UPSA, “the

FERC failed to give weight to the Congressional policy

favoring voluntary power pooling agreements by ‘cava-

lierly disregarding’ the reasonableness of the specific

agreements that were filed with the agency.” AP&L Pet.

Br. at 41 (quoting ANR Pipeline Co. v. FERC, 771 F.2d

507, 519 (D.C. Cir. 1985)). While it is true that sec-

43a

tion 202(a) of the FPA seeks to encourage voluntary

power pooling transactions, see 16 U.S.C. § 824a(a)

(1982), AP&L’s argument is no more than an attack

on the Commission’s finding that the agreements as filed

are unduly discriminatory. But we have already held

that that finding is virtually inescapable, given the rec-

ord in this case, see supra pp. 68-69, and we reject any

suggestion that the FPA’s policy to encourage voluntary

power pooling agreements could override the Commis-

sion’s specific obligation in section 205 of that Act to re-

ject such agreements if found to be “unjust, unreason-

able, unduly discriminatory or preferential.” 16 U.S.C.

§ 824e(a) (1982).

Second, the Arkansas-Missouri parties assert that the

Commission’s decision is “inconsistent with the Commis-

sion’s own established precedent in Nantahala Power &

Light Company, Opinions Nos. 139 and 139-A, 19 FERC

(CCH) § 61,152 (1982) and 20 FERC (CCH) { 61,430

(1982), aff'd, 727 F.2d 1342 (4th Cir. 1984), and Georgia

Powcr Company, Opinion No. 711, 52 FPC 1343 (1974),

aff'd, Opinicn No. 711-A, 53 FPC 1103 (1975).”

Arkansas-Missouri Pet. Br. at 54. Though these cases

involve Commission refusals to equalize costs, they pro-

vide no support for petitioners in this case.

Georgia Power involved a challenge to Georgia Power’s

reliance on its own generation and transmission costs to

establish its cost of service. The challenger argued that

Georgia Power was part of an integrated electric utility

system whose production costs should be allocated to its

members on a system, rather than individual company,

basis. Finding that the existing allocation was not un-

just and unreasonable, the Commission declined to order

a “rolled-in” or equalized cost allocation. Petitioners’

argument ignores the fact that the FPC found no undue

discrimination. The case is distinguishable on that basis

alone. Moreover, the Georgia Power Commission sug-

gested that a case involving companies’ reliance on “large

74a

multi-company generating units which are remote from

their service areas” might necessitate some form of cost

equalization. See 52 F.P.C. at 1349. Grand Gulf is such

a unit. Thus, we hold that Georgia Power’s refusal to

equalize costs in the absence of undue discrimination does

not apply where, as here, the Commission found such

discrimination in the presence of a multistage generating

unit.

Nantahala involved an agreement between Nantahala

Power & Light Ce. and Tapoco, both wholly-owned sub-

sidiaries of Alcoa, apportioning the capacity and energy

which both companies were jointly entitled to receive

from the Tennessee Valley Authority. That entitlement

arose from a series of agreements among TVA, Alcoa,

Nantahala and Tapoco under which Nantahala and

Tapoco turned over land and generating facilities to TVA

for development of the Fontana Dam in exchange for

capacity and energy entitlements. The Commission found

the apportionment agreement between Nantahala and

Tapoco to be unfair. Though the Commisison declined to

order full cost equalization, it increased Nantahala’s en-

titlement to remedy the unfairness. The Commission’s

decision was based, in part, upon its conclusion that the

two companies do not operate as an integrated system.

See 19 F.E.R.C. (CCH) at 61,277. This conclusion was

affirmed by the Fourth Circuit as based on substantial

evidence. See Nantahala Power & Light Co. v. FERC,

727 F.2d 1342, 1348 (4th Cir. 1984).

In the case at bar, the Commission’s review of the evi-

dence led it to reach precisely the opposite conclusion—

that the MSU system is highly integrated. That determi-

nation is supported by substantial evidence. See supra

pp. 66-68. Moreover, the Commission has not ordered ful!

production costs, or even nuclear production cost equaliza-

tion in this case. Rather, as in Nantahala, it has ordered

a more limited remedy designed only to cure the undue

75a

discrimination found. Thus, petitioners’ argument that

the Commission went too far in this case is without merit.

Third, AP&L argues that the energy from its “less

costly base load generation is displaced from AP&L’s

usage, to become ‘exchange energy’ and be sold into the

pool for the benefit of the other operating companies.”

AP&L Pet. Br. at 50. This argument is simply wrong.

Under the 1982 System Agreement, AP&L is entitied to

first call on its own lowest cost energy, whatever the

source. Thus, if ANO I & II produce AP&L’s lowest cost

energy and AP&L’s demand exceeds the amount produced,

then AP&L will retain all of the benefits of the ANO

units regardless of its Grand Gulf allocation. If anything,

more expensive, not less expensive, energy will be dis-

placed. AP&L’s real complaint is that it must pay its

equitable share of Grand Gulf’s capacity costs.

Fourth, AP&L argues that the Commission’s decision

compels it “to pay more for nuclear capacity than is

justified by [its] actual ownership costs, and at the same

time allows the other operating companies to pay less

for nuclear capacity than their actual ownership costs.”

AP&L Pet. Br. at 55-56 (footnote omitted). This argu-

ment is difficult to understand. The premise seems to be

that AP&L’s “actual ownership costs” are only those

associated with ANO I & II, while the other companies’

include the costs of Grand Gulf. The premise is incorrect.

Under the Commission’s allocation, each company is re-

sponsible for the costs of its own nuclear units as well as

its share of Grand Gulf. AP&L’s argument is really that

it should pay for none of the costs associated with Grand

Gulf—the situation under the UPSA as filed. But, as we

have already held, FERC correctly found that the UPSA

allocation results in uxlawful discrimination.

In short, AP&L and the Arkansas-Missouri parties have

advanced no persuasive argument against the Commis-

siun’s decision to reject the UPSA as filed.

76a

2. ALJ Head's Allocation

Petitioners City of New Orleans, Mississippi Industries,

MP&L, and Representative Webb Franklin, and inter-

venor Representative Wayne Dowdy support the Com-

mission’s finding of undue discrimination, but argue that

the Commission erred in deciding to equalize all nuclear

capacity costs. Rather, they assert that the Commission

should have adopted ALJ Head’s solution of equalizing

only the investment costs associated with Grand Gulf.

See Consolidated Brief of Petitioners Mississippi Indus-

tries, Mississippi Power & Light Company, and Repre-

sentative Webb Franklin, and Intervenor Representative

Wayne Dowdy (“Consolidated Pet. Br.”) at 60-61; Brief

of Petitioner City of New Orleans, Louisiana (“New

Orleans Pet. Br.”) at 48-50.

Putting aside for the moment these petitioners’ argu-

ments against the allocation ordered by FERC, we have

little difficulty affirming FERC’s rejection of Judge

Head’s solution. That solution rests on Judge Head’s

finding that Grand Gulf is an anomaly on the MSU Sys-

tem—the only facility planned and constructed for the

benefit of the system as a whole. See 30 F.E.R.C. (CCH)

at 65,170-72. FERC expressly rejected this finding, con-

cluding instead that Grand Gulf was “planned in the

same manner as the other nuclear units on the System.”

31 F.E.R.C. (CCH) at 61,654. Thus, Judge Head’s solu-

tion is viable only if we conclude that the Commission’s

findings concerning the integration of the MSU System

and the status of the Grand Gulf unit are not based on

substantial evidence. We have already concluded that

they are. See supra pp. 66-68.

In advocating adoption of Judge Head’s solution, peti-

tioners rely primarily on three arguments against FERC’s

chosen allocation. First, they assert that the Commis-

sion’s decision irrationally allocates 33% of Grand Gulf to

MP&L, an increase over the 31.63% allocated to MP&L

under the unduly discriminatory UPSA. Second, they

argue that FERC did not adequately explain why it

focused on nuclear but not coal facilities in equalizing

capacity costs. Third, they assert that MP&L and NOPSI

receive less nuclear capacity per nuclear investment dol-

lar than does AP&L. As explained below, we find that

none of the arguments advanced by these petitioners

requires reversal of the Commission’s decision.

Petitioners’ first objection is that “(t]he Commission

failed to reconcile its allocation scheme imposing 33 per-

cent of Grand Gulf costs on Mississippi with the finding

that a 31.63 percent allocation was detrimental and un-

justified.” Consolidated Pet. Br. at 89. The argument

is that because the UPSA was found to be unduly dis-

criminatory, an allocation to MP&L greater than that

found in the UPSA necessarily must be unlawful. The

argument misconstrues the nature of the statutory in-

quiry. The question is whether the agreement is unduly

discriminatory or preferential. Thus, there is no incon-

sistency in the Commission’s determination that the

UPSA’s allocation of 31.63% of Grand Gulf to MP&L

and 0% te AP&L is unduly discriminatory but that a

33% allocation to MP&L and a 36% allocation to AP&L

is not. That is because a party claiming discrimination,

by definition, objects only to his treatment as compared

to that of other similarly situated parties. Thus, the

reasonableness of the Commission’s allocation may be

judged only by examining the relative impact on the four

operating companies and the degree to which they are

similarly situated.

Petitioners’ second argument is no more availing. They

assert that “the system’s planned shift to primary re-

liance on coal and nuclear generation . . . plainly does not

Support focusing exclusively on nuclear generation and

excluding coal-fired baseload units from that formula.”

Consolidated Pet. Br. at 45-46; accord New Orleans Pet.

Br. at 43. This argument is misleading. While the Sys-

78a

tem’s move toward coal and nuclear facilities might sup-

port equalization of the capacity costs of both coal and

nuclear units, it does not preclude FERC’s decision to

equalize only the investment costs of the nuclear units.

Petitioners’ argument ignores the Commission’s explicit

finding that the unforeseen problems that led to dramatic

cost overruns were “unique to constructing nuclear units.”

31 F.E.R.C. (CCH) at 61,655 (footnote omitted). In this

circumstance, we find that the Commission’s focus on

nuclear but not coal units was rational.

Petitioners argue further that “[t]o the extent that

unexpectedly high costs of [nuclear] facilities support

snecial allocation treatment, the stated reason supports

only a grouping of Grand Gulf 1 and Waterford 3.”

New Orleans Pet. Br. at 44; see Consolidated Pet. Br. at

46-47. They argue that to include the ANO units but

not the coal units was arbitrary and capricious since the

investment costs of the former are comparable to those of

the latter. To be sure, this fact would have justified a

Commission decision to equalize only the investment costs

of Grand Gulf and Waterford III. (Interestingly, neither

these petitioners nor any others have advanced this option

here or below.) But, we conclude that the Commission

also rationally could include the ANO units. Indeed,

FERC decided to include them precisely because their

investment costs were not comparable to those of the more

recent nuclear units. The Commission decided to equalize

the investments cost of all nuclear units because their

widely divergent costs were due solely to the timing of

their construction, see 82 F.E.R.C. (CCH) at 61,960-61,

a reason insufficient to justify the differences.

Petitioners’ third argument is that the Commission’s

allocation is itself unduly discriminatory because it allo-

cates only the investment costs of nuclear capacity but

not the benefits produced by that capacity. Thus, “MP&L

must pay approximately 15 percent of the aggregate cost

of nuclear capacity on the MSU system, but receives the

79a

benefit of only 9.5 percent [ (or 371 megawatts) ] of that

capacity.” Consolidated Pet. Br. at 63. AP&L, on the

other hand, is responsible for only 33% of the System’s

nuclear investment costs, but is entitled to first call on the

energy produced by 2099 megawatts, or 53.5%, of that

capacity. See 26 F.E.R.C. (CCH) at 65,109. In addition,

LP&L pays for 44%¢, and NOPSI pays for 8%, of the

System’s nuclear capacity costs, but receive only 1262

megawatts (or 32%), and 191 megawatts (or 5%), of

nuclear capacity, respectively. See id. Tke reason for

these differences is that AP&L’s nuclear capacity is made

up of inexpensive ANO capacity as well as capacity from

Grand Gulf; all other operating companies’ nuclear ca-

pacity is composed entirely of expensive Grand Gulf and

Waterford III capacity.

In our opinion, the Commission acted within its dis-

cretion in ordering equalization of nuclear investment

costs w:thout equalization of nuclear capacity. The Com-

mission’s allocation serves to restore a rough equalization

of all System capacity costs among the operating com-

panies. In view of the fact that such costs have never

been precisely equalized on the System, FERC was re-

quired to do no more to remedy the undue discrimination

it found. As the Commission emphasized on rehearing:

What our decision purports to do is to eliminate

drastic rate disparities at the wholesale rate level

which are associated with units used for the mutual

benefit of all companies, and to do so in a manner

which disturbs the historical operation of the System

as little as possible, and which allows the individual

companies to retain as fully as possible the benefits

of units they have financed and constructed. In other

words, we have sought to achieve an equitable bal-

ance between the interests of the individual com-

panies and the System as a whole, consistent with

the System Agreement.

32 F.E.R.C. (CCH) at 61,959 (emphasis added).

Petitioners’ argument is even less persuasive when it

is recalled that these petitioners advocate adoption of

80a

Judge Head’s solution as just and reasonable. Judge

Head’s solution was to allocate only the costs and ca-

pacity of Grand Gulf in proportion to each company’s

relative share of System demand, without regard to prior

nuclear investment. But under this scheme, MP&L’s

nuclear cost responsibility as a proportion of total System

nuclear costs would still exceed its proportion of total

System nuclear capacity. This is so because although

AP&L would be allocated a greater share of Grand Gulf

responsibility, it would still be able to reduce its average

nuclear capacity costs, with capacity from its less ex-

pensive ANO units; MP&L’s nuclear capacity, though

smaller, would still consist entirely of expensive Grand

Gulf capacity. Petitioners’ simultaneous claims that

FERC’s allocation must be rejected as unduly discrimina-

tory because it mismatches nuclear costs and capacity and

that an alternate allocation that also fails to match nu-

clear costs and capacity is just and reasonable reveals

the real reason for their support of Judge Head’s solu-

tion. It is not that it resolves the flaws they see in the

FERC allocation, but simply that it allocates them less

Grand Gulf responsibility. Under these circumstances,

the objection that the Commission mismatched costs and

benefits rings rather hollow.

The City of New Orleans advances an additional rea-

son why the Commission’s allocation should be considered

unduly discriminatory: AP&L’s average cost for the nu-

clear energy produced by its capacity is 5.7 cents per

kWh while the average cost of the nuclear energy pro-

duced by the other companies’ nuclear capacity is 15

cents per kWh. See New Orleans Pet. Br. at 35. The ob-

jection is apparently that the Commission failed to equal-

ize the companies’ nuclear production costs and that this

failure results in unduly discriminatory rates. Again, it

is curious that this objection comes from a party that

advocates adoption of Judge Head’s solution since that

solution seeks only to équalize Grand Gulf capacity costs,

8la

not nuclear production costs. Nevertheless, the objection

does not undermine FERC’s allocation.

The Commission’s decision sought only to remedy the

drastic disparities in the costs of building the System’s

nuclear capacity by roughly equalizing the investment

cost of that capacity among the companies. That step

was considered sufficient to restore rough equality among

the companies’ overall capacity costs. Petitioner’s objec-

tion is that the Commission failed to equalize nuclear

production costs—i.e., the costs of producing nuclear

energy. There is no reason for the Commission to have

focused on nuclear production costs rather than overall

production costs. As previously discussed, only Grand

Gulf energy is allocated with capacity. All other energy

—whatever its source—is allocated pursuant to the 1982

System Agreement, with each company entitled to first

call on its own lowest cost energy. Historically, and

under the 1982 System Agreement, production costs have

never been precisely equalized. These costs varied from

company to company depending on each company’s fuel

mix at any given time. ALJ Head reviewed the com-

panies’ relative projected average annual production costs

over a nine-year period under several alternative alloca-

tions. See 30 F.E.R.C. (CCH) at 65,156-57. For exam-

ple, the nine-year average of production costs under the

1982 System Agreement as filed would be as follows:

AP&L — 7.47 cents/kWh

LP&L — 8.59 cents/kWh

MP&L — 11.00 cents/kWh

NOPSI — 11.65 cents/kWh

See id. at 65,157. The nine-year average under one of

the production cost equalization proposals would be as

follows:

AP&L — 8.82 cents/kWh

LP&L — 7.61 cents/kWh

MP&L — 9.46 cents/kWh

NOPSI — 8.96 cents/kWh

82a

See id. Despite the production cost disparities under the

1982 System Agreement, Judge Head found no undue

discrimination: “none of the differences brought out on

the record are so compelling that they require the adop-

tion of one form of production cost allocation.” Jd. at

65,169. Accordingly, he approved the 1982 System Agree-

ment as filed.

Like ALJ Liebman, however, Judge Head found undue

discrimination in the System’s allocation of capacity costs.

Unlike Judge Liebman, however, Judge Head believed

this discrimination could be remanded by equalizing the

investment costs of Grand Gulf alone rather than all

nuclear capacity on the System. See id. at 65,172. More-

over, Judge Head pointed out that allocating AP&L a

share of Grand Gulf capacity and energy would also serve

to reduce the production cost disparities identified under

the 1982 System Agreement. See id. at 65,169.

In view of Judge Head’s above findings, affirmed and

adopted by the Commission, see 31 F.E.R.C. (CCH) at

65,656, petitioner City of New Orleans’ suggestion that

production cost disparities among the companies require

reversal of FERC’s decision must be rejected. We affirm

the finding by Judge Head and the Commission that pro-

duction cost disparities under the 1982 System Agree-

ment doe not amount to undue discrimination. In deciding

what discrimination is “undue,” the Commission neces-

sarily possesses discretion and exercises judgment in light

of the facts established by the record. In this case, Judge

Head identified “a strong factual reason for not restruc-

turing the system to meet the current [production} cost

disparity problems”: “production cost equalization would

be inconsistent with the history of intercompany transac-

tion on the Middle South system.” 30 F.E.R.C. (CCH)

at 65,170. Like Judge Head’s solution, the Commission’s

decision alters the UPSA by allocating AP&L a share of

Grand Gulf responsibility. Indeed, since the Commis-

83a

sion’s decision allocates AP&L more Grand Gulf respon-

sibility (36%), the former does even more than the latter

to reduce the production cost disparities among AP&L

and the other companies.

3. Participation Unit Concept

The remaining Mississippi petitioners—the Mississippi

Public Service Commission, the Mississippi Attorney Gen-

eral, and the Mississippi Legal Services Coalition—raise

many of the arguments relied on by the petitioners who

support Judge Head’s solution. These petitioners, how-

ever, urge a return to the participation unit method of

allocating the System’s excess capacity.

Like the other Mississippi parties, these petitioners ar-

gue that the Commission’s decision mismatches nuclear

investment costs and benefits and irrationally increases

MP&L’s Grand Gulf responsibility from 31.63% to 33%.

We have already considered and rejected these argu-

ments, see supra pp. 76-80, and these petitioners’ conten-

tions require only minimal additional discussion.

In objecting to the Commission’s decision to increase

MP&L’s Grand Gulf responsibility, petitioners take issue

with the Commission’s observation that the result of its

decision “is that all three major geographical areas

served by the MSU System will share similar Grand

Gulf cost burdens: AP&L—36%: MP&L—33%; and

LP&L/NOPSI—33%.” 32 F.E.R.C. (CCH) at 61,960.

They claim that this “response” is “grossly inadequate”

to explain why the Commission’s allocation to MP&L is

just and reasonable while the UPSA’s slightly smaller al-

location is not. See Brief of Petitioners, The Mississippi

Public Service Commission, Edwin Lloyd Pittman, Attor-

ney General for the State of Mississippi, and Mississippi

Legal Services Coalition (“Mississippi Pet. Br.’’) at 56.

Rather than focusing on geographical areas, they assert,

“one must look at the actual size of each company in

84a

order to assess the impact of the Grand Gulf allocation

or cost burden on that company’s individual ratepayers.”

Mississippi Pet. Br. at 60. This argument misunder-

stands the significance of the Commission’s observation.

Contrary to petitioners’ suggestion, the Commission has

not stated that any allocation that spreads costs pro-

portionately over geographic regions is just and reason-

able. By allocating nuclear investment costs according

to relative demand, the Commission expressly recognized

that Arkansas, Mississippi and Louisiana do not have

equal loads. The Commission’s point. is simply that its

allocation, unlike the UPSA’s, requires Arkansas to bear

a proportionate share of nuclear investment costs. It

was the relative impact of the UPSA that FERC found

unduly discriminatory. By requiring AP&L to share in

the costs of Grand Gulf, the Commission could reasonably

adopt an allocation that also slightly increased MP&L’s

responsibility.

We also have little difficulty rejecting petitioners’ sub-

mission that “the participation unit concept utilized un-

der the 1973 System Agreement is a concept for equaliz-

ing excess capacity which is . . . just, reasonable, and

not unduly discriminatory.” Mississippi Pet. Br. at 73.

Under this proposal, the System would return to the 1973

System Agreement with MSE, the MSU subsidiary that

owns Grand Gulf, as a party. Since MSE is not an op-

erating company and has no demand, it will always be

“long” on capacity, making Grand Gulf a participation

unit. This means that the responsibility for Grand Gulf

would be borne entirely by the “short” companies, shift-

ing somewhat over time as the operating companies be-

came more or less long or short.

Both Judge Liebman and Judge Head concluded that

this proposal would be unduly discriminatory. See 30

F.E.R.C. (CCH) at 65,167; 26 F.E.R.C. (CCH) at

65,112. The Commission adopted and affirmed the find-

ings of both judges on this point. See 31 F.E.R.C. (CCH)

85a

at 61,655-56. These findings are conclusively established

by the record. Petitioners acknowledge that MP&L is

currently a “long” company and expected to remain so

for approximately ten years. This means that LP&L and

NOPSI, the “short” companies, would bear almost all of

the responsibility for Grand Gulf during this period.

That the proposal would result in profound discrimina-

tion is most readily seen by observing its impact on

LP&L. As discussed, Grand Gulf and Waterford III are

unique on the System in that it is the dramatic cost

escalations of these units that disrupted the System’s

rough equalization of capacity costs among the operat-

ing companies. See 31 F.E.R.C. (CCH) at 61,654; supra

pp. 69-71. Already saddled with 100% of the costs of

Waterford III, LP&L would be required under peti-

tioners’ proposal to pay 90 to 100% of the costs of

Grand Gulf over the next ten years. See 26 F.E.R.C.

(CCH) at 65,112. As Judge Head recognized, the astro-

nomical costs of Grand Gulf and Waterford III mean

that these two units alone “will account for over 70%

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