Amicus Curiae Brief — American Electric Power Co. v. Kentucky Public Service Commission

Iu the Supreme Court of the W

OCTOBER TERM, 1986

AMERICAN ELECTRIC POWER COMPANY, ET AL.,

PETITIONERS

Vv.

KENTUCKY PUBLIC SERVICE COMMISSION, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

BRIEF FOR THE UNITED STATES AND THE

FEDERAL ENERGY REGULATORY COMMISSION

AS AMICI CURIAE

CHARLES FRIED

Solicitor General

LouIs R. COHEN

Deputy Solicitor General

RICHARD J. LAZARUS

Assistant to the Solicitor General

epartment of Justice

Washington, D.C. 20530

(202) 633-2217

CATHERINE C. COOK

General Counsel

JEROME M. FEIT

Solicitor

JOHN N. ESTEs III

Attorney

Federal Energy Regulatory Commission

Washington, D.C. 20426

QUESTION PRESENTED

Whether a federal court should abstain from adjudi-

cating a claim, brought by a public utility against a state

public utility commission, that the state commission is

unlawfully refusing to honor terms filed with or fixed by

the Federal Energy Regulatory Commission for the in-

terstate sale of electric power at wholesale, in violation

of the “filed rate doctrine.”

(I)

TABLE OF CONTENTS

Page

i ss pnemesuoesomanapinsninntonsones 1

A. The Federal Power Act and the filed rate doc-

trine .. "ERIE 2

B. Proceedings below in No. 86-49 _........00-00--. 3

C. NOPSI, No. 86-546 .. iaasdiieaimaiadadadecninianiaite 9

a nsntmasnifniinasionnancinn 16

Conclusion I) See REEL Eat ee nO 29

TABLE OF AUTHORITIES

Cases:

American Electric Power Service Corp.:

- i SS Ea Ey | | eee 5

eR 7

AEP Generating Co.:

ap Pen 2 Glee (1964) _............................ 5,7

| kf Te TE ¢ _” \ eee 7

i gp & ok 8 | 6) 7

Ff oi Ok 6 | as 8, 24

pe BE | ET) 6 | See 9

rs te ED ci tenccresnnne 9,24

Alabama Public Service Comm’n v. Southern Ry.,

I cishanisiociomonnen 17

Aluminum Co. of America v. Utilities Comm'n,

713 F.2d 1024 (1983), cert. denied, 465 U.S.

EE ERR 21

Appalachian Power Co. y. Public Service Comm’n,

614 F. Supp. 64 (S.D. W.Va. 1985), aff’d, 770

F.2d 159 (4th Cir. 1985), on remand, 630 F.

Supp. 656 (S.D. W.Va. 1986), aff’d, No. 86-

See Cee Gs BE, ©, BOBT) ann ncecencceccccercecenne nese 18, 21

Burford v. Sun Oil Co., 319 U.S. 315 (1943)... 6, 16

Burke ¥. Barnes, No. 85-781 (Jan. 14, 1987)... 29

Colorado Interstate Gas Co. v. FPC, 324 U.S. 581

ER Ee ee 20

Cases—Continued : Page

Colorado River Water Conservation Dist. Vv.

United States, 424 U.S. 800 (1976) ...-.---------------- 17, 25

England vy. Louisiana Board of Medical Examin-

ers, 375 U.S. 411 (1964) ......----------------eeeeeeeereeees 18, 25

Gibson v. Berryhill, 411 U.S. 564 (1973) -.......--.-- 20

Hagans v. Lavine, 415 U.S. 528 (1974) ..........-.--. 19

Hastings v. Selby Gil, 319 U.S. 348 (1943) --.-.-.-.. 17

Hawaii Housing Authority v. Midkiff, 467 U.S.

DIO (19BA)) ...-.20--encencceeceecnseencerncenesenarsensconsesereseceooens 20

Huffman v. Pursue, Ltd., 420 U.S. 592 (1975) ..18, 24, 28

Juidice v. Vail, 430 U.S. 327 (1977) -......--.----- bE 18

Kaiser Steel Corp. v. W.S. Ranch Co., 391 U.S.

ay & | __ 5 |e nena sneer ene ir none 17

Kentucky Power Co.:

SPUR. T6L 27 (iss) ....-..-.-.-.:...: dare Ph 8, 24

87 F.E.R.C. 7 63,015 (1986) ..-.-...-..--------0----eeeee0-- 24

Kentucky West Virginia Gas Co. V. Pennsylvania

Public Utility Comm’n, 791 F.2d 1111 (3d Cir.

OI 5a oS a siceersspuslinnnsiaanneenkatilimaenanecabannnione 20, 21

Lake Carriers’ Ass’n V. MacMullan, 406 U.S. 498

(1G TB) csceccnocnconcnoecvennrcennassnsctecsersssnonenancesesroceseasceonnes 22

Louisiana Power & Light Co. v. Louisiana Public

Service Comm’n, 377 So.2d 1023 (La. 1979)... 26

Louisiana Power & Light Co. v. Louisiana Public

Service Comm’n, No. 292,026 (19th Jud. Dist.,

Parish of East Baton Rouge, La., Oct. 9, 1985). 10

McNeese v. Board of Education, 373 U.S. 668

CRY acannon ticeeiscelcocnnnseventmrnenenammcsinmannntnenss 17

Middlesex County Ethics Comm. v. Garden State

Bar Ass’n, 457 U.S. 423 (1982) -.............----- 18, 20, 28

Middle South Energy, Inc. v. The Council of New

Orleans, No. 85-5273 (E.D. La. Dec. 18, 1986).. 14, 28

Middle South Energy, Inc. v. Arkansas Public

Service Comm’n, 772 F.2d 404 (8th Cir. 1985),

cert. denied, No. 85-895 (Jan. 27, 1986) ........10, 18-19,

20, 21

Middle South Energy, Inc., 31 F.E.R.C. § 61,305,

on reh’g, 32 F.E.R.C. { 61,425 (1985), aff’d

sub nom. Mississippi Industries v. FERC, 808

F.2d 1525 (D.C. Cir. 1987) ..---------------- 10, 18, 19, 25, 27

Cases—Continued : Page

Mississippi V. Mississippi Public Service Comm’n,

No. 56,762 (Miss. Sup. Ct. Feb. 25, 1987) ........ 10

Montana-Dakota Utilities Co. v. Northwestern

Public Service Co., 341 U.S. 246 (1951) ........... 3

Moses H. Cone Memorial Hospital v. Mercury

Construction Corp., 460 U.S. 1 (1983) .............. 25

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

oe A | Ra ear eee 1, 3, 16, 25

Narragansett Electric Co. v. Burke, 119 R.I. 559,

381 A.2d 1358 (1977), cert. denied, 435 U.S.

Ii eI sinsecideib ccetdsic sumtich cule dadenatbasbasnedtataseloscees 25-26

NOPSI vy. City of New Orleans, 800 F.2d 488 (5th

Cir. 1986) | Er a EE ee a TRE SAT 15

Ohio Civil Rights Comm’n v. Dayton Christian

School, No. 85-488 (June 27, 1986) —.........0 18, 20

Permian Basin; Area Rate Cases, 390 U.S. 747

| AREAS eet iene ae este me AM Cs PPA IE bee Rete A 20

Public Utilities Comm’n v. United Fuel Gas Co.,

Re Ie OE sepatecsacntibticisdesensenteneoeiscoacionacs 27, 28

Silverman v. Barry, 727 F.2d 1121 (D.C. Cir.

PO sea et er ar 18

Trainor v. Hernandez, 431 U.S. 4341977) _...... 18

United Mine Workers v. Gibbs, 383 U.S. 715

Ge ete sa eatacaienatacmadin usera ene 19

United States v. Munsingwear, Inc., 340 U.S. 36

| etetadad et eNO ea aN AA Meng AN Uae eH oes ke 29

Velsicol Chemical Corp. vy. United States. 435

MIG EE - REI asnicgctetacuectakdesacees puke 29

Western Air Lines v. Board of Equalization, No.

Fe CP, a UIE wimcccccsccentstuacokeisimoncns cc. 19

Younger V. Harris, 401 U.S. 37 (1971) .............. 6, 16, 18

Zablocki v. Redhail, 434 U.S. 374 (1978) ......_. 17, 18

Statutes and rules:

Federal Power Act, 16 U.S.C. 824 et seq. _.. es 1,3

nk one An Te se eee 4

Oe Re III Nastusiecinindicdamaaites cutee 2

BO Gee MD cacbinncisnddcc ues he terdainn, 2

ip I etc i on Fee 8 2

Sp I orntecece il ee) 2

16 U.S.C. 824e ............ slaeahcnicgaianbenplineslccienbleiars cc eaet sts 3, 4

}

VI

Statutes and rules—Continued: Page

Johnson Act, 28 U.S.C. 1342 .....-..----------0---c-eceeceeeeeeeees 6, 14

Natural Gas Act, 15 U.S.C. 717 et seq. .....----.-----------+- 21

Natural Gas Policy Act of 1978, 15 U.S.C. 3301

EO cocrceossciobsncsesesinenesseintnnnnnieninenevennatnsicabaonnonins 21

Public Utility Holding Company Act of 1935, 15

ee, FO 8 OOM, nn hc es 3,9

New Orleans, La., City Council, Resolution :

No. M-85-326 (July 25, 1985) ...-.----.------------------- 11

No. R-85-296 (May 23, 1985) ...------.------0+------+--- 11

No. R-85-346A (July 17, 1985) ...-..------------+-------- 11

No. R-85-373 (June 27, 1985) --.------------------00----++ 11

No. R-85-423 (July 17, 1985) ......... glbsssdeeeninn 11, 27

No. R-85-466 (Aug. 8, 1985) ...--.-.---------------00-000+ 27

No. R-85-526 (Sept. 5, 1985) .........-...----------------- 12, 26

No. R-85-635 (Oct. 10, 1985) -...---------------------- 12, 14, 26

No. B-85-686 (Oct. 17, 1985) .....-........--------...+---- 14, 27

No. R-86-112 (Mar. 20, 1986) .......----------.--------+- 15, 28

Miscellaneous:

Hardin, The Tragedy of the Commons, 162 Science

1243 (1968) -...... <a. sti Stanieaiendihdl indice teakammbaalancabioueitiots 19

New Orleans Public Service Inc.; Middle South

Utilities Inc.; Proposal To Issue and Sell First

Mortgage Bonds and Preferred Stock; Excep-

tion from Competitive Bidding, 50 Fed. Reg.

B2GCI (1985) .....-.-------------ceecceeeceeereeneessesenensecesenseees 13

17 C. Wright, A. Miller, & E. Cooper, Federal

Practice and Procedure (2d ed. 1978) -.-.---.-------- 25

Iu the Supreme Court ef the United States

OCTOBER TERM, 1986

No. 86-49

AMERICAN ELECTRIC POWER COMPANY, ET AL.,

PETITIONERS

Vv.

KENTUCKY PUBLIC SERVICE COMMISSION, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

BRIEF FOR THE UNITED STATES AND THE

FEDERAL ENERGY REGULATORY COMMISSION

AS AMICI CURIAE

This brief is filed in response to the Court’s invitation

to the Solicitor General to file a brief expressing the

views of the United States.

STATEMENT

This case presents the question whether a federal court

should abstain from hearing a claim that a state public

utility commission is violating the Federal Power Act,

16 U.S.C. 824 et seq., by preventing a public utility from

reflecting in retail electric rates certain wholesale costs

provided in agreements filed with the Federal Energy,

Regulatory Commission. Petitioners base their preemp-”

tion claim on the “filed rate doctrine,” under which a

state commission is bound to honor interstate wholesale

rates for the sale of electric energy that have been filed

with or fixed by the Commission (see Nantahala Power

& Light Co. v. Thornburg, No. 85-568 (June 17. 1986),

(1)

2

slip op. 8). As explained in a memorandum we filed with

this Court on November 6, 1986, in another case pending

on a petition for a writ of certiorari, New Orleans Pub-

lic Service, Inc. v. City of New Orleans, No. 86-546

(NOPSI), the legal issue raised in this case (No. 86-49)

(AEP) is similar to that raised in NOPSI.’ For this

reason, we concluded that it would be appropriate while

expressing our views in response to the Court’s invita-

tion in No. 86-49 also to address which, if either, of the

two cases presents the question in an appropriate posture

for the Court’s review. Accordingly, the facts of both

cases are set out separately following a brief review of

the relevant statutory framework.

A. The Federal Power Act And The Filed Rate Doctrine

The Federal Power Act, 16 U.S.C. 824 et seq., gives

the Federal Energy Regulatory Commission exclusive

regulatory authority over the transmission of electric en-

ergy in interstate commerce and the sale of such energy

at wholesale in interstate commerce. FERC is responsi-

ble for ensuring that all rates or charges made, de-

manded, or received by any public utility for or in con-

nection with the transmission or sale of electric energy

in interstate commerce are “just and reasonable” (16

U.S.C. 824d(a)). Public utilities are required to file

with FERC schedules setting forth their rates and

charges within its jurisdiction (16 U.S.C. 824d(c)), and

when a public utility seeks to change a rate or charge

within FERC’s jurisdiction, the utility must file with

FERC a new schedule that explains the changes and

their effective dates (16 U.S.C. 824d(d)). FERC may

hold a hearing on the lawfulness of the filed rate or

charge and, pending its decision, may suspend the filed

rate or charge for up to five months. FERC may require

the public utility to refund, with interest, the excess

amounts received should the rate go into effect and sub-

sequently be deemed unlawful (16 U.S.C. 824d(e)). If

1 That memorandum was served upon all parties in both cases.

FP Se a EL

3

FERC determines that any rate or charge collected by

any public utility is unlawful, FERC is authorized to

determine and to fix prospectively a “just and reason-

able” rate or charge (16 U.S.C. 824e).

Under the “filed rate doctrine” established in Montana-

Dakota Utilities Co. v. Northwestern Public Service Co.,

341 U.S. 246 (1951), a publie utility “can claim no rate

as a legal right that is other than the filed rate, whether

fixed or merely accepted by the Commission [FERC] and

not even a court can authorize commerce in the com-

modity on other terms” (id. at 251). One generally ac-

cepted consequence of the filed rate doctrine, explained by

this Court in Nantahala, is that “a state utility commis-

sion setting retail prices must allow, as reasonable op-

erating expenses, costs incurred as a result of paying a

FERC-determined wholesale price” (slip op. 11). This

follows from the fact that “[o]nce FERC sets such a

[wholesale] rate, a State may not conclude in setting

retail rates that the FERC-approved wholesale rates are

unreasonable” (id. at 13). Finally, the Court held in

Nantahala that the filed rate doctrine “is not limited to

‘rates’ per se” (ibid.), but also applies to contractual

allocations of power, filed with FERC, that similarly

affect a utility’s costs: a state utility commission “can-

not substitute its own conception of what allocation of

[low cost] power would have been * * * fair” (id. at

15).

B. Proceedings Below in No. 86-49

Petitioner American Electric Power Company, Ine.

(AEP) is a fully integrated public utility holding com-

pany established under Title I of the Public Utility Hold-

ing Company Act of 1935, 15 U.S.C. 79 et seg. AEP

owns eight operating electric utility companies, which

serve consumers in seven states. Five of the eight op-

erating companies, including Kentucky Electric Power

Company, own major generating facilities and are in-

terconnected bv extra-high-voltage transmission lines,

forming the Ai: power pool, which allows the five mem-

ber companies to exchange and to sell power among them-

4

selves and with outside companies. The power exchanges

and sales are wholesale transactions that are governed

by contracts and rate schedules subject to FERC’s ex-

clusive regulatory jurisdiction under the Federal Power

Act, 16 U.S.C. °94d, 824e.

Since 1951, the general rights and responsibilities of

the member companies of the AEP pool have been set

forth in the “Interconnection Agreement” entered into

by the companies and approved by FERC. The Inter-

connection Agreement provides for central coordination

and dispatch of the generating capacity of the member

companies and of capacity available from others. The

Agreement provides for payments by those member com-

panies that have a “capacity deficit” (i.e., the company’s

generating capacity is less than its pro rata share of

system demand for power) to those member companies

that have a “capacity surplus” (2.¢., the company’s gen-

erating capacity is greater than its pro rata share of

system demand for power). The payments are designed

for “deficit” members partially to compensate “surplus”

members for the latters’ excess capacity.

1. In 1974, Kentucky Power applied to the Kentucky

Public Service Commission for a certificate of public con-

venience and necessity to construct a high voltage trans-

mission line (the “Hanging Rock-Jefferson” line) at an

estimated cost of $55 million (KPSC Br. in Opp. App.

3a). In 1978, Kentucky Power applied to the Kentucky

Commission for permission to purchase a 15 percent

ownership interest in a generating facility in Rockport,

Indiana owned by another AEP member company, In-

diana & Michigan Electric (I&M) (id. at la). After

initially approving the purchase, the Kentucky Commis-

sion reconsidered its initial decision, reversed itself, and

denied Kentucky Power’s application on August 2, 1984

(id. at 2a). The Commission concluded that the purchase

would be imprudent because Kentucky Power could meet

its load obligations less expensively by purchasing power

through the AEP power pool, pursuant to the Intercon-

nection Agreement (ibid.).

5

in 1984, the AEP member companies, including Ken-

tucky Power, filed two agreements with FERC. The first,

a “Transmission Agreement,” filed in March 1984, gen-

erally provides that AEP member companies in a “defi-

cit” posture regarding investment in transmission facili-

ties must make payments over a five-year period to those

members in a “surplus” posture until each company is

bearing its share of the total investment in transmission

facilities (KPSC Br. in Opp. App. 3a). The second, a

“Unit Power Sales Agreement,” filed on August 2, 1984,

anticipated the Kentucky Commission’s adverse determi-

nation that same day of Kentucky Power’s application to

purchase 15 percent of the Rockport generating facility.

Under the Unit Power Sales Agreement, Kentucky Power

agreed to purchase 15 percent of that facility’s output

for up to twenty years (Pet. App. 15a). Kentucky

Power subsequently applied to the Kentucky Commission

for rate increases based on both its absorption of the

costs of the Hanging Rock-Jefferson transmission line

pursuant to the Transmission Agreement and its power

purchase pursuant to the Unit Power Sales Agreement.

While Kentucky Power’s application for a rate increase

was pending before the Kentucky Commission, FERC

undertook its preliminary review of both the Unit Power

Sales Agreement and the Transmission Agreement. On

August 21, 1984, FERC accepted the Transmission

Agreement for filing, gave the Agreement an effective

date of January 22, 1985, and postponed final approval

of the agreement pending further review. American

Electric Power Service Corp., 28 F.E.R.C. {61,228

(1984). On October 1, 1984, FERC accepted the Unit

Power Sales Agreement for filing and allowed it to take

effect after a brief suspension period, subject to refund

upon further review. AEP Generating Co. (AEPGCo.),

29 F.E.R.C. 7 61,002. FERC then stated its preliminary

view that the rates reflected in the Unit Power Sales

Agreement might be unjust, unreasonable, unduly dis-

criminatory, preferential, or otherwise unlawful.

On December 4, 1984, the Kentucky Commission acted

on Kentucky Power’s application for a rate increase and

6

granted only a partial increase. The Commission con-

cluded that Kentucky Power acted imprudently in enter-

ing into the Unit Power Sales Agreement because the

cost of power under that Agreement substantially ex-

——teeded the cost of purchasing power through the Inter-

connection Agreement. Accordingly, the Kentucky Com-

mission concluded, Kentucky Power’s rate increase should

be based on the cost of purchasing additional power

through the Interconnection Agreement and not on the

cost of additional power under the Unit Power Sales

Agreement. Pet. App. 16a. The Kentucky Commission

also granted Kentucky Power only part of the rate in-

crease it had sought based on the costs of the Hanging

Rock-Jefferson transmission line under the AEP Trans-

mission Agreement. The Commission determined that

Kentucky customers benefited from only a portion of the

transmission line and therefore should pay only for their

fair share. The Commission found that only 44 percent

of the investment should be included in Kentucky Pow-

er’s rate base and only 44 percent of the operation and

maintenance expenses should be charged to retail cus-

tomers. KPSC Br. in Opp. App. 4a.

2. On December 12, 1984, petitioners filed this action

in federal district court. Petitioners’ complaint alleged

that the Federal Power Act preempts the Kentucky Com-

mission’s order because the order failed to give full effect

to the Unit Power Sales Agreement and Transmission

Agreement on file with FERC. Eight days after the com-

____plaint was filed in federal court, petitioner Kentucky

Power filed a petition in Kentucky state court for review

of the Kentucky Commission’s orde.. The state court

complaint included the same federal preemption claim.

On January 16, 1985, the federal district court dis-

missed petitioners’ complaint (Pet. App. 15a-23a). The

court held that the Johnson Act, 28 U.S.C. 1342, did not

bar this suit for injunctive relief, but that federal court

abstention was appropriate under Younger v. Harris,

401 U.S. 37 (1971), in deference to the paraliel proceed-

ing brought by Kentucky Power in state court, and un-

der Burford v. Sun Oil Co., 319 U.S. 315 (1943), be-

7

cause the federal action threatened to interfere with

Kentucky’s “overriding interest in regulating the retail

rates charged by public utilities’ (Pet. App. 21a-23a).

On September 13, 1985, while this case was pending

before the United States Court of Appeals for the Sixth

Circuit and prior to the state court’s disposition of Ken-

tucky Power’s state complaint, FERC issued two orders

regarding the two agreements at issue in this case. On

September 13, 1985, FERC asserted that it had exclusive

authority to determine the prudence of Kentucky Power’s

participation in the Transmission Agreement, particu-

larly the Agreement’s provision that equalization among

the members would be phased in over a five-year period

rather than immediately. See AEP Service Corp., 22

F.E.R.C. J 61,363, at 61,818 (1985). FERC also clarified

an earlier order concerning the Unit Power Sales Agree-

ment by explaining that FERC possessed “primary juris-

diction” to interpret agreements filed with it, which

meant, FERC explained, that once FERC had announced

an interpretation of an agreement, a state public utility

commission was bound to follow that interpretation.

AEPGCo, 32 F.E.R.C. { 61,364, at 61,821 (1985).? Ken-

tucky Power responded to the clarification by filing with

FERC a petition for a declaratory order as to the mean-

ing of the Unit Power Sales Agreement and the Inter-

connection Agreement.

On March 21, 1986, the state court affirmed the Ken-

tucky Commission order in all respects (KPSC Br. in

2In its October 1984 order, FERC had stated that there was “no

overlap or conflict” between the KPSC’s “jurisdiction to consider

the appropriateness of KEPCO’s acquisition of new facilities [or]

power supply alternatives that might be available to KEPCO,” and

FERC’s “independent responsibility to evaluate the reasonableness

of the proposed wholes.le agreements” (29 F.E.R.C. at 61,003).

In November 1984, FERC clarified its October order by stressing

that FERC could consider the prudence of KEPCO entering into

the Unit Power Sales Agreement in the context of a proceeding

concerning KEPCO’s wholesale rates, but would not do so in this

proceeding, which was confined to the narrow issue of the justness

and reasonableness of this particular agreement. AEPGCo, 29

F.E.R.C. { 61,246, at 61,501.

8

Opp. App. la-6a). The court specifically found that the

Interconnection Agreement did not require Kentucky

Power to buy power from the Rockport Facility but

rauner allowed Kentucky Power to meet its need by pur-

chasing less costly power from the AEP power pool (id.

at 4a). The court also ruled that the Kentucky Commis-

sion’s order was within its statutory authority, not pre-

empted by federa! law, and adequately supported by the

evidence (id. at 5a). Kentucky Power’s appeal is cur-

rently pending before the Commonwealth of Kentucky

Court of Appeals.

3. Three days later, the Sixth Circuit affirmed the

United States district court’s dismissal of petitioner’s

complaint (Pet. App. la-12a). In an unpublished per

curiam opinion, the court held that Burford abstention

was not appropriate, but that Younger abstention was

warranted (id. at la-7a). In separate concurring opin-

ions, however, two judges stated that abstention was

appropriate under Burford (id. at Ta-12a).

4. On August 20, 1986, FERC issued one order grant-

ing petitioner AEP’s request for a rehearing of FERC’s

October 1984 order and a second order agreeing to rule

on Kentucky Power’s November 1985 petition that FERC

issue a declaratory order regarding Kentucky Power’s

rights and responsibilities to purchase power under the

Interconnection Agreement and the Unit Power Sales

Agreement. See AEPGCo, 36 F.E.R.C. 9 61,226 (KPSC

Br. in Opp. App. 2la-27a); Kentucky Power Co., 36

F.E.R.C. $61,227 (KPSC Br. in Opp. App. 7a-20a).

In the first order, FERC clarified its earlier statements

regarding the authority of the Kentucky Commission to

interpret the meaning of the two agreements. FERC

stated that it possessed exclusive authority to determine

the just and reasonable allocation of costs and rates

among members of an integrated interstate system.

FERC also concluded that although normally justness

and reasonableness may be determined by the Commis-

sion apart from prudency in terms of availability of

alternative supplies, “where, as here, the transaction in-

volves affiliated, jurisdictional utilities, which are mem-

9

*

bers of an integrated, interstate holding company * :

the relevant issues may not be so readily segregated

[and] are * * * matters most appropriately resolved by

this Commission as part of its overriding authority to

evaluate and implement * * * wholesale rate schedules”

(KPSC Br. in Opp. App. 25a-26a). In its second order,

FERC set issues concerning the meaning of the two

egreements for hearing.®

On March 12, 1987, FERC issued its decision.

AEPGCo, 38 F.E.R.C. 61,243. FERC determined that

Kentucky Power did not have the option under the Inter-

connection Agreement to continue purchasing power from

the pool (slip op. 18-17). According to FERC, the In-

terconnection Agreement obliges each participant to bear

its fair share of the system-wide investment in capacity

(id. at 11-13), and Kentucky Power therefore is obliged

to purchase a portion of the output of the Rockport fa-

cility (id. at 18-22). FERC also concluded that the Ken-

tucky Public Service Commission lacked jurisdiction to

inquire whether Kentucky Power acted prudently in pur-

chasing power from the Rockport facility (id. at 23-25).

C. NOPSI, No. 86-546

New Orleans Public Service, Inc. (NOPSI) is one of

four operating electric utility companies which are wholly-

owned subsidiaries of Middle South Utilities, Inc. (MSU),

an integrated public utility holding company established,

like AE®?, under the Public Utility Holding Company

Act, 15 U.S.C. 79 et seq. The other subsidiary operating

companies, each of which sells electric power at retail

to its own local customers, are Louisiana Power & Light

(LP&L), Mississippi Power & Light (MP&L), and Ar-

kansas Power & Light (AP&L). A generating subsidiary,

Middle South Energy (MSE), was formed to own and

finance two nuclear power plants, Grand Gulf 1 and 2,

and to sell power from those plants to the operating com-

panies.

5 On October 22, 1986, FERC approved a settlement of all issues

relating to the Unit Power Sales Agreement, except for jurisdic-

tional issues. AEPGCo, 37 F.E.R.C. {| 61,044.

10

1. In June 1985, FERC approved wholesale rates for

the power from Grand Gulf 1 and allocated its capacity

costs and energy among the four operating companies.

Middle South Energy, Inc., 31 F.E.R.C. § 61,305, on

reh’g, 32 F.E.R.C. § 61,425, aff'd, Mississippi Industries

v. FERC, 808 F.2d 1525 (D.C. Cir. 1987). FERC con-

cluded that the operating companies should share in the

system’s total investment in nuclear capacity (four units,

including Grand Gulf 1) “roughly in proportion to each

company’s share of system demand” (id. at 61,655-

61,656).4 FERC ordered the following allocation of Grand

Gulf 1 costs: AP&L, 36 percent; LP&L, 14 percent;

MP&L, 33 percent; and NOPSI, 17 percent (ibid.).°

MSE has accordingly billed NOPSI for 17 percent of the

costs ($15.5 million per month) since Grand Gulf 1 went

into service on July 1, 1985 (Pet. App. A2).

4FERC’s ruling rested on two factual findings. First, FERC

found that “the Middle South companies constitute a highly

coordinated integrated electric system,” which historically had

“roughly equalized” generating costs among the four operating

companies (31 F.E.R.C. at 61,645, 61,654). Second, FERC found

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 (id. at 61,651-61,653, 61,656).

5 The fixed costs associated with Grand Gulf 1 are substantially

higher per kilowatt than the costs of other power generated by

the MSU system (with the exception of one other new nuclear

unit). In Mississippi Industries, the District of Columbia Circuit

considered and rejected contentions by entities representing each

of the four service areas that FERC had allocated too large a

share to its utility. In addition, the right of each of the four

utilities to pass through its share of the FERC allocated costs to

its retail ratepayers has been challenged in state proceedings. In

addition to the two proceedings giving rise to No. 86-546 (NOPSI),

see Mississippi v. Mississippi Public Service Comm’n, No. 56,762

(Miss. Sup. Ct. Feb. 25, 1987) (MP&L) (86-546 Pet. Second Supp.

Br. App. 1a-27a); Middle South Energy, Inc. v. Arkansas Public

Service Comm’n, 772 F.2d 404 (8th Cir. 1985), cert. denied, No.

85-895 (Jan. 27, 1986) (AP&L); Louisiana Power & Light Co. v.~

Louisiana Public Service Comm’n, No. 292,026 (19th Jud. Dist.,

Parish of East Baton Rouge, La., Oct. 9, 1985) (LP&L).

11

The City Council of New Orleans regulates NOPSI’s

retail rates. On May 17, 1985, NOPSI applied for a

retail rate increase to reflect the Grand Gulf 1 costs

that it would be required to pay under the FERC alloca-

tion (Pet. App. A87). On May 23, 1985, the Council

established minimum standard filing requirements for

rate applications and notified NOPSI that it must com-

ply with these requirements (Resol. R-85-296). By letter

dated June 6, 1985, NOPSI sought a waiver of the new

filing requirements, which the Council denied on June 27,

1985 (Resol. R-85-373). At that time, the Council stated

that it could not give consideration to NOPSI’s rate relief

request absent the information required by the new appli-

cation requirements and invited NOPSI to make a more

narrow waiver request. NOPSI made such a request, by

letter dated July 5, 1985, which the Council denied on

July 25, 1985 (Resol. M-85-326).

On July 17, 1985, the Council acted on NOPSI’s re-

quest (dated June 5, 1985) that the Council authorize

the sale of securities in the aggregate principal amount

of up to $100 million (Resol. R-85-346A). The Council

authorized NOPSI to issue and sell securities in the ag-

gregate principal amount of up to $60 million, but it

imposed several conditions, including that (1) NOPSI

must make every reasonable effort to recover from MSE

the $32 million NCPSI had advanced to MSE for Grand

Gulf 1 to the extent that the amount reflects more than

17 percent of the costs of the plant, and (2) the pro-

ceeds from the issuance and sale of securities may not go

to pay any obligations arising out of Grand Gulf 1. On

that same day, the Council also announced a public hear-

ing, to be held on July 25, 1985, to consider whether

interim rate relief for NOPSI was warranted (Resol.

R-85-423). The Council stated that the issue of interim

rate relief needed to be addressed because “various fac-

tors, including questions as to the legality and prudency

of the [contracts relating to Grand Gulf 1}, the prudency

and reasonableness of said expenses, and lack of informa-

tion on certain relevant matters, prevent the Council

12

from either denying or granting the requested rate re-

lief at the present time” (ibid.).

2. On August 2, 1985, NOPSI filed a complaint in

federal district court seeking declaratory and injunctive

relief, and money damages. NOPSI asked the court, inter

alia, to issue preliminary and (later) permanent injunc-

tions enjoining the Council from denying NOPSI recovery

through the retail rates filed by NOPSI of its FERC-

allocated share of the expenses of Grand Gulf 1, which

NOPSI was required to pay on a monthly basis begin-

ning July 1985. On August 12, 1985, the district court

denied NOPSI’s motion for a preliminary injunction with-

out prejudice (Pet. App. A38). The court also directed

(ibid.) the Council to take action by September 5, 1985,

on a request to be filed by NOPSI for interim rate re-

lief; NOPSI filed such a request on August 19, 1985,

asking, inter alia, for an emergency increase in electric

rates of approximately $168 million per year (reflecting

full recovery of NOPSI’s Grand Gulf 1 related expenses).

The Council denied the requested rate increase on Sep-

tember 5, 1985 (Resol. R-85-526). The Council instead

froze NOPSI’s rates, including its fuel adjustment level,

and lifted some of the restrictions imposed by the Council

in July 1985 on NOPSI’s issuance of securities (id. at

4-14). According to the Council, the rate freeze would

save NOPSI approximately $28.3 million over a 10-month

period because the lower fuel costs of Grand Gulf 1 would,

absent the freeze, have required a rate decrease (id. at

13). Finally, the Council stated that “[i]f the amount of

permanent rate relief ultimately allowed is greater than

the amount collected through the interim rates, [NOPSI]

shall be allowed to recover those additional amounts, with

interest, in the future” (id. at 12). The Council based

its conclusion that this interim relief would be adequate

to maintain NOPSI’s solvency largely on its assumptions

that NOPSI would omit dividend payments on common

stock to MSU and would be repaid the excess payments

it had made to MSE with respect to Grand Gulf 1, and

that th. Securities and Exchange Commission would allow

NOPSI to issue $35 million in securities (id. at 3, 7, 9).

13

The Council stated that NOPSI could submit a supple-

mental application for emergency relief if the SEC did

not approve the sale of securities (id. at 9).°

On September 16, 1985, the district court granted the

Council’s motion to dismiss (Pet. App. A35-A50). The

court held that dismissal was appropriate both under

the Johnson Act, 28 U.S.C. 1342, and under Burford.

The court specifically rejected NOPSI’s claim that “its

insolvency is imminent due to the Council’s refusal to

grant sufficient emergency interim rate relief” (Pet. Avp.

A46). According to the court, “the September 5th [City

Council] resolution reveals that the Council is determined

to assist NOPSI in maintaining a positive cash position

by pursuing a number of feasible alternatives” (ibid.).

Finally, the court stated that Burford abstention was

appropriate because NOPSI’s rate increase is a “mat-

ter[] which generate[s] local concern and demand{s]

local administrative expertise” and “the actions of the

Council address only retail, intrastate rates, and such

actions have not directly conflicted with FERC’s order”

(id. at A48-A49).,7

®On August 5, 1985, the Securities and Exchange Commission

had reduced by more than one half the value of a securities issue

proposed by NOPSI on the ground that: ~

NOPSI’s financial resources continue to be severely limited and

its liquidity and financial condition impaired. * * * There can

be no assurance that retail rate relief [for Grand Gulf 1] will

be granted on an adequate basis. The timing of rate relief is

becoming increasingly important since [Grand Gulf 1] went

into commercial operation on July 1, 1985. In addition,

NOPSI’s deteriorating financial position has led to the down-

grading of its first mortgage bonds and preferred stock by a

national securities rating agency to a speculative grade.

New Orleans Public Service Inc.; Middle South Utilities Inc.;

Proposal To Issue and Sell First Mortgage Bonds and Preferred

Stock; Exception from Competitive Bidding, 50 Fed. Reg. 32669

(1985).

7 On October 10, 1985, the City Council granted NOPSI’s request

for reconsideration of the Council’s interim relief order in a few

limited respects and denied the request in al! other respects (Resol.

R-85-635). In support of its denial, the Council mentioned that its

14

8 On February 14, 1986, the court of appeals reversed

(Pet. App. Al-A13). The court first concluded that the

Johnson Act did not apply because petitioners’ request

for injunctive relief rested on a “statutorily-based pre-

emption claim” and therefore did not rest solely on the

“ ‘repugnance of the order to the Federal Constitution,’ ”’

within the meaning of the Johnson Act (id. at A12 (quot-

ing 28 U.S.C. 1342)). The court similarly concluded that

Burford abstention was inappropriate where, as in this

case, “the claim is predicated on federal preemption”

(Pet. App. A13).

own prudence review and its challenge to FERC’s determination

(in the United States Court of Appeals for the District of Columbia

Circuit). might decrease NOPSI’s recovery (id. at 3). On October

11th, NOPSI filed its completed rate relief, application forms con-

sistent with the Council’s new filing requirements. On October 17th,

the Council announced that it :ould conduct a prudence investiga-

tion into NOPSI expenditures on Grand Gulf 1 and requested that

NOPSI answer a lengthy series of questions posed by the Council

concerning prudence (Resol. R-85-636). In describing the investiga-

tion, the Council stated that it would consider NOPSI’s assessment

of its need for Grand Gulf 1’s capacity, its consideration of genera-

tion alternatives, its failure to diversify its fuel sources, and the

extent to which its decisions were controlled by outside interests.

The Council also maintained that it “[would] not seek to invalidate

any of the agreements surrounding Grand Gulf 1 or to order

NOPSI to pay MSE a rate other than that approved by the FERC”

(id. at 4). On November 11, 1985, NOPSI filed a second lawsuit

in federal district court in which it sought to enjoin the City

Council’s prudence investigation. NOPSI subsequently amended the

complaint to seek an injunction or a declaratory judgment only to

the extent that the Council takes any action to require NOPSI or

its shareholders to absorb all or a portion of the cost of Grand

Gulf 1 allocated to NOPSI by FERC. On December 18, 1986, the

district court dismissed the complaint. Middle South Energy V.

The Council of New Orleans, No. 85-5273 (E.D. La. Dec. 18,

1986) (Pet. Supp. Br. App. B1-B9). The court ruled, first,

that NOPSI’s claims were not ripe because “it is not clear whether

the Council intends to proceed in a manner contrary to [this Court’s

decision in] Nantahala” (Pet. Supp. Br. App. B6). The court

stressed that “there is little or no hardship to NOPSI in postponing

review” (ibid.). The court next ruled, in the alternative, that both

Younger and Burford abstention were appropriate (id. at B6-B8).

15

4. On March 20, 1986, the Council and NOPSI en-

tered into a settlement agreement with respect to the

treatment of Grand Gulf 1 costs (Resol. R-86-112). The

agreement set out in detail the amounts by which NOPSI

could increase its rate base annually until the costs of

Grand Gulf 1 were fully recovered. Pursuant to the

agreement, NOPSI also agreed permanently to absorb

$51.2 million of the costs. Both sides purported to reserve

all their legal rights, including the Council’s right to

continue to investigate prudence (see note 7, supra)

and the possibility of municipalization,’ and both NOPSI’s

and the Council’s right to continue to seek judicial re-

view of FERC’s allocation order (id. at 11-13).

5. On June 10, 1986, the court of appeals notified the

parties that it was reconsidering (on its own motion)

its ruling on the abstention issue and requested briefs

from the parties. On September 2, 1986, the court of

appeals reversed itself on the abstention issue (Pet. App.

Al14-A24). The court concluded that Burford absten-

tion was appropriate because “the regulation and adjust-

ment of local utility rates is of paramount local concern

and a matter which demands local administrative exper-

tise” (id. at A19). The court also held that Younger

abstention was appropriate because there was an on-

going administrative proceeding before the Council:

“NOPSI would have a full and fair opportunity to liti-

gate its federal claim” through the state appellate process,

and there were no exceptional circumstances, such as

bad faith or harassment, present that rendered absten-

tion improper (id. at A21-A24). Finally, the court noted

that because “the Council at the time NOPSI sought in-

junctive relief from the district court had not yet taken

any definitive action on NOPSI’s May 17, 1985 rate

increase application,’ NOPSI’s claims should receive

“special skepticism” (id. at A24 n.3).

8 The Council had also been considering a municipal takeover of

NOPSI as a means of avoiding Grand Gulf 1 costs. See NOPSI vy.

City of New Orleans, 800 F.2d 488 (5th Cir. 1986).

16

DISCUSSION

The petitions in AEP (No. 86-49) and NOPSI (No.

86-546) both raise an important question concerning the

application of Burford and Younger abstention to a claim

that the Federal Power Act bars a state public utility

commission from refusing to honor a utility’s power costs,

under agreements filed with FERC, in setting that util-

ity’s retail rates. The decisions of the Sixth Circuit in

AEP and the Fifth Circuit in NOPSI, which upheld dis-

missals of complaints on abstention grounds, conflict with

decisions of other courts of appeals, and we believe they

are incorrect. To provide a neutral federal administra-

tive forum to resolve the often ccaflicting interests of

different states, Congress gave FERC exclusive jurisdic-

tion over the terms of sale of power at wholesale in

interstate commerce, including the terms of agreements

allocating particular power among members cf an inter-

state utility system. A state may not exercise its juris-

diction over retail sales to prevent a utility from recover-

ing power costs incurred pursuant to such a FERC-filed

agreement. See Nantahala Power & Light V. Thornburg,

No. 85-568 (June 17, 1986), slip op. 18-19. Where, as in

AEP and NOPSI, the federal plaintiff claims that a state

public utility commission order improperly “traps” such

costs, abstention is not appropriate under either Burford

v. Sun Oil Co., 319 U.S. 315 (1948) or Younger v. Har-

ris, 401 U.S. 37 (1971). The independent interest of

any single state in such an inherently interstate contro-

versy is not sufficient to justify denying the federal

plaintiff the choice of a federal judicial forum.

We do not urge the Court to grant review in AEP to

consider the abstention question. The peculiar circum-

stances of AEP, including the existence of a final deci-

sion in a parallel state court proceeding, diminish its

attractiveness as a vehicle for this Court to address the

abstention question. We urge the Court to grant review

instead in NOPSI, which raises the same general legal

issue in a more appropriate procedural setting, and to

hold AEP for possible further consideration in light of

the decision in NOPSI.

17

1. The decisions of the Sixth Circuit in AEP and of

the Fifth Circuit in NOPSI are incorrect. Each court

affirmed the district court’s dismissal of the complaint

on abstention grounds. The Sixth Circuit apparently re-

lied only on Younger abstention,® while the Fifth Circuit

relied on both Burford and Younger abstention. We do

not believe that either Burford or Younger abstention

was proper in either case.

a. Burford abstention is appropriate when a federal

court is presented with “complex issues of state law,

resolution of which would be ‘disruptive of state efforts

to establish a coherent policy with respect to a matter

of substantial public concern.’” Zablocki v. Redhail, 434

U.S. 374, 380 n.5 (1978) (quoting Colorado River Water

Conservation Dist. v. United States, 424 U.S. 800, 814

(1976) ) ; see McNeese v. Board of Education, 373 U.S.

668, 673 (1963); Kaiser Steel Corp. v. W.S. Ranch Co.,

391 U.S. 593, 593-594 (1968) (per curiam); Alabama

Public Service Comm’n v. Southern Ry., 341 U.S. 341,

347 (1951) ; Hastings v. Selby Oil, 319 U.S. 348 (1943).

Thus, this Court concluded in Burford that it would be

best to “leave these problems of [state] law to the state

court” because of the great harm to state policies that

might result from federal court misinterpretation of

state law concerning the development, production, and

conservation of in-state oil and gas resources (319 U.S.

at 332; see id. at 327, 329-330, 331 & n.28, 333).

No such state law or state policy concerns are present

in either AEP or NOPSI. The basic issue in both cases

is the scope of federal law and federal policy. There has

been a congressional determination that terms for the

allocation of power and costs among members of a multi-

state public utility holding company should be conclu-

sively resolved by a neutral federal administrative forum

(FERC) in accordance with federal law. The question

whether a particular FERC allocation must be honored

® Although the court’s per curiam opinion held that Younger

abstention was required and Burford abstention was not required

(86-49 Pet. App. la-6a), two judges of the three-judge panel stated

in separate concurring opinions that Burford abstention was re-

quired (id. at Ta-12a).

18

by a state utility commission in a particular context is

itself a federal question. Any disruption of state law or

policy resulting from a FERC allocation or from a deci-

sion that a state is required to honor it would be a

deliberate result of the congressional scheme, and there-

fore Burford abstention is inappropriate. Cf. Zablocki

v. Redhail, 434 U.S. at 379-380 n.5 (“there is of course

no doctrine requiring abstention merely because resolu-

tion of a federal question may result in the overturning

of a state policy”) ; England v. Louisiana Board of Med-

ical Examiners, 375 U.S. 411, 415-416 (1964) (“recogni-

tion of the role of state courts as the final expositors of

state law implies no disregard for the primacy of the

federal judiciary in deciding questions of federal law”) ;

Silverman v. Barry, 727 F.2d 1121, 1123-1124 n.4 (D.C.

Cir. 1984).

b. Younger abstention is also inappropriate. The most

“vital consideration” prompting Younger abstention is

the “notion of comity, that is * * * the belief that the

National Government will fare best if the States and

their institutions are left free to perform their separate

functions in their separate ways” (401 U.S. at 44). See

Ohio Civil Rights Comm’n v. Dayton Christian Schools,

No. 85-488 (June 27, 1986), slip op. 6; Middlesex County

Ethics Comm. v. Garden State Bar Ass’n, 457 U.S. 423,

431 (1982); Trainor v. Hernandez, 431 U.S. 434, 441

(1977) ; Juidice v. Vail, 430 U.S. 327, 334 ‘1977); Huff-

man v. Pursue, Ltd., 420 U.S. 592, 601 (1975). The

notion of comity loses much of its force, however, where,

as in both AEP and NOPSI, the interests of several

states are at odds because of their participation in a

multistate “common pool,” in which a decision by the

institutions of any one state in favor of its citizens has

or is at least likely to have a corresponding direct adverse

effect on citizens of the other participating states. See

Mississippi Industries v. FERC, 808 F.2d at 1548-1549;

Appalachian Power Co. v. Public Service Comm’n, No.

86-2540 (4th Cir. Mar. 4, 1987), slip op. 15-17; Middle

South Energy, Inc. v. Arkansas Public Service Comm’n,

19

772 F.2d 404, 416-417 (8th Cir. 1985); see generally,

Hardin, The Tragedy of the Commons, 162 Science

1243 (1968).%° Unlike the federal claims at issue in

Younger and its progeny, the claims in such inherently

interstate disputes are not readily susceptible to resolu-

tion by leaving states “free to perform their separate

functions in their separate ways.”

We do not mean to suggest that merely because the

issue is federal preemption, abstention is always inappro-

priate; state tribunals are of course generally obliged to

evaluate claims that federal law has preemptive effect.

But Congress gave FERC exclusive jurisdiction to regu-

late interstate wholesale rates precisely because such

matters involve inherent conflicts between the interests of

different states and localities. Under those circumstances,

the considerations underlying Younger abstention, par-

ticularly the notion of comity, do not have substantial

force. Plaintiffs in such inherently interstate disputes,

such as the petitioners in AEP and NOPSI, should not be

deprived of their choice of a federal judicial forum to

hear their federal preemption claim. Cf. Western Air

Lines Vv. Board of Equolization, No. 85-732 (Feb. 24,

1987), slip op. 6 (“The general principle that * * * the

meaning of words in a federal statute is a question of

federal law has especial force when the purpose of the

federal statute is to eliminate discriminatory state treat-

ment.”) ; Hagans v. Lavine, 415 U.S. 528, 530 (1974)

(quoting United Mine Workers v. Gibbs, 383 U.S. 715,

729 (1966) (“ ‘the federal courts are particularly appro-

priate bodies for the application of preemption princi-

ples’ ”’) .™

10The common pool may consist of shared benefits, such as the

low-cost power available to the utilities under the Interconnection

Agreement in AEP, or of shared burdens, such as the investment

costs associated with the “catastrophically uneconomical” Grand

Gulf 1 nuclear power plant in NOPSI (Mississippi Industries v.

FERC, 808 F.2d at 1528 (86-546 Pet. Supp. Br. 7) ).

11 Younger abstention is also inappropriate in NOPSI because

the ongoing proceedings before the City Council are not (at least

not entirely) “ ‘judicial in nature’ from the outset.” Ohio Civil

20

9. Review of the abstention issue is warranted be-

cause the issue is important and there is a conflict in

the circuits concerning whether abstention is required

in these circumstances.

a. To date, five courts of appeals have addressed the

issue whether abstention is warranted in the context of

a federal preemption claim based on the “filed rate doc-

trine.” The decisions reflect widely differing views. The

Sixth and Fifth Cireuits agree that Younger abstention

is appropriate (see 86-49 Pet. App. 6a-7a; 86-546 Pet.

App. A21-A24), although apparently only the Fifth Cir-

cuit believes that Burford abstention is generally appro-

priate (86-546 Pet. App. A19; see note 9, supra). The

third and Eighth Circuits have rejected both Burford

and Younger abstention in the context of preemption

claims similar to those raised in AEP and in NOPSI. See

Kentucky West Virginia Gas Co. V. Pennsylvania Public

Utility Comm’n, 791 F.2d 1111 (3d Cir. 1986); Middle

South Energy, Ine. v. Arkansas Public Service Comm'n,

772 F.2d 404 (8th Cir. 1985), cert. denied, No. 85-895

(Jan. 27, 1986). Indeed, the preemption claim in Mid-

dle South Energy, Inc., like the preemption claim in

NOPSI, arose out of FERC’s allocation of the costs of

the Grand Gulf 1 nuclear power facility; it involved the

efforts of a state public service commission to shield the

citizens of Arkansas from absorbing AP&L’s FERC-allo-

cated share of those costs. The Eighth Circuit in Middle

Rights Comm'n v. Dayton Christian Schools, slip op. 7 (emphasis

added) (quoting Middlesex County Ethics Comm. v. Garden State

Bar Ass’n, 457 U.S. at 433-434); see Hawaii Housing Authority Vv.

Midkiff, 467 U.S. 229, 287-289 (1984). The City Council is a

popularly elected legislative body. When setting rates, its proceed-

ings are not judicial; they are “essentially a legislative function.”

Colorado Interstate Gas Co. v. FPC, 324 U.S. 581, 589 (1945);

see also Permian Basin Area Rate Cases, 390 U.S. 747, 776 (1968).

Moreover, the Council is also, inter alia, evaluating possible con-

demnation of NOPSI. See note 8, supra. It may not be appropriate

to presume that in this multistate dispute, the Council can provide

the unbiased state decisionmaking forum upon which Younger ab-

stention is predicated. Cf. Gibson V. Berryhill, 411 U.S. 564, 577

(1973).

21

South Energy, Inc., unlike the Fifth Circuit in NOPSI,

however, held that neither Burford nor Younger absten-

tion was required because the plaintiffs were claiming

that federal law preempted the ongoing state proceeding

itself (772 F.2d at 417) .%

Finally, two Fourth Circuit decisions, both also involv-

ing the abstention issue raised in the context of a pre-

emption claim based on the filed rate doctrine, further

illustrate the scope of the current circuit conflict. In

Aluminum Co. of America v. Utilities Comm’n, 713 F.2d

1024, 1030 (1983), cert. denied, 465 U.S. 1052 (1984),

the Fourth Circuit upheld abstention on Burford grounds

after concluding that evaluation of plaintiff’s claim—

that the state commission’s establishment of retail, intra-

state rates conflicted with FERC-approved wholesale in-

terstate rates—would require detailed factual inquiry.

The court of appeals suggested, however, that abstention

would not be appropriate in a case where the conflict

between state and federal law was direct and clear

(ibid.). Presumably based upon that caveat, the Fourth

Circuit more recently affirmed a district court’s denial

of both Younger and Burford abstention in the context

of a preemption claim more akin to that present in

NOPSI and AEP. See Appalachian Power Co. v. Public

Service Comm’n, 614 F.Supp. 64 (S.D. W.Va.), aff'd,

770 F.2d 159 (4th Cir. 1985), on remand, 630 F.Supp.

656 (S.D. W.Va. 1986), aff’d, No. 86-2540 (Mar. 4,

1987). In Appalachian Power, the utility had challenged

12In Kentucky West Virginia Gas Co. v. Pennsylvania Public

Utility Comm’n, supra, the Third Circuit considered a public utility’s

claim that the federal Natural Gas Act, 15 U.S.C. 717 et seq. and

the Natural Gas Policy Act of 1978, 15 U.S.C. 3301 et seq., pre-

empted the state public service commission’s authority to refuse

the utility’s request to pass through increased costs reflected in

interstate tariffs filed with and approved by FERC. The court

declined Burford abstention on the ground that the preemption

claim did not present an essentially local issue (791 F.2d at 1116),

and rejected Younger abstention largely because the ongoing state

proceeding implicated important federal interests as well as state

interests (id. at 1116-1117).

22

the state public service commission’s refusal to author-

ize the recovery of costs reflected in the same Transmis-

sion Agreement at issue in AEP until the utility sub-

mitted the Agreement to the commission for its study

and ultimately its approval.*

b. We also share petitioners’ view that the abstention

issue is important. The plethora of lower court deci-

sions involving the same abstention issue—and some-

times even involving overlapping factual circumstances

as in NOPSI and Middle South Energy, Inc., and as in

AEP and Appalachian Power Co.—is no mere happen-

stance. During the last several decades utilities in neigh-

boring states have increasingly affiliated and entered into

joint financing and power sharing arrangements to con-

struct the more massive power production facilities neces-

sary to meet predicted increases in energy demand. Con-

struction cost overruns, sometimes of catastrophic dimen-

sions, and lower than predicted energy demand, however,

have severely strained those arrangements and produced

the interstate disputes reflected in these cases. The estab-

lishment of a fair and expeditious mechanism for the

resolution of these disputes, including a more settled

understanding of when federal court intervention shouid

13 Althougn respondents in AEP do not deny the existence of a

conflict in the circuits, respondents in NOPSI argue (86-546 Br.

in Opp. 22-24) that the differing court of appeals decisions simply

reflect the different circumstances of each case and the appropriate-

ness of case-by-case review. We share respondents’ view that there

is, of course, no per se rule against abstention in a federal preemp-

tion case. See, e.g., Lake Carriers’ Ass’n Vv. MacMullan, 406 U.S.

498, 511-512 (1972). We also agree that the propriety of absten-

tion depends on the nature of the particular preemption claim at

issue. In our view, however, the various court of appeals decisions

amply reveal a clear circuit conflict on the important issue whether

abstention is appropriate in the context of a preemption claim based

on the filed rate doctrine. In addition, petitioners cannot avoid the

conflict by claiming that those cases “in which the court refused

to abstain * * * involved a direct, facial conflict” (86-546 Br. in

Opp. 23 n.29) because both AEP and NOPSI include such facial

challenges (see pages 24, 25-27 & note 14, infra), yet the Sixth and

Fifth Circuits directed abstention.

23

be permitted, is plainly important and would be fur-

thered by this Court’s review.

Resolution of the abstention issue is, moreover, espe-

cially important to a fair resolution of these interstate

disputes. As NOPSI illustrates, a utility’s liability for

wholesale costs may be immediate and ongoing, and a

delay in passing those costs through in retail rates will

often have consequences that are irreparable; apart from

immediate cash flow problems and uncertainties that may

threaten bankruptcy, impede securities offerings, and

force compromise settlements (see page 15, supra), it is

neither feasible nor lawful in most jurisdictions (includ-

ing Louisiana, see note 17, infra) to charge “catch-up” re-

tail rates once a retail increase is finally permitted. De-

lay in the decisionmaking process therefore often per-

manently traps costs borne by the utility. Hence, federal

policy may be frustrated by lengthy state proceedings.

Because abstention may contribute to this result by add-

ing to the delay, the issue whether the policy concerns

underlying either Burford or Younger require abstention

in these circumstances is particularly significant.

3. Whether this Court should grant review in AEP,

in NOPSI, in both, or in neither, is a more difficult ques-

tion. Both AEP and NOPSI present the abstention issue

that we believe warrants this Court’s review, but in both

cases (particularly AEP) the issue is blemished by pro-

cedural problems. On balance, we are persuaded that the

Court should grant review in NOPSI, which better pre-

sents the issue. The petition in AEP should not be de-

nied, but should be held pending disposition of NOPSI.

Similar problems are likely to encumber future candi-

dates for this Court’s review in this area and the ab-

stention issue is sufficiently concrete in NOPSI, and too

important, to let slip this opportunity for review.

a. AEP is not an attractive candidate for review for

two principal reasons. First, the preemption issue was

not sharply delineated either when the petitioners brought

the case in the first instance or when the lower courts

ruled on abstention. FERC only more recently clarified

24

its views concerning the proper role of the Kentucky

Commission in reviewing the Interconnection Agreement

and the Unit Power Sales Agreement and FERC only re-

cently interpreted for itself the relevant provisions of

the two Agreements. See AEPGCo, 38 F.E.R.C. {] 61,243

(1987); Kentucky Power Co., 37 F.E.R.C. {63,015

(1986); Kentucky Power Co., 36 F.E.R.C. {] 61,227

(1986) (KPSC Br. in Opp. App. 7a-20a); AEPGCo, 36

F.E.R.C. 61,226 (1986) (KPSC Br. in Opp. App. 21la-

27a); pages 7-9, supra. The conflict between the Ken-

tucky Commission’s order and FERC’s authority there-

fore was not clear when the lower courts decided to ab-

stain, which, at the very least, diminishes the conflict the

case presents with those court of appeals decisions that

reject abstention in the face of a direct, facial conflict

between state regulatory action and federal law.”

In addition, the Court’s opportunity to reach the ab-

stention issue in AEP is threatened because Kentucky

Power also initiated a parallel state judicial proceeding

that has since resulted in a judgment (see KPSC Br. in

Opp. App. la-6a). As a result, the abstention issue is

now further obscured in AEP by respondents’ claim that

res judicata now precludes federal court reconsideration

of the preemption claims. Whatever the merits of re

spondents’ reliance on res judicata, it is a “difficult” is-

sue to avoid (see Huffman v. Pursue, Ltd., 420 U.S. at

607-608 & n.19),!° and we are reluctant to recommend

14 Petitioners in AEP may suggest that, apart from their pre-

emption claim in connection with the Unit Power Sales Agreement,

the Transmission Agreement filed with FERC also gave them rights

(unobscured by the problems discussed in the text) that were

violated by the Kentucky Commission’s order. However, even if

shifting the focus to the Transmission Agreement, which was

barely discussed by the court of appeals (see 86-49 Pet. App. 2a

n.1), provides a firmer preemption argument, it does not avoid

our other principal concern with AEP—the effect of the parallel

state proceeding—and, hence, does not affect our judgment that this

Court should simply hold AEP pending review of NOPSI.

15 Whether petitioners may rely on Kentucky Power’s apparent

effort to reserve the federal issues from state court consideration

25

that this Court grant review when we cannot be con-

fident that the Court will have the opportunity to ad-

dress the important issue whether abstention is re

quired.'®

b. Although NOPSI is not wholly free from procedural

problems, we believe the Court should grant review in

NOPSI/ because the abstention issue is sufficiently con-

crete and the circumstances of the case illustrate par-

ticularly well the competing policy concerns present in

these abstention cases.

No parallel state court proceeding obscures the absten-

tion issue in NOPSI and the underlying federal preemp-

tion claim is clear. In NOPSI, unlike AEP, the utility’s

request for rate relief derived from a final FERC deci-

sion: FERC had issued its final allocation determination

with respect to a fair allocation of the costs of Grand

Gulf 1. See Middie South Energy, Inc., 31 F.E.R.C.

{1 61,305, on reh’g, 32 F.E.R.C. 7 61,425 (1985), aff’d, Mis-

sissippt Industries Inc. v. FERC, 808 F.2d 1525 (D.C.

Cir. 1987). NOPSI’s claim under federal law therefore

was clear from the outset: the New Orleans City Council

was obliged to respect FERC’s determination of NOPSI’s

share of the costs of Grand Gulf 1, and to authorize

retail rates that would prevent “trapping of [those]

costs” (Nantahala Power & Light Co. v. Thornburg, slip

op. 17). See Narragansett Electric Co. v. Burke, 119

pursuant to this Court’s decision in England v. Louisiana State Bd.

of Medical Examiners, 375 U.S. 411 (1964) is not clear. This Court

established the England procedure in the context of Pullman absten-

tion, in which, unlike either Burford or Younger abstention, the

federal lawsuit is stayed and is not dismissed. See id. at 415 n.5; 17

C. Wright, A. Miller, & E. Cooper, Federal Practice and Procedure

§ 4245, at 490-491 (2d ed. 1978).

16 The initiation of the parallel state judicial proceeding by Ken-

tucky Power, while understandable, also injects comity considera-

tions into AEP not present in NOPSI (see Moses H. Cone Memorial

Hospital vy. Mercury Construction Corp., 460 U.S. 1 (1983); Colo-

rado River Water Conservation Dist. vy. United States, 424 U.S.

800 (1976) ).

26

R.I. 559, 381 A.2d 1358 (1977), cert. denied, 435 U.S.

972 (1978).

The record in NOPSI suggests that the City Coun-

cil nonetheless resisted its obligation to treat FERC-

allocated expenses as reasonable operating costs and in-

stead launched an inquiry into the “legality and pru-

dency” of the Grand Gulf 1 contracts that it had no au-

thority to conduct. Instead of allowing NOPSI an im-

mediate pass-through of its costs, it provided NOPSI

with “interim relief” which, at best, kept NOPSI solvent

from a cash standpoint and, at worst, threatened NOPSI

with bankruptcy. The Council invited NOPSI to remain

solvent by issuing securities but also undermined that

option by preventing NOPSI from immediately recover-

ing substantial costs (see pages 12-13 & note 6, supra).

The City Council’s decision effectively denied NOPSI full

recovery of its share of the Grand Gulf 1 costs—approxi-

mately $15.5 million per month—for at least 10 months,

pending the Council’s investigation, contrary to Nanta-

hala’s prohibition on the “trapping” of FERC approved

costs.’7

17 While the Council formally stated that “[i]f the amount of

permanent rate relief ultimately allowed is greater than amount

collected through the interim rates, [NOPSI] shall be allowed to

recover those additional amounts, with interest, in the future”

(Resol. R-85-526, at 12 (Sept. 5, 1985) ), that promise would appear

to be an empty one because the City Council appears not to have

auhority to make that guarantee. The Louisiana Supreme Court

in 1979 rejected a utility’s effort to recover for past expenses on the

ground that such retroactive cost recovery was unlawful in Louisi-

ana because it had not been expressly authorized by statute or by

the state constitution. See Louisiana Power & Light Co. v. Louisi-

ana Public Service Comm’n, 377 So. 2d 1028, 1027-1029 (La. 1979).

The Council also denied NOPSI’s request for assurances that the

costs would be recovered in future rates; NOPSI apparently needed

those assurances to avoid treating the cost deferrals as “losses”

under generally accepted accounting principles. See Resol. R-85-635

(Oct. 10, 1985). One stated ground for the Council’s negative

determination was the possibility that the Council might later con-

clude that recovery was inappropriate because the costs had been

imprudently incurred (id. at 3).

27

The district court abstained in the face of NOPSI’s

preemption challenge to the City Council’s actions, in-

cluding its denial of full recovery at least during a 10

month investigation. In our view, on the facts alleged,

the Council’s action clearly conflicted with the filed rate

doctrine and, hence, for the reasons previously discussed

(see pages 17-19, supra), Burford or Younger absten-

tion was improper. As reflected in the Council’s origi-

nal explanation for denying pass-through in July 1985

(see Resol. R-85-423 (July 17, 1985)) and again in

August 1985 (see Resol. R-85-466 (Aug. 8, 1985), and

in its subsequent formal announcement of a lengthy

prudence investigation in October 1985 (see Resol.

R-85-636 (Oct. 17, 1985)), the Council’s stated purpose

was to investigate whether NOPSI acted prudently in

incurring its allocated share of the Grand Gulf 1 ex-

penses. But that was a matter within FERC’s exclu-

sive jurisdiction,* and, indeed, the City Council had

participated in the determination both before FERC and

in the District of Columbia Circuit on review of the

FERC decision. For this reason, the City Council could

not legitimately deny NOPSI’s request for recovery of

its FERC allocated costs while the Council undertook a

10 month prudence investigation. Cf. Public Utilities

Comm’n v. United Fuel Gas Co., 317 U.S. 456, 468

(1943) ).

Respondents now claim (86-546 Br. in Opp. 10-13) for

the first time in this Court that a partial settlement en-

tered into by the parties in March 1986, almost six

18 FERC specifically found that all decisions regarding the plan-

ning and construction of Grand Gulf 1 were made by the Middle

South System as a whole and that the individual operating com-

panies, such as NOPSI, had no “autonomy” in the planning and

construction process (31 F.E.R.C. at 61,649-61,651). FERC’s find-

ing precludes any investigation by the City Council into the pru-

dency of NOPSI’s participation. The Council’s sole remedy was

to seek review of FERC’s decision before the United States Court

of Appeals for the District of Columbia Circuit, which recently

upheld FERC’s decision in a case to which the City of New Orleans

was a party. See Mississippi Industries vy. FERC, 808 F.2d 1525,

(D.C. Cir. 1987).

28

months before the decision of the court of appeals, ren-

ders the case moot. We disagree. NOPSI’s complaint

challenged the City Council’s authority to deny pass-

through of NOPSI’s Grand Gulf 1 costs, which neces-

sarily included a challenge to the Council’s authority to

deny recovery on prudence grounds, and under the par-

tial settlement the Council expressly reserved the right

to decrease NOPSI’s recovery based on the results of the

Council’s prudence investigation. That prudence investi-

gation is still underway and therefore the issue of its

lawfulness under federal law, including whether the

Council may further decrease NOPSI’s recovery on pru-

dence grounds,” is very much a live controversy. Hence,

the abstention issue presented in NOPSI is not moot.*°

19 Under the partial settlement NOPSI has already agreed to

absorb $51.2 million of the costs of Grand Gulf 1 (see Resol. R-

86-112 (Mar. 20, 1986) ). Thus, to a certain extent, the City Council

has already achieved the “trapping of costs” prohibited by this

Court’s decision in Nantahala.

20 That the prudence investigation was formally initiated after

the complaint was filed and is the subject of a second complaint

filed by NOPSI, recently dismissed by the district court on ripeness

and on both Younger and Burford abstention grounds (see Middle

South Energy v. The Council of New Orleans, No, 85-5273 (E.D.

La. Dec. 18, 1986) (Pet. Supp. Br. App. B1-B9); see note 7,

supra), does not support a different result. The Council’s denial of

an immediate rate increase, and announcement of its intention to

examine the prudence of the Grand Gulf 1 costs, preceded the first

injunction complaint, which is the subject of the present petition.

Moreover, it is plainly permissible for the Court to consider events

occurring subsequent to the filing of the original complaint and

the district court’s decision in determining whether the original com-

plaint still presents a live controversy and in determining the current

contours of that controversy. See Middlesex County Ethics Comm.

v. Garden State Bar Ass’n, 457 U.S. at 487; id. at 438-439 (Mar-

shall, J., dissenting); see also Huffman v. Pursue, Ltd., 420 U.S.

at 612; Public Utilities Comm’n V. United Fuel “as Co., 317 U.S. at

466. We see no reason to suppose that a different rule should obtain

merely because the subsequent event also happens to be relevant to

a later-filed and somewhat overlapping complaint.

Respondents further claim (86-546 Br. in Opp. 13 n.13) that

the Court should simply deny the writ of certiorari on mootness

grounds. Although, as discussed in the text, we do not believe

29

CONCLUSION

The petition for a writ of certiorari in NOPSI, No.

86-546, should be granted and the petition in AEP, No.

86-49, should be held pending this Court’s decision in

NOPSI.

Respectfully submitted.

CHARLES FRIED

Solicitor General

LOUIS R. COHEN

Deputy Solicitor General

RICHARD J. LAZARUS

Assistant to the Solicitor General

CATHERINE C. CooK

General Counsel

JEROME M. FEIT

Solicitor

JOHN N. ESTEs III

Attorney

Federal Energy Regulatory Commission

MARCH 1987

that NOPSI is moot, a denial of certiorari would not be appropriate

even if the case were moot. Instead, if the Court concludes that

NOPSI is moot, the Court should grant certiorari and remand the

case to the Fifth Circuit with instructions to vacate the judgment

on mootness grounds. See Burke v. Barnes, No. 85-781 (Jan. 14,

1987); United States vy. Munsingwear, Inc., 340 U.S. 36 (1950).

Respondents’ reliance (86-546 Br. in Opp. 13 n.13), on Velsicol

Chemical Corp. v. United States, 485 U.S. 942 (1978) for support

of their contrary view is misplaced because in this case, unlike

Velsicol, review would be justified in the absence of mootness and

therefore a denial of certiorari would not be appropriate.

GS Ot SOVERNMENT PRINTING OFFICE; 1987 181483 40264