# Appendix — Arkansas Public Service Commission v. Federal Energy Regulatory Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385011_1878%3A02 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1987 - **Citation:** 484 U.S. 985 ## Text 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 la APPENDIX A United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT No. 85-1611 MISSISSIPPI INDUSTRIES, PETITIONER Ts 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 2a Nos. 85-1613, 85-1620 & 85-1621 MISSISSIPPI PUBLIC SERVICE COMMISSION, PETITIONER V. 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 We FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT | lll 3a No. 85-1618 OCCIDENTAL CHEMICAL CORPORATION, et al., PETITIONERS v. 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 V. FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT No. 85-1624 ARKANSAS AND MISSOURI CONGRESSIONAL DELEGATIONS, PETITIONER Vv. FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT 4a 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 v. FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT No. 85-1647 CITY OF NEW ORLEANS, PETITIONER v. FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT 5a 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. 6a 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. 7a 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). 8a 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. Ya 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 © 63,015 (1983). 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 © 61,304, at 61,627 (1985) (Order on remand) ). 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 1288. ©) 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 . + ¢ Ul A, c 5 « I er - ’ y anes + x * Clavilix_ c \ ng © Pd Y Y a ~ e vy y ¥ Y y ~~ ~ x . ii c ik = | C ‘ } ~ “ | QR r cy . 6 * ° . « ar C oe = 4 3. 7 " : 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- wh 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 ee 1. ~te (; , ~ al is 6 awn by Congress is bright, and rr ; a — " “Tale + nat " ’ rrecv. SlUc VL Liar 41110 Mt , natitianare . " 3 . ' The cases cited by the Arkansas-Missour petutionel i fit Cases CsIlcu Y AIAdaIi: } T “., $5” + . 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Ii Wey Cal ry . % + . tal c ne supreme ‘° vu =Fre- . j . , , , ~+? ~ . ann sit terpretation of the “but” clause and held — : P : "eg ab sayrisdiction , - + .' a* . a s ae’ s . - ’ > +, - "nc = y epi ; 1 ; \ ¢ . 4 +e >», > - . is > YY |> ‘ ‘ ¢ } e ty ; Tey ‘ re} > T | | . . + y t roi ‘ ~ a4 ; e > ‘ , v Fr ’ + 7 s ‘ ‘ . : —_ . . _ ‘ ‘ lee > . ‘ , ¥ ,, TpYr t . I . ‘ » c ai a* es j oe ; | —. . p © sa - a 99 + } —, = oY > ~ ’ > i ~ ii og | I | . > : ¥ _ ‘ > ¥ ~~ > > ec e’ oY tT) Ss y saliil . . +, yt o . ‘ , inc I E ‘ 4 . 4 a4 4 + ~aee0* a + ‘ — iy ‘ ioc exct , refutes P — T. +} ce y the ( urt a ry T | | — . + ‘ . . > on t t [ [ a iWwiu » adr Utd j ‘ me roan . 4 ] 11es . Amt ae ia t : . ~ > 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. A. 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. B. 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 bl [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385011_1878%3A02. Public record. Not legal advice.