Reply Brief — New Orleans Public Service, Inc. v. City of New Orleans

a).

No. 86-546 APR 13 1987

IN THE j

Supreme Court of the Gnited States

OCTOBER TERM, 1986

NEW ORLEANS PUBLIC SERVICE INC.,

Petitioner,

THE CITY OF NEW ORLEANS, et al.,

Respondents.

On Petition For Writ Of Certiorari To The United

States Court of Appeals For The Fifth Circuit

BRIEF FOR THE CITY OF NEW ORLEANS IN

RESPONSE TO THE “BRIEF FOR THE UNITED

STATES AND THE FEDERAL ENERGY REGULATORY

COMMISSION AS AMICI CURIAE”’

OKLas JONES, II CLINTON A. VINCE*

City Attorney BERNHARDT K. WRUBLE

Bruce E. NACccaRI L. JOHN OSBORN :

Assistant City Attorney VERNER, LIIPFERT, BERNHARD,

1300 Perdido Street McCPHERSON AND HAND, Chartered

New Orleans, Louisiana 70112 1660 L Street, N.W.

(504) 586-4651 Suite 1000

Washington, D.C. 20036

, (202) 775-1047

*Counsel of Record

April 13, 1987

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

TABLE OF CONTENTS

Page

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II si cs da cin spidioannnagenunbhiceneidecsbareianianertin 4

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ii

TABLE OF AUTHORITIES

CASES:

Alabama Public Service Commission v. Southern Ry.

Co, BER UB. BRE CITED. .. ncorcicnerocisnrtecisnvcncess

Allegheny Airlines, Inc. v. Pennsylvania Public Util-

ities Commission, 465 F.2d 237 (3d Cir. 1972),

cert. denied, 410 U.S. 943 (1973) ............eee

Aluminum Company of America v. Utilities Com-

mission of the State of North Carolina, 713

F.Gd DORE COG, Gir. BORD. cccesiisicnccioensiaciciccee.

American Electric Power Co. v. Kentucky Public

Service Commission, No. 86-49 (petition for

cert. filed, 55 U.S.L.W. 3032 (U.S. July 29,

LOUD vackecciskssicrisnsecineneoeabeennaaeiaiaiitas, Cotte

Appalachian Power Co. v. Public Service Cornmis-

sion of West Virginia, No. 86-2540 (4ta Cir.

Bee. ©, FOBT) scessnsecsnsienscasrectss sallipersastiaciavstsse

Browning-Ferris, Inc. v. Baltimore County, Mary-

land, 774 F.2d 77 (4th Cir. 1985) _ .............00

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

Federal Power Commission v. Southern California

Edison Co., 376 U.S. 205 (1964) 0... eeeeeeeees

Kentucky West Virginia Gas Co. v. Pennsylvania

Public Utility Commission, 791 F.2d 1111 “4

Che. TS ovvasesuaciskiccecsmsenepennlimantieecssciipoienen

Louisiana Power & Light Co. v. Louisiana Public

Service Comm’n., 377 So.2d 1023 (La.

TOTD). ccearestncssccstinicssnenaniniaaenenenanielindemess

Middle South Energy, Inc. v. Arkansas Public Ser-

— giant 772 F.2d 404 (8th Cir.

FOU ciccvsisiecscccivepctiinctictaieenstcnahiaaameiiiamnintices

Middle South Energy and New Orleans Public Ser-

vice, Inc. v. The Council of New Orleans, No.

85-5273 (E.D. La. Dec. 18, 1986)...

Middlesex County Ethics Committee v. Garden State

Bar Assn., 457 U.S. 423 (1902) ........seeeeeeeeee

Page

iil

Table of Authorities Continued

Page

Mississippi Industries v. FERC, No. 85-1611 (D.C.

IEE EEE snsscscschoseenscusnnnsnsbouncieesoonse 9

Nantahala Power & Light Co. v. Thornburg, 106 S.

i io. crash cingnsecabavoavscess 1,9

Ohio Civil Rights Commission v. Dayton Christian

Schools, Inc., 106 S. Ct. 2718 (1986) 0.0.0... 5

Railroad Commission of Texas v. Pullman Co., 312

cin sc cumsunbecsce¥dltes 5

Robert-Gay Energy Enterprises Inc. v. State Cor-

poration Commission of Kansas, 753 F.2d 857

os asdanonscnesaners 5

United Services Automobile Assn. v. Muir, No. 85-

Dome (ee Cir. Jan. 6, 1986) . ...... cccccocsecceseesss. 5

Williams v. Red Bank Board of Education, 662 F.2d

sac cubeuvitoaseiennentes 5

Younger v. Harris, 401 U.S. 37 (1971) .............. 5,6,8,9

REGULATORY DECISIONS:

Arkansas Power and Light Company, Docket No.

84-249-U, Order No. 26 (Arkansas Public Ser-

vice Commission, Sept. 9, 1985) ...............002. 6

Louisiana Power and Light Company, Order No. U-

16945 (Louisiana Public Service Commission,

nic caleinasinodicnensndecues .

Middle South Energy Inc., 26 FERC 4 63,044

Mississippi Power and Light Company, Docket No.

U-4620, Final Order on Rehearing (Mississippi

Public Service Commission, Sept. 16, 1985) .. 6

— Dd

STATUTES AND ORDINANCES:

Federal Power Act, 16 U.S.C. 824, et seg. .........

Louisiana Annotated Statutes, § 33-4405 ............

Louisiana Constitution Art. 4, § 21(E) ...........

New Orleans Ords. Nos. 6822 and 7068 _ .............

1954 Home Rule Charter, § 4-1604 oo...

oo or or bo

BRIEF FOR THE CITY OF NEW ORLEANS IN

RESPONSE TO THE “BRIEF FOR THE UNITED

STATES AND THE FEDERAL ENERGY REGULATORY

COMMISSION AS AMICI CURIAE”’

This brief is filed pursuant to Rule 22.6 in response to

the Brief for the United States and the Federal Energy

Regulatory Commission as Amici Curiae, filed in American

Electric Power Co. v. Kentucky Public Service Commission,

No. 86-49 (‘‘the Government Brief’’). The Government

Brief! addresses review here and was served upon the

parties to this action.

STATEMENT

The Government urges this Court to review a case that

was prematurely and improvidently commenced, has been

settled in substance, represents no conflict and is consist-

ent with established law. After the FERC allocated Grand

Gulf I costs to NOPSI as a wholesale rate, the Council

confronted complex retail ratemaking issues—within its ex-

clusive jurisdiction. The Government omits mention of any

such issues. For example, in order to address the ‘“‘severe

rate shock effect’’ (Pet. at A-38.) portended by a 60 per-

cent rate increase, the Council was entitled to consider

rate “‘phase in’ (or “‘levelization’’), that graduates the in-

crease over time to alleviate its impact.

The FERC’s own administrative law judge declared that

levelization had to be decided by local regulators: ‘The

design of local retail rates to ultimate consumers is a mat-

ter within the jurisdiction of the states. ... in light of the

clear bright line which the Federal Power Act sought to

draw between Federal and state jurisdiction over electric

‘References to the parties and other participants here are in the

same form as in the respondent’s principal brief. The Solicitor General

and the FERC are, together, referred to as ‘‘the Government’; and

their brief as (“‘G.Br.”’). References to respondents’ principal brief are

in the form (“CNO Br.’’).

utilities. F.P.C. v. Southern California Edison, Co., 376

U.S. at 215-16.” Middle South Energy, Inc., 26 FERC 4

63,044 at 65,148. NOPSI’s iawsuit, which sought a man-

datory, immediate and full pass-through, was entirely in-

appropriate.’

A. The Federal Power Act

The Government's presentation of the Federal Power

Act omits any reference to the reservation of regulatory

powers to the states. Section 201 of the Act, 16 U.S.C.

§ 824(a) concludes, “‘such Federal regulation, however, to

extend only to those matters not subject to regulation by

the States.’”’ The Act denies FERC jurisdiction ‘‘over fa-

cilities used for the generation of electric energy or over

facilities used in local distribution or only for the trans-

mission of electric energy in intrastate commerce.”’ 16

U.S.C. § 824(b\1).

In Federal Power Commission v. Southern California

Edison Co., 376 U.S. 205 (1964), the Court concluded that

Congress had ‘“‘apportioned regulatory power between state

and federal governments.” Jd. at 211 and adopted the

Attleboro “‘bright line” that preserved the states’ tradi-

tional role in setting loca] retail rates. Jd. at 214-15.

The Government’s refusal to acknowledge this limit is

paralleled in its treatment of the ‘‘filed rate doctrine.” Its

impact on state retail regulatory powers was recently ex-

plicated in Naniahala Power & Light Co. v. Thornburg,

106 S. Ct. 2349 (1986). Nantahala bears on abstention by

? The local regulator must also consider how customer classes (in-

dustrial, commercial and residential) should bear the increase and can

inquire into public interest issues that may suggest the desirability of

cost absorption by a utility. It is not invariably in a utility’s interest

to pass on cost. fully, which might initiate the ‘‘death spiral” effect

of “‘rate shock.” That is, business and low-income residents, leave or

go bankrupt. Unpaid costs are then borne by a diminished customer

base. This triggers a new round of failures, leaving the utility in a

financially untenable position.

illustrating how a claim of preemption involving the filed

rate doctrine may properly be dealt with. The decision was

rendered on appeal from the North Carolina Supreme

Court. Regulatory issues had been allowed to develop

within the state system, for ultimate review by this Court.

There, the FERC had adopted a formula for allocation

of costs between utilities located in different states. The

state simply adopted a different formula as the basis for

retail rates. The Court held that the ‘‘filed rate doctrine”

barred adoption of a contradictory formula and required

the state to pass through costs in order to avoid their

“trapping.” 106 S. Ct. at 2359. The Court held, however,

that traditional retail ratemaking actions (e.g., recognition

of offsetting costs) could properly be taken. Jd. at 2357-

58.3

B. Proceedings Before the Counsel

The Government (pp. 10-15, 27) would portray NOPSI

as having suffered unjustified administrative de-

lay.Although the matter before the Council required fac-

tual and expert presentations, it could have been conducted

more expeditiously, but for NOPSI’s strategy. Even so,

the time was a fraction of what the FERC took in the

Grand Gulf I matter and other typical FERC and judicial,

proceedings require. The Fifth Circuit found that there

was no “‘bad faith, harassment or other exceptional cir-

cumstances,” and indicated a different result if there had

been. (Pet. at A-24.) The Government also omits to state

that NOPSI sought a billion dollars in damages from mem-

bers of the Council personally, apparently for intimidation.

(Compl., par. 33.) Instead of participating responsibly,

NOPSI bypassed opportunities for relief and sought to

exhaust the Council’s resources through litigation. (See Pet.

at A-39.)

8 See note 2 supra. Moreover, although the prudence inquiry is not

before the Court in this case, it should be noted that the Nantahala

case did not involve managemental imprudence. See discussion infra.

NOPSI filed its application to increase retail rates just

two days after the Council reacquired regulatory authority

from the state commission. While the Council required

time to institute orderly procedures, it acted responsibly

throughout. For example, on July 17, 1985, after public

hearing and technical review, the Council authorized

NOPSI to issue $60,000,000 in securities. (R. Def. Ex. P.)

The Council, on its own initiative, set a hearing on interim

rate relief, Resolution R-85-423, and later provided relief.

During the proceedings NOPSI sought delays in setting

of filing requirements, delayed submission of information,

ignored invitations to seek interim relief, and testified, in

the face of expert evidence, that it would become insolvent

in September, 1985. It claimed inability to recapture the

$32 million ‘‘advance payment” it had made (based on the

improper allocation that the FERC had rejected), though,

at the Council’s instance, it did so. The Council enabled

NOPSI to remain current on its Grand Gulf I payments

throughout.

DISCUSSION

A. The case was correctly decided below.

The Government concedes the availability of abstention

and that there is no per se rule against abstention in a

federal preemption case (G.Br. 10, 22, n. 13); and that

abstention depends upon “the particular preemption claim

at issue.”’ (Id.) It contends, however, that there can be no

abstention if there is a “preemption claim based on the

filed rate doctrine” (id.), arguing for special treatment of

FERC decisions. ;

Both courts below found a compelling need for Burford

abstention here. The Fifth Circuit stated that, “the reg-

ulation and adjustment of local utility rates is of para-

mount local concern and a matter which demands local

administrative expertise. The regulatory scheme is com-

plex. In addition, the Louisiana state courts are fully able

”

to address NOPSI’s complaints about Council actions. ...

(Pet. at A-19.)* Yet the Government contends that there

were ‘“‘no state law or policy concerns” present here. (G.Br.

at 17.) Moreover, it denigrates abstention where the pro-

ceeding is before a state administrative body (G.Br. 14-

20, especially n. 11). The latv is to the contrary. Alabama

Public Service Commission v. Southern Ry. Co., 341 U.S.

341, 349 (1951), See also Robert-Gay Energy Enterprises

Inc. v. State Corporation Commission of Kansas, 753 F.2d

857 (10th Cir. 1985); Browning-Ferris, Inc. v. Baltumore

County, Maryland, 774 F.2d 77 (4th Cir. 1985); Allegheny

Airlines, Inc. v. Pennsylvania Public Utilities Commission,

465 F.2d 237 (8d Cir. 1972), cert. denied, 410 U.S. 943

(1973). The Council’s authority is on equal plane with

LPSC; in fact, NOPSI derives its authority to operate from

the Council.®

The three part test of Younger was also met here.®’

This Court’s recent decision in Ohio Civil Rights Com-

mission v. Dayton Christian Schools, Inc., 106 S. Ct. 2718

(1986), is virtually dispositive. The Court of Appeals held

that a state administrative proceeding—which involved se-

lection criteria for teachers, “intrusive” actions and con-

‘The Fifth Circuit could also have held that the court should not

become involved in the unnecessary determination of constitutional

questions—here under the Supremacy Clause, on premature challenge,

based on an undeveloped regulatory record—under Railroad Commis-

sion of Texas v. Pullman Co., 312 U.S. 496 (1941).

5 See Louisiana Annotated Statutes § 33-4405; New Orleans Ords.

Nos. 6822 and 7068.

* Section 4-1604 of the 1954 Home Rule Charter, provides for prompt

judicial review of the Council’s actions. The Court is empowered to

grant plenary relief. See La. Const., Art. 4, § 21(E). Louisiana courts

have vigorously enforced the filed rate doctrine. (CNO Br. p. 17 n. 22.)

7 See Middlesex County, Ethics Committee v. Garden State Bar Assn.,

457 U.S. 423, 432-43 (1902); United Services Automobile Association v.

Muir, No. 85-5662 (3d Cir. Jun. 6, 1986) Williams v. Red Bank Board

of Education, 662 F.2d 1008, 1017 (3d Cir. 1981).

tinuing surveillance*—violated the complainant school’s

Constitutional rights. 766 F.2d 932, 942-43, 961-62 (6th

Cir. 1985). This Court reversed, noting that the schcol’s

claims could be raised at state level. It restated that it is,

“perfectly natural for our cases to repeat time and time

again that the normal thing to do when federal courts are

asked to enjoin pending proceedings in state courts is not

to issue such injunctions.” 106 S. Ct. at 2723. (Emphasis

by the Court.)

The Government contends that Younger is inapplicable

here, claiming erroneously that NOPSI participated in a

‘multistate ‘common pool’ ”’ and that a decision one state

has “‘a corresponding direct adverse effect on the citizens

of other participating states,’ (G.Br. at 18). The Council

never acted, and it would have been inappropriate to spec-

ulate that its decision would burden other states. The

Council also disclaimed any action that would have NOPSI

bear any costs other than those assigned by the FERC

(Resolution No. R-85-636). Moreover, each of NOPSI’s

three sister operating companies, also allocated Grand Gulf

costs, entered into rate agreements that involved ‘‘phase-

in’’ plans and cost absorption.® These did not have a “‘cor-

responding direct adverse effect’? on NOPSI, and its pres-

ident so testified.'°

*The state had sought extensive discovery and used its “‘coercive

tools’’ to compel practices inconsistent with complainant’s tenets. 766

F.2d at 950-51.

* Arkansas Power and Light Company, Docket No. 84-249-U, Order

No. 26 (Arkansas Public Service Commission, Sept. 9, 1985); Mississippi

Power and Light Company, Docket No. U-4620, Final Order on Re-

hearing (Mississippi Public Service Commission, Sept. 16, 1985); Lou-

isiana Power and Light Company, Order No. U-16945 (Louisiana Public

Service Commission, Nov. 14, 1985).

'° Deposition of James M. Cain, December 23, 1985, In the Matter of

Ex Parte Application of New Orleans for An Increase of Its Electric

Rates (Docket No. CD 85-1), pp. 125-131.

B. There is no cc:.flict among the circuits.

As to the Government’s claim that abstention is never

warranted “‘in the context of a preemption claim based on

the filed rate doctrine,” there is clearly no conflict since

not one court has suggested such a rule. Because all five

of the cases proffered by the Government are distinguish-

able, there is no conflict at all.

(1) In Kentucky West Virginia Gas Co. v. Pennsylvania

Public Utility Commission, 791 F.2d 1111 (3d Cir. 1986),

the court declined to abstain where a particularized state

response had been fully articulated—by all three branches

of the government. 791 F.2d at 1113, 1114, 1118.

(2) In Middle South Energy, Inc. v. Arkansas Public

Service Commission, 772 F.2d 404 (8th Cir. 1985), the state

proposed to void ab initio the agreements with respect to

Grand Gulf, 772 F.2d at 408, so that the utility might

avoid any costs assigned by the FERC, id. at 411. T>-re

was complete preemption.

(3) In Aluminum Company of America v. Utilities Com-

mission of the State of North Carolina, 713 F.2d 1024 (4th

Cir. 1983), the court abstained where the state commission

had taken substantive action; the state courts were in an

“advanced stage’”’ of considering the matter, 713 F.2d at

1029; and fact-finding would be required as to the effect

of the utility commission’s order. Jd. at 1030.

(4) In Appalachian Power Co. v. Public Service Com-

mission of West Virginia, No. 86-2540 (4th Cir. Mar. 4,

1987), previously briefed,!! the same court demonstrated

willingness to reach a preemption claim, and it barred a

state prudence inquiry where the particularized issues were

identical to those already determined by the FERC. (Slip

Op. at 13).

! Respondents’ Brief In Opposition To Petitioner’s Third Supplemen-

tal Brief, Filed March 30, 1987.

(5) In American Electric Power Company, Inc. v. Ken-

tucky Public Service Commission, the Sixth Circuit af-

firmed abstention under Younger, (although it held Burford

inapplicable because the state commission had already

acted) because of parallel proceedings in the state court.

C. Other Factors Bearing on Review.

The abstention issue is important only if the Court were

to upset the particularized consideration that now char-

acterizes court decisions. !f local regulators were stripped

of their powers to moderate increases, there would be

irreparable economic damage, the Congressional judgment

in favor of localized adjustment would be undermined, and

utilities would be encouraged to exhaust local resources

by litigation that sought federal intrusion into a tradition-

ally state proccss—a course followed by NOPSI here.

The Government erroneously asserts that utilities will

be subjected to “irreparable damages’’.(G.Br. at 23). Local

regulators can grant interim relief and provide for recov-

ery of costs borne during the proceeding. (Resolution No.

R-85-526.) Financial planning by utilities is customarily

based on an interlude for regulatory consideration. The

claim that it is not lawful in most jurisdictions to allow

for costs incurred during the regulatory interim is spe-

cious.'? In fact the rate agreement here included recovery

‘2 The Government concedes that) Resolution No. R-85-526 allowed

NOPSI to recover costs incurred during regulatory consideration, but

suggests that the Council ‘appears not to have the authority to make

that guarantee.”’ It cites only Louisiana Power & Light Co. v. Louisiana

Public Service Comm’n., 377 So.2d 1023, 1027-1029 (La. 1979). That

case addressed the different problem posed when a utility ‘‘surcharged”

retroactively a class of ratepayers to recover a refund made to a dif-

ferent class, and it does not address regulatory inclusion of deferred

costs in rates. NOPSI earlier raised this argument in Middle South

Energy, Inc. v. The City Council of New Orleans, Civ. Action No. 85-

5273 (E.D. La., Dec. 11, 1985) (‘“‘NOPSI IT’) but was met by undisputed

testimony that the Council’s action conformed with others nationwide,

all under state laws barring “retroactive ratemaking.”

sinh es nf NA il a a Sit hc ARINC MAA SN A Bi treat Saree

i A a it a th as ny

tee

of such costs. Instead, the Government would subject com-

munities to irreparable damage because it is impossible to

reconstitute closed businesses or repatriate residents forced

to relocate as a result of rate shock. However, no court

has adopted the Government’s position.

The states’ obligation to reflect costs allocated by the

FERC has just been explicated in Nantahala, relied upon

by the court below. Since Nontahala applies to wholesale

costs of “joint financing and power production arrange-

ments,”’ which the Government posits as a basis for review

here (G.Br. 22), there is no need to review the issue.

Finally, any decision here would be rendered in the con-

text of a FERC allocation which may itself be ephemeral.

The appeal of its decision will be reheard en banc “‘limited

to the issues raised by the dissenting opinion.” Mississippi

Industries v. FERC, No. 85-1611, (D.C. Cir. Apr. 3, 1987).

That dissent found untenable the FERC’s allocation of

nuclear plant costs that failed to remedy the disparities

which it held discriminatory. Id., Slip Op. at 1-3 (D.C. Cir.

Jan. 6, 1987) (Bork, J., dissenting).

D. Comparison with the AEP case

The Government concedes that the issue here is ‘‘blem-

ished by procedural problems” (G.Br. 23), but argues for

review here, but not in AEP. In AEP, the state commis-

sion had already acted. Here, the complaint was filed be-

fore the Council had a chance to act, and while NOPSI

bypassed opportunities for interim relief.'* In AEP, the

controversy is active; here, it has been settled.

13 The Government contends that Younger abstention is inappropriate

because the Council’s ratemaking proceedings are “‘essentially a leg-

islative function.” (G.Br. 19 n.11) They are no more ‘“‘legislative” than

the FERC’s own. The hearings are governed by rules of procedure,

provide for cross examination, are fully transcribed, result in written

decisions, and are subject to state court review (see n.6 supra). The

Government’s suggestion that the Council’s deliberations should be ov-

10

E. The Prudence Piweeedings.

The Government misstates that NOPSI’s complaint

“necessarily includes” a challenge to the prudence inquiry.

It did not, and the Fifth Circuit conducted no review of

it. The inquiry was initiated after the complaint here was

filed (Res. R-85-636, Oct. 17, 1985). Moreover, NOPSI com-

menced an entirely separate action, challenging that in-

quiry, ‘‘NOPSI II,’”’ now pending before the Fifth Circuit.

The Government also misstates that the prudence in-

quiry was causally related to the Council’s alleged refusal

(which did not occur) to reflect NOPSI’s costs in retail

rates. In fact, the rate agreement was implemented not-

withstanding the inquiry. The complaint in NOPSI II, con-

ceded that ‘‘Defendants failure to grant adequate rate relief

is not at issue in the present case.”” (Compl. Par. 10.)

The Government asserts that the Council has no au-

thority to conduct a prudence inquiry even though FERC

has conducted no such inquiry. (See CNO Br. at p. 5, n.6.)

Resolution, R-85-636 declares that, ‘‘the Council will not

seek to ... order NOPSI to pay MSE a rate other than

that approved by the FERC.” The prudence hearings, now

complete, have focused on whether NOPSI’s management

acted imprudently in respects which would not disturb its

interstate commitments. It is improper to presume that

the Council will act in a manner violating its Constitutional

responsibilities. More important, this issue is not before

the Court in this case.

CONCLUSION

For these reasons the petition should be denied.

erridden because it is popularly elected denigrates those who have

responsibility to an electorate and would disqualify a substantial number

of state trial and appellate courts. The suggestion that the Council

might act improperly here because it also is considering a proposal to

municipalize NOPSI, merits no reply. The same argument would un-

dermine the integrity of the New York State Public Utility Commission

with respect to the Long Island Lighting Company, since the Com-

mission is appointed by the Governor, who is championing state take-

over of that utility. Wall St. Journal, Jan. 15, 1987, at 10, col. 1.

ei ic i AARNE oN 0.

OKLA JONES, II

City Attorney

BrucE E. NACCARI

Assistant City Attorney

1300 Perdido Street

(504) 586-4651

April 13, 1987

Respectfully submitted,

CLINTON A. VINCE*

BERNHARDT K. WRUBLE

L. JOHN OSBORN

VERNER, LIIPFERT, BERNHARD

MCPHERSON AND HAND, Chartered

1660 L Street, N.W.

Suite 1000

Washington, D.C. 20036

(202 775-1047

*Counsel of Record