Opposition Brief — Arkansas Power & Light Co. v. Federal Energy (Nos. 86-1424, 86-1380, 87-469)

Nos. 86-1380, 86-1424, and 87-469

Supreme Court, U.S..

riLEe p

NOV_13 1987

Jn the Supreme Court of the Ani

OCTOBER TERM, 1987

ed states JR

ARKANSAS PUBLIC SERVICE COMMISSION, ET AL.,

PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.

ARKANSAS POWER AND LIGHT COMPANY, PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.

REYNOLDS METALS COMPANY, ET AL., PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION, ET Al

ON PETITIONS FOR A WRIT OF CERTIORAR

THE UNITED STATES COURT OF APPEALS FOR

= 4E DISTRICT OF COLUMBIA CIR

BRIEF FOR THE FEDER RGY REGULATORY

COMMISSION IN OPP

CHARLES FRIE

“

SoOuctior Gener

Department of

Weshingion, D.¢

(202) 633-2217

j

Jia

CATHERINE C. COOK

General Counsel

JEROME M. FEIT

Solicitor

JOHN N. ESTES Ill

Altorney

Federal Energy Regulatory Commission

Washington, D.C. 20426

~

157

wht

QUESTION PRESENTED

Whether the Federal Energy Regulatory Commission

had jurisdiction under Part II of the Federal Power Act,

16 U.S.C. (& Supp. IV) 824 ef seqg., to reallocate the

capacity of an electric power generating facility among

four wholly-owned subsidiaries of an integrated public

utility holding company, where the four subsidiaries

operate as an interstate power pool and the system decided

to build the facility to serve its overall needs.

(1)

TABLE OF CONTENTS

Page

erat sce Let be ebbs neces scececcanedes l

A TTS A ge ge 2

ee ee ee ibd bide be encuedees 2

A RS PI pal ren ee eae 10

a a ee i wed ek W0 6040.0 6 23

TABLE OF AUTHORITIES

Cases:

Appalachian Power Co. v. Public Service Comm'n, 812

I ra er 14

Arkansas Electric Cooperative Corp. v. Arkansas Public

Service Comm’n, 461 U.S. 375 (1983) ............... 21

Connecticut Light & Power Co. v. FPC, 324 U.S. 515

ee eae kee ansseneaense 16, 17

FPC v. Conway Corp., 426 U.S. 271 (1976) ............ 16

Kentucky Power Co., 38 F.E.R.C. 4 61,243 (1987), peti-

tion for review pending, No. 87-3643 (6th Cir.) ....... 22

Kentucky Utilities Co. v. FERC, 766 F.2d 239 (6th Cir.

re ee ae as bab bee Gees 19

Minnesota v. FERC, 734 F.2d 1286 (8th Cir. 1984) ...... 14

Nantahala Power & Light Co. v. Thornburg, No. 85-568

NA SC 14, 15, 19, 20

Northern States Power Co. v. Minnesota Public Utilities

Comm’n, 344 N.W.2d 374 (Minn.), cert. denied, 467

ee na ie a cand ese bee senses 22

Pacific Gas & Electric Co. v. State Energy Resources

Conservation & Develeupment Comm’n, 461 U.S. 190

Teen ee ee wee eae eedacen's 16

Pennsylvania Water & Power Co. v. FPC, 343 U.S.

ES ST a 18, 19

Public Utilities Comm’n v. Attleboro Steam & Electric

Ns nw ceenbaauwbeensean 21

Wisconsin Gas Co. v. FERC, 770 F.2d 1144 (D.C. Cir.

1985), cert. denied, 476 U.S. 1114(1986) ............. 19

Statutes:

Federal Power Act, 16 U.S.C. (& Supp. IV) 824 ef seg. ... 6

ong bw akan th woe ese 10

Statutes — Continued: Page

i i eb seca dectcsssesaeoues 17

ee RD on dé anes sccnncssscedes 19

§ 201(b)(1), 16 U.S.C. 824(b)(1) .. 2... ee eee. 8, 15, 16

i ee es ete t ews eiwsccdsdncasesees 10

ee EE re Lead caenaeddensens sees 10, 19

Se EP ED ances: cetensocseceegaws 11

Public Utility Holding Company Act of 1935, 15 U.S.C.

PED Ae a AMai he hss 6505 0's b00d090000068 6% 2, 8, 20, 22

Se a css eae eehaneesen saueseene 22

ey Ot os Cec ce decease keeenduna bed 22

yO ds oe cee dcekaGad sentsenee t 22

Miscellaneous:

H.R. Rep 1903, 74th Cong., Ist Sess. (1935) ............ 17

In the Supreme Court of the Anited States

OCTOBER TERM, 1987

No. 86-1380

ARKANSAS PUBLIC SERVICE COMMISSION, ET AL.,

PETITIONERS

Vv.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.

No. 86-1424

ARKANSAS POWER AND LIGHT COMPANY, PETITIONER

V.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.

No. 87-469

REYNOLDS METALS COMPANY, ET AL., PETITIONERS

V.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.

ON PETITIONS FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE DISTRICT OF COLUMBIA CIRCUIT

BRIEF FOR THE FEDERAL ENERGY REGULATORY

COMMISSION IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. la-96a)

is reported at 808 F.2d 1525.' A subsequent order on re-

' “Pet. App.” refers to the appendix to the petition for a writ of cer-

tiorari in No. 86-1380.

(1)

2

hearing remanding the case for reconsideration of two

issues not involved here is reported at 822 F.2d 1104. The

orders of the Federal Energy Regulatory Commission

(Pet. App. 14la-222a, 97a-140a) are reported at 32

F.E.R.C. ¢ 61,425 and 31 F.E.R.C. ¢ 61,305.

JURISDICTION

The judgment of the court of appeals was entered on

January 6, 1987. On April 3, 1987, the court of appeals

granted rehearing en banc (86-1380 Supp. Br. App. SA-1

to SA-2). On June 24, 1987, the court vacated its grant of

rehearing en banc (86-1380 Supp. Br. App. SA-3 to SA-4).

‘ On the same day, the panel granted rehearing and vacated

a portion of its opinion and judgment of January 6, 1987

(86-1380 Supp. Br. App. SA-5 to SA-6). The petitions in

Nos. 86-1380, 86-1424, and 87-469 were filed on February

20, 1987, March 4, 1987, and September 22, 1987, respec-

tively. On September 3, 1987, the court of appeals denied

a further petition for rehearing and rehearing en banc filed

by certain petitioners (86-1380 Supp. Br. App. SA-7 to

SA-10). The jurisdiction of this Court is invoked under 28

U.S.C. 1254(1).

STATEMENT

1. Petitioner Arkansas Power & Light Co. (AP&L),

and respondents Louisiana Power & Light Co. (LP&L),

Mississippi Power & Light Co. (MP&L), and New Orleans

Public Service, Inc. (NOPSI) are all wholly-owned sub-

sidiaries of Middle South Utilities, Inc. (MSU), a public

utility holding company established in 1949 under Title |

of the Public Utility Holding Company Act of 1935, 15

U.S.C. 79 et seq. The four subsidiaries operate as a highly

integrated electric power pool (Pet. App. 33a, 37a, 44a).

They sell and exchange electricity at wholesale across state

lines, to each other as well as to outside companies, and

they also sell electricity at retail in separate service areas in

five states. All electricity on the Middle South system is

centrally dispatched from the system’s dispatch center at

Pine Bluff, Arkansas. /d. at 288a-292a, 378a.

A systemwide Operating Committee has historically

coordinated the planning of new generating capacity for

the system and has attempted to equalize the costs of addi-

tional capacity among the four operating companies (Pet.

App. 10a-13a).? Until the late 1960s, the MSU system

added new generating units in the southern part of the

system to take advantage of cheap oil and gas reserves in

that area (id. at 13a). The system has since sought to meet

projected increases in demand and to diversify its fuel base

by adding coal and nuclear generating units (ibid.). The

Operating Committee has made the major decisions con-

cerning timing, location, and size of additional capacity,

based on its assessment of systemwide needs and objec-

tives (id. at 18la-182a). In an effort to equalize costs a

promote economies of scale, the Operating Commitice

has, in effect, rotated the responsibility for financing,

building, and operating these new generation units among

the four operating companies (id. at 183a-189a,

190a-191a; see also id. at 13a-19a). The Operating Com-

mittee has, to that end, “assigned” to each operating com-

pany at least one nuclear unit (id. at 190a-19la).? The

? The system Operating Committee has five members, consisting of

one representative from the holding company and one from each

Operating company (Pet. App. 10a).

> Various parties in the administrative proceedings disputed the

contention that the Operating Committee “assigned” new generation

units tO Operating companies and claimed that the companies had in-

stead “volunteered” to finance and construct the units (Pet. App.

18ia-182a). FERC ultimately determined that “[wJhether units were

‘volunteered’ for or ‘assigned’ is not so relevant as the fact that

Operating companies ended up with responsibility for the units only

where all the system companies, jointly acting as the System Operating

Committee, concurred that this was in the best interests of the system

as a whole” (id. at 182a).

4

Commiitee assigned to AP&L the responsibility for fi-

nancing and construction of the first two nuclear units,

ANO | and 2, which were built in the early 1970s, and

thereafter assigned nuclear units to the other three

operating comnanies (id. at 13a-l4a, 184a-187a,

394a-397a).

In July 1971, the Operating Committee decided that

Grand Gulf would be built and that Units Nos. 1 and 2

would come on line in 1979 and 1980, respectively. Under

the original plan, MP&L was assigned responsibility for

financing and constructing Grand Gulf Unit No. 1 (Grand

Gulf 1), and NOPSI was assigned responsibility for fi-

nancing and constructing Grand Gulf Unit No. 2 (Grand

Gulf 2). Responsibility for construction of both units,

however, soon shifted to MP&L because of siting prob-

lems within NOPSI’s jurisdiction. When it subsequently

became apparent that MP&L could not finance the con:

struction, MSU made a system decision in 1974 to form a

generation subsidiary, Middle South Energy (MSE) (now

Systems Energy Resources, Inc.), to be the vehicle for

financing the project. MSE acquired from MP&L all of its

right, title, and interest in the Grand Gulf project. Pet.

App. 16a-17a, 294a-296a, 396a-398a.

By the late 1970s, it became evident that Grand Gulf’s

capacity would not be needed immediately to meet de-

mand, which was lower than predicted in earlier forecasts

(Pet. App. 396a-397a). MSU continued to build Grand

Gulf 1 and 2 on the assumption that, because of the

relatively low cost of nuclear fuel, the overall cost (fixed

plus variable) per kilowatt hour would be less than that of

alternative energy sources and that, upon completion,

MSE would sell the plants’ capacity at wholesale to each of

the four operating companies, in amounts to be deter-

mined later (id. at 398a-400a). All four operating com-

5

panies provided credit support to enable MSE to receive

financing, and each remains liable for an agreed percent-

age of Grand Gulf costs (id. at 397a-398a).

The investment cost of Grand Gulf 1 and 2 continued to

increase dramatically because of regulatory delay, addi-

tional construction requirements, inflation, and increased

financing costs. As a result, although the investment cost

of the two Grand Gulf units combined had been projected

to be $1.2 billion, the investment cost of Grand Gulf 1

alone was approximately $3 billion upon its completion;

construction of Grand Gulf 2 was suspended. The invest-

ment and other fixed costs associated with Grand Gulf |

are substantially higher per kilowatt than the costs of

other power generated by the MSU system (with the excep-

tion of one other nuclear plant). Although fuel costs are

lower for Grand Gulf | than for most nonnuclear system

power sources, the overall cost per kilowatt hour is higher

for Grand Gulf 1 than for other system sources because of

its much higher investment costs. Because AP&L com-

pleted construction of both of its nuclear units, ANO |

and 2, by 1980, its overall cost per kilowatt hour for these

plants is much lower. Pet. App. 14a-15a, 146a n.2, 233a,

396a-401a.

Transactions among the operating companies in the

Middle South system, including the sale and exchange of

capacity and energy, have been governed by a series of

“System Agreements” filed with FERC. These agreements

have provided the contractual basis for planning and

operating the companies’ generating units on a single-

system basis; they have also provided mechanisms for

equalizing cost imbalances among the four companies that

result from the system’s method of planning and operating

the units. Pet. App. 1Sla. In 1982, Middle South Com-

panies filed with FERC the 1982 System Agreement,

which set forth the terms and conditions for transactions

among the four operating companies (except the sale of

6

power from Grand Gulf), and a Unit Power Sales Agree-

ment (UPSA), which established wholesale rates for

MSP’s sale of capacity in Grand Gulf 1 (with an entitle-

ment to the associated power) to the operating companies

(id. at 19a). The 1982 System Agreement, like prior ver-

sions, established a scheme of “capacity equalization

payments” designed to ensure that each company con-

tributes proportionately to the total cost of generating

power on the System.4 The UPSA obliged the four

Operating companies to purchase the following specified

percentages of Grand Gulf capacity: LP&L, 38.57%;

MP&L, 31.63%; NOPSI, 29.80%; and AP&L, 0% (id. at

147a).°

2. Under Part II of the Federal Power Act, 16 U.S.C.

(& Supp. IV) 824 ef seg., the Commission is responsible

for ensuring that all rates or charges, made, demanded, or

received by any public utility for or in connection with the

transmission or sale of electric energy in interstate com-

merce, as well as all rules, regulations, practices, and con-

tracts affecting those rates or charges, are just and

reasonable (see 16 U.S.C. 824d(a)). FERC assigned the

1982 System Agreement and the UPSA to two different

4 These payments are intended to compensate for the imbalances

created by the system’s rotational scheme of adding capacity: the last

company to add capacity would, because the plant is sized for system

needs, typically have contributed more than its share of costs. While

the method of computing the amounts of these payments has been dif-

ferent in different System Agreements, the overall result has been that

each company contributes to the total costs of generating power on

the system roughly in proportion to its share of the overall demand for

electricity of the system. Pet. App. 10a-16a, 151a-153a, 357a-358a,

391a-392a.

5 The allocation of Grand Gulf 1 distributes among the four com-

panies the “capacity” of the plant (that is, the capacity to produce a

certain amount of electricity), the entitlkements to whatever energy is

produced from that capacity, and the costs of both the capacity (the

up-front “investment” costs of constructing the plant and other fixed

costs) and the energy (including fuel and other variable costs).

os

/

administrative law judges for review. After administrative

hearings, the judges concluded that the agreements, as

filed, were not just and reasonable, and were unduly

discriminatory because they allowed AP&L to avoid any

financial responsibility for the costs associated with Grand

Gulf 1 (Pet. App. 367a, 414a).

FERC reviewed these initial decisions, rendered in

February 1984 (Pet. App. 374a-526a) and February 1985

(id. at 223a-373a), and issued its decision in June 1985.

FERC agreed that the 1982 System Agreement and the

UPSA, because they did not allocate a share of Grand

Gulf 1 to AP&L, would not result in just and reasonable

allocations of costs between the operating companies and

“that some form of equalization of nuclear plant costs is

necessary to achieve just[,] reasonable, and non-dis-

criminatory rates among the MSU operating companies”

(Pet. App. 19la (footnote omitted)). FERC determined

that the “most equitable ailocation” would be for the

Operating companies to share in the system’s total invest-

ment in nuclear capacity (four units, including Grand Gulf

1) “roughly in proportion to each company’s share of

System demand” (id. at 192a). On that basis, FERC

ordered the following allocation of Grand Gulf 1 capacity

and costs: AP&L, 36%; LP&L, 14%, MP&L, 33%; and

NOPSI, 17% (ibid.).

In reaching its decision, FERC made two factual find-

ings important to the present issue. First, FERC found

that neither Grand Gulf 1, nor any one operating com-

pany, could be viewed in isolation: “the Middle South

companies constitute a highly coordinated integrated elec-

tric system,” which historically has “roughly equalized”

generating costs among the four operating companies

(Pet. App. 172a, 190a); the system Operating Committee

made all “major critical decisions, including decisions to

build new generating units, * * * for the benefit of the

8

system as a whole” (id. at 173a);® FERC specifically found

that Grand Gulf 1 was no exception and had been planned

to meet system needs (id. at 183a, 189a-19la). Second,

FERC found that Grand Gulf 1 was part of a reasonable

system plan to diversify the system’s fuel base by develop-

ing nuclear power to meet anticipated demand (ibid.).

FERC rejected contentions advanced by several parties,

including petitioners, that FERC lacked jurisdiction to

reallocate the costs of Grand Gulf 1 among the four

operating companies (Pet. App. 167a-170a). The Commis-

sion agreed with the two administrative law judges (id. at

306a-313a, 427a-439a) that neither the Federal Power Act

provision denying FERC jurisdiction over generating

facilities (Section 201(b)(1), 16 U.S.C. 824(b)(1)), nor any

limitation on FERC’s authority to compel a purchase or

sale of power, precludes FERC’s jurisdiction to reallocate

the costs of Grand Gulf 1. The Commission noted “that

the issue here is not whether a company should be forced

to purchase or sell power, but rather is the appropriate

allocation of costs among integrated companies owned by

the same parent” (Pet. App. 169a). With respect to AP&L,

in particular, the Commission “reject{[ed] any assertion

* * * that AP&L has had no involvement in the Grand

Gulf unit * * *. AP&L has been continuously involved in

the system decisions regarding Grand Gulf and MSE” (id.

at 169a-170a). Finally, FERC likewise rejected (id. at

171a-172a) claims that its allocation order unduly im-

pinged on state authority and was inconsistent with the

Public Utility Holding Company Act of 1935, 15 U.S.C.

79 et seq.

6 The individual operating company responsible for a particular

unit decided only subsidiary matters, such as the precise size or loca-

tion of the unit, within the general guidelines set out by the system

Operating Committee (Pet. App. 18la-182a; see also id. at 118a).

9

In subsequently denying several requests for rehearing,

FERC further elaborated on the statutory basis for its

authority to reallocate the capacity of Grand Gulf 1

among the four operating companies (Pet. App.

99a-113a). The Commission reiterated that it has “jurisdic-

tion under Section 201 over the 1982 System Agreement

because the agreement involves sales of electric energy at

wholesale in interstate commerce” (Pet. App. 105a). The

Commission also noted that the contrary view “would per-

mit companies engaging in wholesale sales in interstate

commerce to avoid the intended Federal regulation in Sec-

tion 201(a) by forming a generation-only subsidiary to

engage in the wholesale sales which otherwise would come

under our jurisdiction” (Pet. App. 106a). Finally, the

Commission stressed that, contrary to the premise

underlying these jurisdictional challenges, AP&L is a

“component part[]” of a highly integrated holding com-

pany system, whose interests must be “subsumed by the

greater interests of the entire System” (id. at 129a).

3. On petition for review of FERC’s orders, the court

of appeals affirmed FERC’s determination that it had

jurisdiction to reallocate the capacity of Grand Gulf 1

among the four operating companies upon a finding that

the two agreements as filed were unduly discriminatory

(Pet. App. la-93a). On rehearing, however, the court

vacated FERC’s specific reallocation, remanding to FERC

for a fuller explanation.’

7 On April 3, 1987, the panel had initially denied rehearing and the

court of appeals had granted rehearing en banc to consider the terms

of FERC’s allocation (814 F.2d 773; 86-1380 Supp. Br. App. SA-1 to

SA-2). On June 24, 1987, the court of appeals issued two orders. In

the first, the court, sitting en banc, vacated its prior order setting the

case for rehearing en banc and reinstated the poriions of the opinion

and judgment it had earlier vacated (86-1380 Supp. Br. App. SA-3 to

SA-4). In the second, the panel vacated its earlier order denying the

petitions for rehearing, granted the petitions, and reversed a portion

of its opinion and judgment of January 6, 1987, concerning FERC’s

10

The court concluded that “[t]he combined force of [Sec-

tions 201, 205 and 206, 16 U.S.C. 824, 824d, 824e] 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”

(Pet. App. 33a). “When, as here, generation capacity has

been built and planned on a profoundly integrated basis,

the Commission properly may examine its allocation as a

cost component affecting wholesale rates” (ibid.). The

court stressed that “{u]nreasonable disparities in the shares

borne by affiliates of the total costs of the system’s

generating capacity plainly ‘affect’ the wholesale rates at

which the operating companies exchange energy, and

therefore require remedial action by the Commission pur-

suant to section 206” (id. at 35a). Finally, the court re-

jected petitioners’ claims that FERC has unlawfully exer-

cised jurisdiction over a generating facility, unlawfully

compelled the purchase of generating capacity, imper-

missibly intruded on state jurisdiction, and taken action

inconsistent with the Public Utility Holding Company Act

(id. at 39a-57a).

ARGUMENT

Petitioners contend that the Commission lacked

jurisdiction under the Federal Power Act to determine the

just and reasonable allocation of Grand Gulf 1 capacity

and costs among the four operating companies of the

MSU system. The court of appeals’ rejection of that claim

allocation (id. at SA-5 to SA-6). In accordance with Judge Bork’s par-

tial dissent to the original panel opinion (Pet. App. 94a-96a), the re-

mand is for FERC’s “reconsideration of the decision to equalize the

capacity costs of all nuclear plants, and for an explanation of the

criteria used to determine what constitutes ‘undue discrimination’ and

of why {[FERC’s] ultimate decision is not unduly discriminatory”

(86-1380 Supp. Br. App. SA-6).

11

was plainly correct and is consistent with all pertinent deci-

sions of this Court and other courts of appeals. Further

review is not warranted.®

1. Section 206(a) of the Federal Power Act, 16 U.S.C

824e(a) (emphasis added), provides that whenever the

Commission finds that any “contract affect/ing] [any]

rate, charge, or classification [demanded, observed or col-

lected by any public utility for any sale subject to the

jurisdiction of the Commission] is unjust, unreasonable,

[or] unduly discriminatory,” the Commission shall “deter-

mine the just and reasonable * * * contract to be there-

after observed and in force, and shall fix the same by

order.” The Commission’s jurisdiction to order a specific

allocation of Grand Gulf 1 capacity and costs is squarely

based on that specific directive: the contract provisions in

question “affect” the four operating companies’ “charges”

' to each other, as well as to public customers, in interstate

wholesale transactions.

The four operating companies and MSE are all “public

utilities.” Each of them both produces and sells electric

power at wholesale in interstate commerce: the four

operating companies share the system’s “capacity” and

make “equalization payments” designed to align each com-

pany’s share of the cost of total system capacity with its

share of the demand for the system’s energy (see Pet. App.

10a-12a); in addition, the four operating companies sell

energy to each other, with the buyer always assumed to

buy the lowest cost energy available in the pool after the

8 The court of appeals remanded to the Commission for further

proceedings (see note 7, supra). The interlocutory posture of this case

may itself justify denial of certiorari. However, because of the rela-

tionship between this case and Mississippi Power & Light Co. v. State

of Mississippi, No. 86-1970, which is currently pending before the

Court on the merits (see note 21, infra), we explain more fully why the

decision below is correct and why the case does not present any issue

that warrants this Court’s consideratign.

12

needs of the producer of that energy have been served (see

id. at lla & n.7); in addition, each of the four operating

companies sells energy at wholesale to public customers

(id. at 378a).

As the court of appeals said, although the provisions of

the UPSA that allocate the capacity and costs of Grand

Gulf “do not fix wholesale rates, their terms do directly

and significantly affect the wholesale rates at which the

operating companies exchange energy, due to the highly

integrated nature of the MSU system” (Pet. App. 37a (em-

phasis in original)). The assignment of a specified amount

of Grand Gulf 1 capacity to a particular operating com-

pany obviously affects both its obligation to pay (or right

to receive) capacity “equalization payments” from time to

time, and its need to buy (or ability to sell) excess power

from (or to) other members of the system; in view of the

pricing of pool exchanges under the System Agreement,

the allocation of Grand Gulf 1 capacity also affects the

prices at which such transactions occur.? In sum, the pro-

visions the Commission reviewed here are an inseparable

part of a set of interrelated agreements that set terms for

interstate wholesale transactions between components of

the MSU system, and they are exactly what Congress

evidently intended to reach by the “contract affect[ing]”

clause of Section 206(a).

° The amount of Grand Gulf capacity allocated to an operating

company affects the terms on which system power from Grand Gulf is

available to that company. For instance, under the UPSA and 1982

System Agreement as originally filed with the Commission, AP&L,

although not obliged to pay for any share of Grand Gulf capacity,

would have been able to purchase electric energy from Grand Gulf

through the system power pool at extremely low prices: under the 1982

System Agreement, prices for power pool transactions reflect variable

costs (which for Grand Gulf are very low) and not fixed costs (which

for Grand Gulf are very high). The cost of Grand Gulf power to the

other operating companies, which were all allocated a percentage of

Grand Gulf capacity, would, of course, have been much greater.

13

Petitioners contend (86-1380 Pet. 10 n.8; 87-469 Pet.

18-19) that the court of appeals’ theory would extend the

Commission’s jurisdiction to labor contracts, construction

contracts, and in general any contract that affects a

utility’s costs and therefore its rates. They are wrong for

two reasons. First, the court of appeals affirmed the Com-

mission’s jurisdiction over these provisions not because

they affect the wholesale rates the companies charge in

sales to customers, but because they affect the meaning

and operation of agreements governing transactions be-

tween the operating companies themselves: these provi-

sions “affect rates” not merely in the sense that they tend

to cause rates to be higher or lower, but by altering the

practical operation of other agreements between the same

companies that govern inter-company transactions that

concededly are subject to FERC’s jurisdiction. As the

court of appeals said (Pet. App. 37a (emphasis deleted and

added)), “the allocation of Grand Gulf capacity and costs

* * * significantly affects the wholesale rates at which the

operating companies exchange energy [with each other]

due to the combined effect of the UPSA and the 1982

System Agreement.”!° Second, even as respects the effects

on rates charged by a utility to wholesale customers, there

is an obvious difference between a contract that merely

sets a price to be charged to a utility by a third-party sup-

plier and a contract that allocates a commonly-incurred

cost between two utilities. FERC believes that it would

have jurisdiction to reform the latter (if unjust) in connec-

1° See Pet. App. 11la (footnote omitted) (“{[WJe emphasize that the

UPSA cannot be viewed in isolation. It is an agreement which ‘sup-

plements or supersedes’ the coordination arrangements among the

MSU utilities, and * * * is a contract ‘affecting’ rates under the 1982

System Agreement.”).

14

ion with its review of wholesale rates for the two utilities,

whether or not the two utilities are otherwise related.'!

The breadth of FERC’s jurisdiction over contracts “af-

fecting” rates and charges was recently reaffirmed by this

Court in Nantahala Power & Light Co. v. Thornburg, No.

35-568 (June 17, 1986). That case involved contracts be-

‘ween two affiliated utilities allocating a limited supply of

low-cost power. Commenting on the binding effect of

these contracts (as FERC-filed agreements) for state rate-

making purposes, and on the Commission’s power to

modify the entitlements provided for, the Court said that

while the terms of the agreements “do not purport explicit-

ly to set a sales price for power, FERC’s decision on how

Nantahala may treat these agreements in determining its

wholesale rates obviously does affect Nantahala’s costs

directly, and thus Nantahala’s wholesale rates” (slip op. 17

(emphasis added)). As the court of appeals said (Pet. App.

38a), this decision provides a “clear and timely message

that FERC’s jurisdiction under such circumstances is un-

questionable.”!? The same rationale has been accepted by

every court Of appeals to a fdress the issue. (see Ap-

palachian Power Co. v. Public Service Comm’n, 812 F.2d

898 (4th Cir. 1987); Minnesota v. FERC, 734 F.2d 1286,

1287-1289 (8th Cir. 1984)).

1! See Pet. App. 342a-343a. Contrary to the assumption of peti-

fioner Reynolds Metals (87-469 Pet. 17 n.17), the Commission’s

jurisdiction here does not depend on whether the Commission has a

long-standing practice — which it does — of “rolling-in” jointly incurred

costs to avoid unduly discriminatory rates. ™

'2 Neither of petitioners’ objections to following Nantahala here

has merit. First, it is true (see 86-1380 Pet. 19) that in Nantahala the

Commission had merely set certain wholesale rates and had not

altered the agreements themselves. But it was assumed in Nantahala

that FERC could have altered the agreements, and indeed the case

would have been one step easier had it done so: one problem in Nan-

tahala was that the State was being compelled to honor, in setting

Nantahala’s retail rates, a reallocation that was not embodied in

FERC-altered agreements but only in FERC’s determinations for pur-

eT an

15

2. Petitioners claim (86-1380 Pet. 8-10; 86-1424 Pet.

5-7; 87-469 Pet. 21-23) that Section 201(b)(1), which limits

the Commission’s jurisdiction “over facilities used for the

generation of electric energy” (16 U.S.C. 824(b)(1)),

deprives the Commission of jurisdiction to reallocate the

capacity of Grand Gulf. There are two dispositive

answers. First, Section 201(b)(1) provides that “[t]he Com-

mission * * * shall not have jurisdiction, except as

specifically provided [elsewhere in the Act], over facilities

used for the generation of electric energy or over facilities

used in local distribution * * *” (16 U.S.C. 824{b)(1) (em-

phasis added)). Since the provisions in question here are,

as explained above, contractual provisions affecting rates

and charges for transactions within the Commission’s

jurisdiction, Section 206 “specifically provided” the Com-

mission with jurisdiction to issue the reallocation order

challenged in this case.

Second, the assertion of jurisdiction over contract terms

affecting interstate wholesale transactions in the power

produced by a particular generating facility simply is not

the same as the assertion of jurisdiction over the

“generating facility,” within the meaning of Section

201(b)(1). That section plainly means to refer to such mat-

ters as the size, type, iocation, and operation of the facili-

ty, none of which FERC asserted jurisdiction over. See

poses of a parallel proceeding setting Nantahala’s wholesale rates; the

Court solved that problem by noting that the Commission’s order in

the wholesale case was “for purposes of this case, essentially the same

as reformation of the agreement itself” (slip op. 18).

Second, petitioner Reynolds Metals’ reliance (87-469 Pet. 21 n.21)

on the Commission’s own distinction of Nantahala is misplaced. The

Commission’s remarks, which were made prior to this Court’s decision

in Nantahala, were expressly confined to factual distinctions that are

relevant only to a legal issue (piercing the corporate veil) not presented

by the petitions. See Pet. App. 124a; cf. id. at 169a (citing Nantahala

as authority for the Commission’s jurisdiction here).

16

Pacific Gas & Electric Co. v. State Energy Resources Con-

servation & Development Comm’n, 461 U.S. 190, 205-206

(1983). Although the Commission’s order may affect some

matters relating to generation, that, as the court of appeals

said (Pet. App. 40a), is simply “the byproduct of a

legitimate exercise of FERC’s power to regulate wholesale

rates” and not regulation of the facility itself.'?

Nor, contrary to petitioners’ claim (86-1380 Pet. 9;

86-1424 Pet. 5, 6; 87-469 Pet. 22-23), does this Court’s

decision in Connecticut Light & Power Co. v. FPC, 324

U.S. 515 (1945), suggest otherwise. In Connecticut Light

& Power, the Court ruled that the Commission had no

jurisdiction over the accounting practices of a utility

whose facilities were used solely for “local distribution” of

out-of-state energy because Section 201(b)(1) exempts

“facilities used in local distribution” from the Commis-

sion’s jurisdiction “except as specifically provided”

elsewhere in the Act (16 U.S.C. 824(b)(1)). The reason the

Court gave (324 U.S. at 531) was that allowing FERC to

assert jurisdiction solely because of the carriage of some

out-of-state energy “would nullify the exemption and

transfer as a practical matter to Federal jurisdiction the

regulation of many local companies that we think Con-

gress intended to leave in state control.” The present case,

by contrast, involves a fundamentally interstate arrange-

'3 Contrary to petitioner Reynolds Metals’ claim (87-469 Pet.

18-19), the court of appeals’ decision is not inconsistent with FPC v.

Conway Corp., 426 U.S. 271 (1976). In that case, this Court held that

FERC should have considered certain matters concededly not within

the Commission’s jurisdiction in determining whether wholesale rates

within the Commission’s jurisdiction met applicable federal stand-

ards. The issue in this case is whether the allocation of Grand Gulf

capacity is a matter within the Commission’s jurisdiction, an issue on

which Conway has no bearing.

ET

17

ment that only /'ERC can regulate, and there is no danger

of swallowing the “generating facilities” exemption, which

serves an entirely different purpose.'* Section 201(a)

reveals Congress’s understanding that there would be

“Federal regulation of matters relating to generation to the

extent provided in this subchapter and subchapter III” (16

U.S.C. 824(a)). And, as the court of appeals said, “[t}he

Conference Report on the FPA instructs that the * * *

phrase[] [in Section 201] [“except as specifically provided”

elsewhere] w[as] ‘added to remove any doubt as to the

Commission’s jurisdiction over facilities used for the

generation * * * of electric energy to the extent provided

in other sections’” (Pet. App. 40a (quoting H.R. Rep.

1903, 74th Cong., Ist Sess. 74 (1935)).

3. Petitioners claim (86-1380 Pet. 19-20; 86-1424 Pet.

6-7; 87-469 Pet. 15-16, 26-27) that FERC exceeded its

authority by “forcing” AP&L to purchase Grand Gulf

capacity. But AP&L is not entitled to be treated as if it

were a Stranger to the system. AP&L participated in the

complex set of intra-system arrangements that allocate

'* The “local distribution” and “generating facilities” exceptions

also differ in a material respect. As this Court stressed in Connecticut

Light & Power, 324 U.S. at 524, FERC already exercises jurisdiction

over wholesale rates before the electricity reaches the local distribution

facility and therefore “[wjhat [the utility] does or fails to do is only

after the incidence of federal regulation and can in no way frustrate

it.” But denial of FERC jurisdiction to regulate interstate wholesale

transactions merely because they are described in terms of the output

of a particular generating facility would have quite different effects,

substantially frustrating important policies of the Act. Indeed, peti-

tioners’ view would permit companies engaging in interstate commerce

to avoid federal regulation altogether by forming a generation-only

subsidiary to engage in the wholesale sales to them. The court of ap-

peals correctly rejected this illogical reading of the congressional

design.

18

the costs and output from all of the system’s generating

capacity, and AP&L participated in the system decision to

build Grand Gulf 1. Indeed, under the original plan,

AP&L would have been responsible for 17.1% of Grand

Gulf costs (see Pet. App. 398a) and, as FERC found (/d. at

170a), AP&L still remains financially obligated to

creditors for that amount in the event that the other

operating companies fail to meet their obligations. FERC

specifically rejected AP&L’s claim that Grand Gulf “was

planned only for the other operating companies” and

FERC instead found that “AP&L has been continuously

involved in the system decisions regarding Grand Gulf

and MSE” (id. at 169a-170a; see id. at 397a-398a,

427a-428a). The Commission and the court of appeals

concluded (id. at 43a-44a (footnote omitted) (quoting id.

at 169a)) correctly that “ ‘the issue here is not whether a

company should be forced to purchase or sell power, but

rather is the appropriate allocation of costs among in-

tegrated companies owned by the same parent.’ ”'®

As the court of appeals said (Pet. App. 44a), “[a] consis-

tent line of judicial precedent” supports the Commission’s

assertion of jurisdiction in these circumstances. This

Court’s decision in Pennsylvania Water & Power Co. v.

FPC, 343 U.S. 414 (1952), is most directly on point. There,

the Court upheld the Commission’s authority to require

two unaffiliated utilities to continue their long-standing

integrated activities, holding that integration was a “prac-

tice” affecting wholesale rates, and that the Commission

could, therefore, require the utilities to “continue to buy,

sell, and transmit power in the same coordinated manner

's Contrary to petitioner Reynolds Metals’ apparent assumption

(87-469 Pet. 16), AP&L was not a nonparty to the allocation; it was a

party (to both the 1982 System Agreement and the UPSA) that re-

ceived an allocation of 0%. The Commission’s jurisdiction is just as

clear as it would be if AP&L had originally been allocated some

positive percentage that the Commission found to be unduly low.

19

in which [they] have been functioning * * *” (343 U.S. at

421 (emphasis added)).'* Of course, the basis for Commis-

sion jurisdiction is even stronger in this case, because here

FERC is regulating the interstate activities of affiliated

members of a public utility holding company established

(and given permission under the Public Utility Holding

Company Act) to operate on a regional, integrated basis

(see Pet. App. 46a).

Finally, petitioner Reynolds Metals’ related assertion

(87-469 Pet. 15) that the Commission lacks jurisdiction

because Section 201(b) extends only to wholesale sales, not

purchases, also fails. Section 201(b) is not so narrowly

drawn and the Commission frequently approves provi-

sions for a seller’s wholesale rates that, in effect, limit the

options of a purchaser.'’ Petitioners’ reliance (87-469 Pet.

15) on this Court’s decision in Nantahala for the contrary

view is misplaced. The Court’s arguendo assumption in

Nantahala, slip op. 19—that “a particular quantity of

power procured by a utility from a particular source could

be deemed unreasonably excessive [by the state commis-

sion in setting retail rates] if lower-cost power is available

elsewhere, even though the higher-cost power actually pur-

chased is obtained at a FERC-approved, and therefore

reasonable, price” —does not bear on this case at all. This

is not a case of the kind there envisioned, where a utility

'¢ Petitioners’ attempt to distinguish Pennsylvania Water & Power

is unpersuasive. Contrary to petitioners’ claim (86-1424 Pet. 6-7;

87-469 Pet. 26-27), the Court’s decision in that case did not turn on the

narrow circumstance that the Commission was simply enforcing a pre-

existing contractual arrangement or merely requiring compliance with

an Outstanding Commission order. As described by the court of ap-

peals (Pet. App. 45a n.77), the Court relied, more broadly, on the

Commission’s authority under Section 206. See 343 U.S. at 422-423.

'? See, e.g., Kentucky Utilities Co. v. FERC, 766 F.2d 239, 240-241

(6th Cir. 1985) (cancellation notice periods); cf. Wisconsin Gas. Co. v.

FERC, 770 F.2d 1144, 1150 (D.C. Cir. 1985), cert. denied, 476 U.S.

1114 (1986) (minimum commodity bills) (FERC implementation of

similar provision of Natural Gas Act).

20

purchases power from an affiliate at a FERC-approved

price while “lower-cost power is available e/sewhere” (ibid.

(emphasis added)). Rather, this is a case like Nantahala

itself, where all of the relevant sources of power, some of

which are more expensive than others, are within the utili-

ty system and the sole question — one that only FERC can

fairly resolve—is how the benefits and burdens of those

sources should be shared among affiliated companies

doing business in different states. In these circumstances,

FERC must determine both the price and the quantity, as

it has done in its allocation of Grand Gulf capacity.'®

4. Petitioners’ final claims that the court of appeals’

decision will create an undesirable “regulatory gap”

(86-1380 Pet. 10-15), will preclude an “entirely workable”

scheme of state regulation (87-469 Pet. 27-28), and is con-

trary to the Public Utility Holding Company Act of 1935,

15 U.S.C. 79 et seq. (86-1380 Pet. 21-22; 87-469 Pet. 25

n.27), also warrant no further review.

First, no “regulatory gap” is created by the court of ap-

peals’ decision. Contrary to petitioner Arkansas Public

Service Commission’s assertion (86-1380 Pet. 13-15),

FERC had the power to consider a claim—had one been

made—that Grand Gulf 1 was an imprudent investment

whose costs should be borne in whole or part by MSU

stockholders rather than by the operating companies’

ratepayers, and that MSE should therefore not be per-

mitted to charge the operating companies 100% of the

'8 Petitioners likewise err in claiming (86-1380 Pet. 6; 87-469 Pet.

21) that FERC’s allocation has forced AP&L to share the benefits of

its relatively inexpensive coal and nuclear generation capacity with the

other three operating companies. As the court of appeals found (Pet.

App. 53a n.93), this argument is “fallacious” because “[t]he realloca-

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

capacity costs—costs incurred jointly by the system.” See also id. at

75a.

21

costs. But none of the parties, including those from

Arkansas, made that argument to FERC.!'9

It is petitioners’ crabbed view of the Commission’s

jurisdiction that would threaten to create a regulatory gap,

in which no authority, state or federal, would have power

to regulate important aspects of interstate arrangements

for the wholesale sale of power. As this Court observed in

Arkansas Electric Cooperative Corp. v. Arkansas Public

Service Comm’n, 461 U.S. 375, 378-379 (1983), Congress

adopted Part II of the Federai Power Act to provide

federal authority to fill the regulatory gap created by the

holding in Public Utilities Comm’n v. Attleboro Steam &

Electric Co., 273 U.S. 83 (1927), that states had no

authority to regulate interstate wholesale electric rates.

Without attempting to explore precisely the limits of state

authority (in the absence of federal jurisdiction) over the

present complex arrangements, it is at least highly likely

that the states could not, either effectively or constitu-

tionally, regulate the allocation of costs among the four

utilities operating in four states of the MSU system. In-

deed, each of the affected jurisdictions has sought to

deflect the financial liability for the joint Grand Gulf

enterprise Onto the citizens of its neighboring states (see

87-469 Pet. 28 & n.33). As explained by the court of ap-

peals (Pet. App. 5la-52a (footnote omitted) (quoting /d. at

312a)), this is the sort of situation for which Congress con-

cluded that FERC would be “ ‘in the best position to reach

the most equitable result and to act in the public interest,

'? FERC found (Pet. App. 183a-195a), moreover, that Grand Gulf

1 was part of a reasonable system plan to diversify the fuel base by

developing nuclear power to meet anticipated growth in demand.

FERC also explicitly affirmed and adopted (id. at 190a-191a, 216a)

the findings and conclusions of its administrative law judge who deter-

mined that MSU’s decisions both to begin and to complete construc-

tion of Grand Gulf | were prudent (see id. at 426a).

22

rather than to be controlled by the necessarily parochial

concerns of the States.’ ”?°

For this reason, petitioners’ suggestion that FERC’s

assertion of jurisdiction is inconsistent with the Public

Utility Holding Company Act of 1935 is also without

merit. To be sure, that law sought to eliminate or simplify

holding company systems to make the component utilities

more amenable to state regulation. But it also specifically

authorized the Securities and Exchange Commission to

allow a holding company system to continue to exist upon

a finding that a “single integrated public-utility system”

can best serve a particular geographical region (see 15

U.S.C. 79k(b)(1), 79b(a)(29)). Congress placed such

systems under comprehensive federal control because their

activities “extending over many States are not susceptible

of effective control by any State” (15 U.S.C. 79a(a)). The

MSU system operates within that framework, and peti-

tioners’ claim that the court of appeals’ decision is

somehow inconsistent with the Public Utility Holding

Company Act is wholly mistaken. See Northern States

Power Co. v. Minnesota Public Utilities Comm’n, 344

N.W.2d. 374, 382 n.17 (Minn.), cert. denied, 467 U.S.

1256 (1984).?!

20 Petitioners are mistaken in arguing (86-1380 Pet. 14;

87-469 Pet. 15 n.14, 21 n.21) that prior Commission decisions endorse

the principle of state review of prudence in these circumstances. The

Commission has carefully qualified that principle in cases, such as this

one, involving affiliates. See Kentucky Power Co., 38 F.E.R.C.

§ 61,243, at 61,822-61,824 (1987), petition for review pending, No.

87-3643 (6th Cir.).

2! In a related case, Mississippi Power & Light Co. v. State of

Mississippi, No. 86-1970, the Court recently postponed consideration

of jurisdiction to the hearing of the case on the merits. We do not,

however, share petitioners’ view (86-1380 Supp. Br. 3-4; 87-469 Pet.

28-29) that the Court should for that reason grant review in this case

and either decide this case before deciding Mississippi Power & Light,

or decide the two cases “in tandem.” The issues presented in the two

cases are entirely distinct, and the decision below in the present case is

23

CONCLUSION

The petitions for a writ of certiorari should be denied.

Respectfully submitted.

CHARLES FRIED

Solicitor General

CATHERINE C. COOK

General Counsel

JEROME M. FEIT

Solicitor

JOHN N. EsTEs Ill

Altorney

Federal Energy Regulatory Commission

NOVEMBER 1987

in keeping with all relevant precedent and plainly correct. FERC’s

order in the present case is indeed a premise of the dispute in

Mississippi Power & Light, but unwarranted prolongation of the

meritless challenge to FERC’s jurisdiction here will only complicate

resolution of that dispute.

US. GOVERNMENT PRINTING OFFICE. 1987 —202-037/60109