Amicus Curiae Brief — Arcadia v. Ohio Power Co.

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Roprems Ghent, GE

FIDBD

Nos. 92-264 and 92-280

SEP 11 tage

IN THE

OFFICE OF THE CLERK

Supreme Court of the United States

October Term, 1992

ARCADIA, OHIO, et al.,

Petitioners,

y

OHIO POWER COMPANY, et al.,

Respondents.

FEDERAL ENERGY REGULATORY COMMISSION

Petitioner,

Vv.

OHIO POWER COMPANY, et al.

Respondents.

ON PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

BRIEF OF THE NATIONAL ASSOCIATION OF

REGULATORY UTILITY COMMISSIONERS,

AS AMICUS CURIAE

IN SUPPORT OF BOTH PETITIONERS

September 11, 1992

WILLIAM PAUL RODGERS, JR.

General Counsel

(Counsel of Record)

CHARLES D. GRAY

Assistant General Counsel

JAMES BRADFORD RAMSAY

Deputy Assistant General Counsel

National Association of Regulatory

Utility Commissioners

1102 ICC Building

Post Office Box 684

Washington, D.C. 20044

(202) 898-2200

Counsel for Amicus Curiae

sae’ sik

CASILLAS PRESS, INC.,

1717 K STREET, N.W._, WASHINGTON, D.C. 200%

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TABLE OF CONTENTS

Page

INTEREST OF AMICUS CURIAE...........%%. l

pumemermn se Gl AMCSUMEONE oii i ee ee aes 3

es i oe EP CO ee OE tre eee 4

THE PETITIONS MUST BE

GRANTED TO PREVENT

HARM TO STATE

REGULATION OF ELECTRIC

UTILITY RATES AND

UU 6 Ao Se yc ok i eR eS 4

oR nie areas a ee ar Ge 13

ii

TABLE OF AUTHORITIES

Cases Page

American Electric Power Co., 46 S.E.C. 1299 (1978) .. 9

v

Arcadia v. Ohio Power Co., __ U.S. _,

ALS GR. OE Clg 3k a he eee ee 4,12-13

Arkansas Electrical Cooperative Corp. v.

Arkansas Public Service Commission,

OR Wa ee Ee 6 ee ek ee 7

Cheek v. United States, __ U.S. __,

155: 3. Ge eee ss we Re we ee bo

Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989) .. 7

Electrical District No. 1 . FERC, 776 F.2d

Ce G4, Gl. TD sce one has eee es 7

FPC v. Hope Natural Gas Co., 320 U.S. 591 (1944) .. 7

Louisiana Public Service Commission v. FCC,

CPO Ti. 2ae CAP i a hak eS ck ae |)

Mississippi Power & Light Co. v. Mississippi

ex rel. Moore, 487 U.S. 354 (1988) ....... 7,8

Nantahala Power & Light Co. v. Thornburg,

SS, ONCE oe ee es 7,8

New England Power Co. v. New Hampshire,

| Gd ieiutes Clee 6 beeen ake 9

iid

Ohio Power Co. v. FERC, 954 F.2d 779

ek a gee be 10

Ohio Power Co. v. FERC, 880 F. 2d 1400

a NS eg Cie a 6 a 08 wale 6 ess )

Pauley v. BethEnergy Mines, Inc., __ U.S. __,

ee I ss 6 be oe 0 05% 5

Permian Basin Rate Cases, 390 U.S. 747 (1968) ..... i

Towns of Alexandria, Minnesota v. FPC,

aoe a ee eee Ce. Ce. B97ED «6 ce i oe es 7

Statutes:

Federal Power Act,

16 U.S.C. §824 et seg. (1985):

SC Sener rae 4

Public Utility Holding Company Act of 1935,

15 U.S.C. §79 et seg. (1981):

a a re 6,12

oR SA are arene 4,6,8,11

a ae ee re 6

Ss i kiss Sie eae 8 es ke a os 12

-f '

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1992

No. 92-264

No. 92-280

ARCADIA, OHIO, et al.

Petitioners,

vs

OHIO POWER COMPANY, et al.,

Respondents.

FEDERAL ENERGY REGULATORY COMMISSION,

Petitioner,

Vv.

OHIO POWER COMPANY, et al.,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the District of Columbia Circuit

BRIEF OF THE NATIONAL ASSOCIATION OF

REGULATORY UTILITY COMMISSIONERS

AS AMICUS CURIAE IN

SUPPORT OF BOTH PETITIONERS

INTEREST OF AMICUS CURIAE

The National Association of Regulatory Utility

Commissioners (NARUC) is a quasi-governmenial nonprofit

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organization founded in 1889. The NARUC represents the

collective interest of the State regulatory commissions charged

with regulating the rates and conditions of service of electric,

natural gas and telephone utilities operating within their

respective jurisdictions. The NARUC’s member commissions

are obligated under State law to ensure that the rates charged

to retail consumers are just and reasonable. The NARUC’s

mission is to serve the public interest by seeking to improve

the quality and effectiveness of public utility regulation in

America. }

The NARUC submits this brief as amicus curiae in

support of the petitions for certiorari filed by Arcadia, Ohio,

et al. and the Federal Energy Regulatory Commission (FERC)

because review by this Court is essential to prevent the harm

the decision below will have upon the ability of State

regulatory commissions to effectively scrutinize and regulate

the retail rates of electric utilities. That decision eliminates

the FERC’s jurisdiction to determine the justness and

reasonableness of fuel charges an electric utility can include

in its wholesale rates where the utility purchases its fuel

through affiliate contracts subject to the jurisdiction of the

Securities and Exchange Commission (SEC). Left unreviewed,

the decision also could be used to prevent State public utility

commissions from reviewing similar costs and determining the

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extent to which they are properly passed through to the retail

consumer. The resulting gap in both federal and State rate

regulation would allow any utility owned by a registered

public utility holding company to buy fuel or other goods and

services from an affiliate at inflated prices and pass through

its entire cost to ratepayers without any scrutiny by a

ratemaking agency at either the Federal or State level.'

SUMMARY OF ARGUMENT?’

Left unreviewed, the decision of the court below will

have a devastating effect not only on the FERC’s regulation

of wholesale power sales, but also could provide a

springboard for substantial preemption of State regulation of

the retail rates of electric utility subsidiaries of registered

holding companies. The NARUC respectfully submits that

this court must grant the respective petitions for the reasons

therein stated, but also to protect the integrity of State utility

regulation. Unless reviewed and reversed, the lower court’s

' Pursuant to Rule 36 of the Rules of this Court, NARUC

has obtained the consent of the parties to the filing of this

brief. Copies of the letters of consent have been filed with the

Clerk of the Court.

? The facts of this case are set forth fully in the two

petitions. Accordingly, the NARUC will assume familiarity

with those facts and focus on the reasons for granting the

petitions.

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erroneous reliance on this court’s decisions finding preemption

of State retail regulation of holding company affiliates carries

the clear threat of federal preemption under a new guise -- the

SEC’s purported regulation of interaffiliate transfer prices "at

cost." Because Congress did not intend such preemption of

either FERC or State regulatory authority, the petitions must

be granted.

ARGUMENT

THE PETITIONS MUST BE GRANTED TO PREVENT

HARM TO STATE REGULATION OF

ELECTRIC UTILITY RATES AND SERVICES

In Arcadia v. Ohio Power Co., __ U.S. _, 111 S. Ct.

415 (1990) (Arcadia I), this Court reversed the same court of

appeals’ prior attempt to construe section 318 of the Federal

Power Act (FPA), 16 U.S.C. § 825q, to divest the FERC of

its authority to disallow the pass-through of costs from "SEC-

approved" affiliated coal companies in establishing just and

reasonable wholesale power rates. In its decision below, the

court of appeals has reinstated its prior holding, this time

invoking Section 13(b) of the Public Utility Holding Company

Act (PUHCA), 15 U.S.C. § 79m(b). Section 13(b) provides

for SEC jurisdiction over certain transactions among holding

company affiliates, and prohibits sales of goods between

affiliates unless they are “at cost." The court below held that

the "at cost” standard set forth in Section 13(b) governs not

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only the transfer price of goods and services among holding

company affiliates, but also dictates the extent to which those

costs can be passed through and recovered in rates,

irrespective of whether the costs are reasonable or consistent

with market prices. This holding creates a substantial risk that

the authority of State public utility commissions to review

those costs, which are central to retail rates, would likely be

preempted under Supremacy Clause principles. Stated simply,

the decision below could be read to preclude State public

utility commissions from-satisfying their respective statutory

mandates to ensure that retail utility rates are just and

reasonable.

This Court has stated that "this Court, where possible,

interprets congressional enactments so as.to avoid serious

constitutional questions." Cheek v. United States, ___ U.S.

: -, 111 S. Ct. 604, 611 (1991). The preemption

analogies used by the court below, however, unnecessarily

raise important Supremacy Clause issues. In cases involving

the relationship between two federal agencies, as here, the

Court has limited its analysis to the applicable statutes.

J See ee

2524, 2539 (1991) ("an interpretation that harmonizes an

Pauley v. BethEnergy Mines, Inc., __ U.S.

—_—?’

agency’s regulation with their authorizing statute is

presumptively reasonable ..."). The court of appeals’ decision

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to rely on an unnecessary. preemption analysis, to the potential

detriment of the States, and to interfere with a reasonable

statutory interpretation by FERC, is error.’

The crux of the issue is that the SEC has neither the

Statutory authority nor the expertise to set wholesale or retail

electric rates. The SEC’s authority is intended to prevent

collusion and abusive self-dealing between the affiliates of

utility holding companies that could occur through their

contractual relationships. See, 15 U.S.C. §§ 79a(c), 79m(b),

and 79m(c). Potential abuses of the horizontal relationship

between holding company affiliates are regulated by the SEC’s

imposition of a ceiling on transfer prices. By contrast, the

FERC’s role is to ensure reasonable rates to be charged by a

> Even if preemption analogies were appropriate, the

decision below is seriously flawed. As the Court stated in

Louisiana Public Service Commission v. FCC, 476 U.S. 355

(1986), the authority of a federal agency such as the SEC to

displace state regulatory jurisdiction must be firmly grounded

in the agency’s statutory authority:

An agency may not confer upon _itseif

[preemptive] power. To permit an agency to

expand its power in the face of a congressional

limitation on its jurisdiction would be to grant

to the agency power to override Congress.

This we are both unwilling and unable to do.

476 U.S. at 375.

in we

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utility subsidiary to its wholesale customers -- a vertical

transaction. Electrical District No. 1 v. FERC, 776 F.2d 490

(D.C. Cir. 1985); Towns of Alexandria, Minnesota v. FPC,

555 F. 2d 1020 (D.C. Cir. 1977). In practice, the FERC.

reviews a utility subsidiary’s management of the agreements

whose establishment was approved by the SEC. The point

here, however, is that it is the FERC, and not the SEC, that

has ongoing jurisdiction over utility operations at wholesale

under the FPA. City of LaFayette, Louisiana v. SEC, 454

F.2d 941 (D.C. Cir. 1971).

Equally important from the NARUC’s perspective, the

Court has often recognized that "the regulation of utilities is

one of the most important of the functions traditionally

associated with the police power of the states." Arkansas

Electrical Cooperative Corp. v. Arkansas Public Service

Commission, 461 U.S. 375, 377 (1983). Accordingly, it has

sought to protect the flexibility and discretion of State (and

Federal) utility regulators in exercising their judgment. See,

e.g., Duquesne Light Co. v. Barasch, 488 U.S. 299, 316

(1989); Permian Basin Rate Cases, 390 U.S. 747 (1968); FPC

v. Hope Natural Gas Co., 320 U.S. 591 (1944). Thus, in

Nantahala Power & Light Co. v. Thornburg, 476 U.S. 953

(1986), and Mississippi Power & Light Co. v. Mississippi ex

rel. Moore, 487 U.S. 354 (1988), this Court carefully limited

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federal preemption of State public utility commission authority

to cases resulting in “trapped" costs.

Nantahala and Mississippi Power make clear that

“trapping” of costs can occur only where one governmental

agency requires a utility to incur specific costs and a second

agency sets a price that ignores the utility's obligation. See

Mississippi Power, 487 U.S. at 354 ("it obviously cannot be

unreasonable for [a utility] to procure the particular quantity

of high-priced ... power that FERC has ordered it to pay

for."). Thus, in Nantahala, the Court made clear that “a

particular quantity of power procured by a utility from.a

particular source could be deemed unreasonably excessive if

lower cost power is available elsewhere, even though the

higher cost power is obtained at a FERC-approved, and

therefore reasonable price." 476 U.S. at 972. Here, the Ohio

Power Company was not required by either the SEC orders at

issue or Section 13(b) to purchase high-cost coal -- or any coal

at all -- from Southern Ohio Coal Company (SOCCO). Thus,

neither Nantahala nor Mississippi Power can be fairly read to

preclude State public utility commissions or the FERC from

scrutinizing the reasonableness of those costs or similar

captive costs and disallowing their pass-through if warranted.

By contrast, the decision of the court below would

entirely oust both State commissions and the FERC from

i ace

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jurisdiction over all captive coal costs, as well as the costs of

other inter-affiliate transactions. What is worse, it commands

this result in response to SEC action that provides no serious

scrutiny of the reasonableness of the "costs" one affiliate

charges the other. Moreover, by vesting exclusive jurisdiction

over inter-affiliate transactions with the SEC, the decision

below threatens to eviscerate the wholesale and retail ratepayer

protection currently provided by FERC and State public utility

commissions. As Judge Mikva recognized in his concurrence

in Ohio Power Co. v. FERC, 880 F. 2d 1400, 1412 (D.C.

Cir. 1989), "the SEC’s approval of the various transactions

was grounded on the financial aspects of the corporate

arrangements, not on the reasonableness of the price paid for

coal. "4

Indeed, the SEC is incapable of rate regulation.°

* The decision below directly conflicts with this Court’s

holding that "Congress. . .delegated to. . .the Federal Energy

Regulatory Commission exclusive authority to regulate the

transmission and sale at wholesale of electric energy in

interstate commerce, without regard to source of production.”

New England Power Co. v. New Hampshire, 455 U.S.331,

340 (1982).

* The SEC itself has repeatedly emphasized that it has

"no power over the ... dealings [of electrical utilities regulated

under PUHCA] with their customers, retail or wholesale."

American Electric Power Co., 46 S.E.C. 1299, 1323 (1978).

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Unlike the FERC and State public utility commissions, the

SEC has none of the technical expertise, authority or

administrative apparatus necessary for effective rate

regulation. The SEC even lacks the fundamental ratemaking

power to suspend rates and order refunds. For this reason,

there is absolutely no assurance, much less likelihood, that an

SEC-approved cost would result in a rate that is just and

reasonable.° Accordingly, the suggestion of the court of

appeals that the ability of the FERC or, presumably, a State

public utility commission, to "comment" on or to request an

SEC investigation of proposed inter-affiliate transaction costs

bridges the regulatory gap created by the decision below is

completely fanciful. See Ohio Power Co. v. FERC, 954 F.2d

779, 786 (D.C. Cir. 1992). It also demeans the important

functions of rate regulators.

The inevitable result of such gross lack of regulatory

oversight is clear. Coal costs alone (not to mention the

® The inadequacy of the SEC’s “regulation” of captive

coal costs in this case is evident in the court of appeals’

inability to discern from the SEC orders at issue whether the

SEC had established cost as both a ceiling and a floor for

SOCCO’s coal prices. Ohio Power Co., 954 F. 2d at 785.

Indeed, in issuing those orders, the SEC conducted no

hearings and made no findings of fact whatsoever regarding

any aspect, let alone the reasonableness, of the prices at which

SOCCO would sell its coal to Ohio Power.

1]

myriad additional costs that could and, most likely would,

become the subject of inter-affiliate transactions under the

decision below) comprise approximately 50 percent of the total

cost of electrical generation. There can be no doubt that such

costs, left only to "review" by the SEC under Section 13(b)’s

"at cost" standard, would be inflated. The facts of this case

show as much. In 1980 and 1981, just before the FERC

adopted the “comparable market" cost test and initiated its

investigation of Ohio Power’s rates, the cost of coal purchased

by Ohio Power from SOCCO was 50 percent and 94 percent

over the comparable market price, respectively. Under the

decision below, FERC and State public utility commissions

will be powerless to prevent such abuses.

Similar opportunities for self-dealing, rate manipulation

and rate-payer gouging by utilities subject to PUHCA

abound.’ In fact, the result of the court of appeals’ decision

will be to encourage utilities to adopt a holding company form

” The potential for rate manipulation and abuse is

particularly acute where a holding company-owned utility

obtains SEC approval both to transfer assets previously

included in its rate base to a newly created wholly-owned

subsidiary and to purchase goods from that subsidiary “at

cost" without further regulatory scrutiny. In this manner, a

utility can simply spin-off inefficient or gold-plated operations

and recover the inflated costs through SEC-insulated rates.

Such disincentives to develop least-cost sources of fuel and

other goods and services are intolerable.

"

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to take advantage of such opportunities. Such a result is

plainly inconsistent with Congress’ express goal in enacting

PUHCA of eventually eliminating public utility holding

companies. 15 U.S.C. § 79a(c).

In sum, the court of appeals’ decision in its entirety is

fundamentally inconsistent with congressional intent and State

Statutory schemes. As Justice Stevens pointed out in Arcadia

I, Congress clearly could not have intended to create the huge

regulatory gap opened up by the court of appeals’ decision

which will enable utilities owned by holding companies to

escape effective State and Federal regulation because of their

corporate structure. Arcadia I at 423. To the contrary, in

enacting PUHCA and the FPA, Congress intended utilities

owned by holding companies to be regulated by both the SEC

and FERC (Id.), as well as by State public utility

commissions, to the greatest extent practical.* Sixty years

after the passage of these acts, State public utility commissions

should not be faced with the risk of preemption of a vital

portion of their longstanding mandate to ensure the justness

* See 15 U.S.C. § 79u ("Nothing in this chapter shall

affect...the jurisdiction of any other commission, board,

agency, or officer...of any State or political subdivision of any

State, over any person, security, or contract, insofar as such

jurisdiction does not conflict with any provision of this chapter

or any rule, regulation, or order thereunder.")

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and reasonableness of retail rates for electricity.

This Court in Arcadia | granted certiorari and closed

the regulatory gap created by the decision below. In

reinstating that gap, the court of appeals acted in direct

conflict with this Court’s decision and severely jeopardized

effective Federal and State regulation of electrical utility rates.

If anything, certiorari is more important now than it was three

years ago. The NARUC respectfully urges this Court to

review the decision below and remedy the broad jurisdictional

consequences of its ruling.

CONCLUSION

For the foregoing reasons, the petitions for certiorari

should be granted.

Respectfully submitted,

WILLIAM PAUL RODGERS, JR.*

General Counsel

CHARLES D. GRAY

Assistant General Counsel

JAMES BRADFORD RAMSAY

Deputy Assistant General Counsel

National Association of Regulatory

Utility Commissioners

1102 ICC Building

Post Office Box 684

Washington, D.C. 20044

(202) 898-2200

* Counsel of Record

September 11, 1992