Amicus Curiae Brief — micro_IA40386011_1140

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D i rr

. i. : ypreme Court,

Nos. 92-264 and 92-280 LED

IN THE SEP 11 1992

Supreme Court of the United Sta Bcc of THE CLERE

OCTOBER TERM, 1992

ARCADIA, OHIO, et al.,

Datatanmoma

Vv. Petitioners

OHIO POWER COMPANY, ef al.,

Respondents

FEDERAL ENERGY REGULATORY COMMISSION,

Yotits

y. Petitioner

OHIO POWER COMPANY, et al.,

Respondents

On Petitions for Writs of Certiovari to the

United States Court of Appeals

for the Disirici of Columbia Circuit

BRIEF OF THE

INDIANA MUNICIPAL POWER AGENCY

AS AMICUS CURIAE

IN SUPPORT OF BOTH PETITIONS

JAMES N. Horwoop

Counsel of Record

THOMAS C, TRAUGER

P. DANIEL BRUNER

SPIEGEL & MCDIARMID

1350 New York Avenue, N.W.

Suite 1100

Washington, D.C. 20005-4798

(202) 879-4000

JAMES R. MCCLARNON

HACKMAN MCCLARNON HULETT

& CRACRAFT

1900 One Indiana Square

Indianapolis, IN 46204

(317) 636-5401

Counsel for the Indiana

September 11, 1992 Municipal Power Agency

W1.S0N - Epgs PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

QUESTIONS PRESENTED

1. Whether the court of appeals erroneously inter-

preted Section 13(b) of the Public Utility Holding Com-

pany Act (PUHCA), 15 U.S.C. § 79m(b), to divest the

Federal Energy Regulatory Commission (FERC) of /ju-

risdiction under Sections 205 and 206 of the Federal

Power Act, 16 U.S.C. $$ 824d and 824e, to determine

whether it is just and reasonable for a utility that is a

subsidiary of a registered holding company to charge

wholesale electric customers the entire cost of fuel pur-

chased from an affiliate when lower-cost alternatives are

available.

2. Whether the court of appeals erred by failing to

defer to FERC’s consistent interpretation of its regu-

lation, 18 C.F.R. § 35.14(a) (7), and by construing that

regulation to require that all payments by a utility for

fuel purchased from an affiliate must be charged to rate-

payers, whenever the contract between the utility and

its affiliate is subject to the jurisdiction of the Securi-

ties and Exchange Commission under PUHCA Section

13(b).

(i)

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED i

TABLE OF. AUTHORITIES iv

INTEREST OF THE INDIANA MUNICIPAL

POWER AGENCY * J

REASONS FOR GRANTING THE PETITIONS 5

CONCLUSION 19

(iii)

TABLE OF AUTHORITIES

JUDICIAL DECISIONS Page

Areadia, Ohio v. Ohio Power Co., 111 S. Ct. 415

(1990) passim

Brimm v. Cache Valley Banking Co., 269 P.2d 859

(Utah 1954) z ain 16

California Oregon Power Ce. v. FPC, 150 F.2d 25

(9th Cir. 1945), cert. denied, 326 U.S. 781

(1946) 10, 11

FPC v. Hope Natural Gas Co., 320 U.S. 591

(1949) 15

rel. Moore, 487 U.S. 354 (1988 5, 14,15

Nantahala Power & Light Co. v. Thornburg, 476

U.S. 953 (1986) 5, 14,15

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

1989). rev'd and remanded sub nom. Arcadia,

Ohio v. Ohio P Co., 111 S. Ct. 415 (1990)

(O] a Powe , T) passim

AGENCY OPINIONS AND DECISIONS

Appalachian Electric Power Co., 27 S.E.C. 1029

(1948) 13

Ce ntral and Sout] We: f F ‘f¢ ls, Ih Ces HCAR No

23876, 34 S.E.C. Docket 500 (Oct. 23, 1985) 12-13

Fuel Adjustment Clauses in Wholesale Rate Sched-

ule, FPC Order No. 517, 52 F.P.C. 1304 (1974) 17

Georgia Power Co., HCAR No. 23448, 31 S.E.C

Docket 621 (Oct. 10, 1984) 13, 14

Georgia Power Co., HCAR No. 23330, 30 S.E.!

Docket 934 (June 15, 1984) 14

Georgia Power Co., HCAR No. 18750, 5 S.E.C

Docket 24 (Dec. 31, 1974) 14

Indiana and Michigan Electric Co., et al., HCAR

No. 24039, 35 S.E.C. Docket 207 (Mareh 4,

1 2 EERO tai TEP eoUN ee aN 3

Indiana and Michigan Municipal Distributors

Ass’n v. Indiana Michiqan Power Co., 51

F.E.R.C. © 63,019 (1990) (Initial Decision), er-

_—

ceptions pe nding o, ¢

McDowell County Consumers Council, Ine. v.

American Electric Power Co., 54 F.P.C. 361

Sc: |} GRRE Ce Leaerac seus were 11,17

TABLE OF AUTHORITIES—Continued

Page

New England Electric System, HCAR No. 22309,

24 S.E.C. Docket 298 (Dec. 9, 1981) ........... eae 13

The North American Co., 29 S.E.C. 521 (1949)... 13

The Southern Company, HCAR No. 21665, 20

S.E.C. Docket 799 (July 24, 1980) ..............00000. 14

STATUTES

Administrative Procedure Act, 5 U.S.C. § 551, et

seq.

Section 10(e), 5 U.S.C. § 706(2) (A) ...... .. “8,36

Federal Power Act, 16 U.S.C. § 791a et seq. passim

Section 205, 16 U.S.C. § 824d _............. passim

Section 206, 16 U.S.C. § 824e...__.. Le

Section 313(b), 16 U.S.C. § 8251 (b) ree, ey

Section 318, 16 U.S.C. § 825q 00. passim

Federal Water Power Act of 1920, ch. 285, 41

Stat. 1063, codified as amended as Part I of the

Federal Power Act, 16 U.S.C. § 791a et seq......... 11

Ss SUG GO oo) 3 a 1

Public Utility Act of 1935, ch. 687, 49 Stat. 803 9,14

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

§ 79a et seq. . passim

Section.13(b), 15 U.S.C. 79m(b) __...... _...passim

FEDERAL ENERGY REGULATORY COMMISSION

REGULATIONS

18 C.F.R. § 35.14 (a) (7) ; 74 ......3, 16, 17

LEGISLATIVE MATERIALS

The Utilities Act of 1975: Hearings on S. 594 Be-

fore the Subcomm. on Intergovernmental Rela-

tions and the Subcomm. on Reports, Accounting

and Management of the Senate Comm. on Gov-

ernment Operations, 94th Cong., Ist Sess. 500-20

(1975) (letter of FPC Chairman John N.

Nassikas to Senator Lee Metcalf dated May 15,

1975) ... Nsiea 7 cite ce tak ats ae

IN THE

Siywrenw Court of the United Siates

OCTOBER TERM, 1992

No. 92-264

ARCADIA, OHIO, et al.,

Petitioners

OHIO POWER COMPANY, et al..,

Responden ts

No. 92-280

FEDERAL ENERGY REGULATORY COMMISSION,

Petitioner

OHIO POWER COMPANY, et al.,

Respond nts

On Petitions for Writs of Certiorari to the

United States Court of Appeals

for the District of Columbia Circuit

BRIEF OF THE

INDIANA MUNICIPAL POWER AGENCY

AS AMICUS CURIAE

IN SUPPORT OF BOTH PETITIONS

INTEREST OF THE INDIANA MUNICIPAL

POWER AGENCY

Amicus Indiana Municipal Power Agency (IMPA) is

a political subdivision of the State of Indiana, pursuant

to Ind. Code § &-1-2.2, that serves as an electric power

supply and planning agency for municipalities which own

and operate retail electric distribution systems.' IMPA

currently consists of 31 Indiana cities and towns, serving

approximately 250,000 people IMPA purchases whole-

sale eleetrie power from Indiana Michigan Power Com-

pany (I&M?!, which is an operating company subsidiary

of the American Electric Power Company, Inc. (AEP).

AEkP is a registered public utility holding company sub-

ject to the jurisdiction of the Securities and Exchange

Commission (SHC) under the Public Utility Holding

Company Act (PUHCA). I&M’s wholesale rates to

IMPA are subject to the jurisdiction of the Federal In-

ergy Regulatory Commission (FiRC) under the led-

eral Power Act (FPA). Sections 205 and 206 of the

FPA, 16 U.S.C, $8 824d and 824e, authorize and direct

FieRC to ensure that wholesale electric rates are just and

reasonable.

The opinion below, Ohio Power Co, v. FERC, 954 F.2d

779 (D.C. Cir. 1992) (hereinafter Ohio Power 11), elimi-

nated the authority of FERC to disallow in wholesale

rates unjust and unreasonable costs of coal purchased by

an operating company subsidiary of AEP, Ohio Power

Company (Ohio Power), from a fuel subsidiary. The

D.C. Circuit held that Section 18(b) of PUHCA, 15 U.S.C.

$ 79mib), deprives FERC of jurisdiction to disallow in

Ohio Power's wholesale electric rates the portion of pay-

ments to its fuel subsidiary which FERC found to be in

excess of the price of comparable coal in the market. The

1 Consent of the parties is not required for the filing of this brief,

because IMPA is a political subdivision of the State of Indiana, and

is represented here by its General Counsel. as well as by other

counsel (Rule 37.5).

The members of [MPA are the cities and tow of Advance

Anderson, Bainbridge, Barger ville, Centerville, Columbia Cit

Covington, Crawfordsville, Darlington, Edinburgh. Flora, Frankfort,

Frankton, Greendale, Greenfield, Jamestown, Ladoga, Lawrencebury

Lebanon, Linton, Middletown, Paoli, Pendleton, Peru, Renssalaer,

tichmond, Rising Sun, Scottsburg, Tipton, Washington and Wayne

town, Indiana.

lower court also held that a FERC fuel adjustment clause

regulation, 18 CLELR. § 35.14(a) (7), requires FERC to

treat all of Ohio Power’s coal payments to its subsidiary

as conclusively just and reasonable, and, therefore, re-

coverable from ratepayers, because those payments «ie

ubject to the SEC’s jurisdiction under Section 13(b) oF

UtiCA. The case was on remand from this Court.

Arcadia, Ohio v. Ohio Power Co., 111 S. Ct. 415 (1990).

tn civeadia, the Court reversed a previous opinion of the

D.C. Cireuit, Ohno Power Co. v. FERC, 880 F.2d 1400

(D.C, Cir. 1989) (hereinafter Ohio Power 1). In its

earlier decision. the lower court had held that Section

S18 of the IfPA, 16 U.S.C. § 825q,-deprived FERC of

jurisdiciion to Issue its order. IMPA_ participated as

amicus curtae in this Court, supporting reversal of Ohio

Power 1,

Inter-affiliate transactions can he a sizable component

of the costs of operating subsidiaries of public utility hold-

ing companies. For example, AEP, through its operating

companies, has invested not only in affiliate coal mining

operations, but also in related fuel supply equipment and

facilities, including a fleet of river towboats and approxi-

mately 500 coal barges; more than 3,000 rail-hopper cars

for transporting coal; and a rail-to-barge coal transfer

terminal on the Ohio River with the capacity to transfer

approximately 15,000,000 tons of coal annually. As a

purchaser of electricity from an operating company sub-

sidiary of a registered public utility holding company,

[MPA has a direct interest in preventing the imposition

of unwarranted restrictions upon FERC’s ability to regu-

late for the protection of consumers the wholesale electric

rates of such operating company subsidiaries.

‘Indiana and Michigan Electric Co., et al. HCAR No. 24039, 35

S.BE.C. Docket 207, 208 (March 4, 1986)

'Jndiana and Michiga Municipal Distributor | n Indian

Michigan Power Co., 51 F.E.R.C. © 63.919, at 65,080 (1990) (Initial

Decision), exceptions pending on other grounds

IMPA currently is invelved in litigation before FERC

regarding, infer alia, the reasonableness of I&@M’s inclusion

in-its wholesale electric rates of amounts associated with

purchases of coal and coal transportation services from

affiliates and from a non-affiliated company. In Phase IT

of tha. Utigation, a FERC Administrative Law Judge

(ALJ) has ruled that a portion of payments made by

I&M under contracts to purchase coal should be disallowed

us unrensonable. To accomplish this disallowance, the

ALJ ordered 1&M to redcge its rates to its wholesale elec-

tric customers by $25 million. Indiana and Michiqan Mu-

micipal Distributors Ass'n v. Indiana Michigan Power Co.,

51 FLELRC. at 65,090. In addition, the ALJ found that

I@M’s payments to an affiliate for the capital costs of the

AEP rai!-to-barge coal transfer facility allocated an ex-

cessive share of the costs of that facility to I&M’s rate-

payers, He ordered I&M to charge its wholesale customers

only for that portion of the facility that it actually uses.

Id, at 65,098. Exceptions to the ALJ’s decision are pend-

ing before FERC. Prior to this Court’s decision in. Arca-

dia, I&M argued that Ohio Power I immunized I&M’s

costs from the ALJ’s scrutiny and order. Subsequent to

the issuance of Ohio Power IT, the Chairman of FERC

stated in a letter to Congressman Sharp of Indiana:

If the D.C. Circuit’s latest opinion is left ‘unchanged,

it is conceivable that the Commission may be without

jurisdiction, to resolve the issues in Phase II.

App., ‘fra, 3a" Although IMPA does not necessarily

agree that Ohio Power IT deprives FERC of jurisdiction

to affirm the ALJ’s decision against I&M or to provide-

additional relief, IMPA has a direct interest in seeking

review by this Court of the lower court’s opinion.

* The Appendix to this brief reproduces the April 9, 1992, letter

from FERC Chairman Mertin L. Allday, to the Honorable Pkilip

R. Sharp of the House of Representatives. A copy of the letter is in

the public file in FERC Docket Nos. EL&8-1-000, ER&8-21-000 and

ER&8-32-000 (Phase II) in FERC’s Office of Public Information.

REASONS FOR GRANTING THE PETITIONS

i. The lower court’s ruling that Section 13(b) of

PUHCA limits FERC’s jurisdiction to disallow in whole-

sale electric rates the costs of unjust and unreasonable

inter-affiliate transactions violates this Court’s mandate

in Arcadia, The lower court acted beyond the scope of

the remand, and its ruling is inconsistent with Arcadia’s

holdings and reasoning. As in Ohio Power I, the-lower

court has upset half a century of decisionmaking by FERC

and its predecessor, the Federal Power Commission

(FPC), and by the SEC. Moreover, the lower court er-

roneously applied this Court’s precedents on Federal pre-

emption in electric ratemaking."

a. In the D.C. Circuit’s first opinion, a majority of a

three-judge panel held that FERC was divested of juris-

diction to regulate Ohio Power’s wholesale rates, insofar

as they included the cost of coal purchased from its

affiliate, Southern Ohio Coal Company (SOCCO), by See-

tion 318 of the FPA. The panel majority held that Section

318 ousted FERC of jurisdiction under the FPA over any

“subject matter” which was subject to SEC regulation

under PUHCA. Ohio Power 1, 880 F.2d at 1405-06, 1408.

The panel majority also held that when FERC disallowed

a portion of thé price paid by Ohio Power to SOCCO, it.

was regulating the’same subject matter as Section 13(b)

of PUHCA: “!t|he price term of sales contracts between

associated companies.” Jd. at 1406. Relying on a broad

reading of Section 13(b) as delegating to the SEC the

task of “regulating the terms of affiliate contracts in the

interest of consumers, as well as investors and the publie”

(id.), the court concluded, analogizing to this Court’s hold-

ing that state retail ratemaking agencies may not “trap”

costs of wholesale transaetions subject to FERC’s juris-

—— ,

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

(1986) ; Mississippi Power & Light Co, v. Mississippi ex rel. Moore,

487 U.S. 354 (1988).

6 f

diction, that an absolute bar on FERC’s jurisdiction was

intended by the statute (id. at 1406, 1408-10).

In Arcadia, this Court reversed the lower court’s read-

ing of Section 318 as “a general conflicts provision, polic-

ing the entire regulatory border between the two agen-

cies.” Jil S. Ct. at 421 (footnote omitted). The Court

held that the phrase “or any other subject matter’ in Sec-

tion.818 belongs to the fourth and final category of

subjects as to which SEC jurisdiction under PUHCA pre-

vails over conflicting FERC jurisdiction under the FPA:

“the acquisition or disposition of any security, capital

assets, facilities, or any other subject matter.” Jd. at |

419. The Court observed that “|PUHCA and the FPA]

subject! ] some companies that transmit and distribute

electric power to overlapping regulatory jurisdiction of

both the SEC and of FERC.” Jd. at 417. Section 318

contains a “careful enumeration of subjects” (id. at 419),

with the intent of resolving jurisdictional conflicts “within

four areas of plainly parallel authority granted both to

the SEC, under PUHCA, and to the FPC (FERC), under

the FPA” (id.). These “areas of plainly parallel author-

ity” do not include Section 13(b) of PUHCA or Sections

205 and 206 of the FPA. Id. at 419-20. Moreover, the

Court specifically held that when FERC disallowed in

Ohio Power’s rates a portion of the price it paid to

SOCCO for coal, it was noi regulating the same “subject

matter” as Ohio Power’s acquisition of SOCCO or of coal

(id. at 422 & n.3), even if Section 318 were construed

_—_— as applying to requirements “imposed ‘with respect to the

disposition’ of electric power” (1d. at 422).

The Court then remanded for the lower court to consider

the argument that the FERC-prescribed rate is not

“just and reasonable” because it “traps” costs which

the government itself has approved—disregarding a

governmental assurance, possibly implicit in the

SEC approvals, that Ohio Power will be permitted to

recoup the cost of acquiring and operating SOCCO.

Id. (citation omitted).

On remand, the same panel of the lower court adhered

to its view that in Section 13(b) of PUHCA, “Congress

has granted the SEC alone the authority to establish prices

charged by |registered holding company] associates for

goods.” Ohio Power II, 954 F.2d at 786 (Arcadia Pet.

App., 14a).? The court reiterated its earlier conclusion

that FERC ratemaking is regulation of the same subject

matter that is delegated to the SEC by Section 13(b):

“the economi¢ relationship between Ohio Power and

SOCCO,” id. at 784 (Arcadia Pet. App., lla), and that

the only way to prevent the “trapping” of costs is to

consirue Section 13(b) as ousting FERC of ratemaking

jurisdiction under FPA Sections 205 and 206:

|Wle hold that Congress in § 13(b) of the PUHCA

authorized the SIC to set the price of SOCCO coal

“at cost,” and in so doing constrained FERC from

altering that price under its “just and reasonable”

rate-setting authority.

Id. at 785 (Arcadia Pet. App., 12a).

The lower court simply failed to address the question

posed to it by this Court: whether “the FERC-prescribed

rate is not ‘just and reasonable’ because it ‘traps’ costs

which the government itself has approved.” Arcadia,

111 8. Ct. at 422 (emphasis supplied). On remand, the

lower court should have considered whether FERC gave

appropriate weight to Ohio Power’s legitimate expecta-

tions in light of the actual scope of the SEC’s review of

its activities. Of course, FERC’s ratemaking determina-

tions under FPA Sections 205 and 206 must be supported

by substantial evidence of record* and must not be arbi-

?In Ohio Power I, Judge Mikva disagreed with the majority’s

jurisdictional ruling, but concurred in the judgment because he

concluded that FERC had violated one of its fuel adjustment clause

regulations. 880 F.2d at 1410-14. In Ohio Power 11, however, the

panel’s opinion was unanimous.

* Section 313(b) of the FPA, 16 U.S.C. § 8251(b).

trary or capricious or an abuse of discretion.® Instead of

reviewing FERC’s setting of just and reasonable rates

under these well-established principles of administrative

law, the lower court construed another statute to “con-

strain|] FERC from altering [the] price [paid by Ohio

Power to SOCCO] under its ‘just and reasonable’ rate-

setting authority.” Ohio Power II, 954 F.2d at 785 (Ar-

cadia Pet. App., 12a).

Having concluded that FPA Section 318 did not limit

FERC’s jurisdiction to determine the extent to which it

would be just and reasonable to include in wholesale

electric rates Ohio Power’s payments to SOCCO, this

Court did not remand the case to the D.C. Circuit to

consider whether FERC should be ousted of ratemaking

jurisdiction by means of a different statutory provision.

The lower court declared that its reading of PUHCA Sec-

tion 13(b) as limiting the reach of FPA Sections 205 and

206, like its reading of FERC’s fuel adjustment clause

regulation,’® “provides Ohio Power with . . . succor from

the ‘overlapping regulatory jurisdiction of both the SEC

and of FERC’ found by the Arcadia Court.” 954 F.2d at

784 (Arcadia Pet. App., 10a) (quoting Arcadia, 111 S.

Ct. at 415). This Court, however, did not hold that the

“overlapping regulatory jurisdiction” created by Congress

was a problem, to be resolved by ousting FERC of rate-

making jurisdiction over the inclusion of costs of inter-

affiliate transactions in electric rates. To the contrary,

Arcadia held that ratemaking regulation of Ohio Power

is not regulation of the same subject matter as Ohio

Power’s acquisition of SOCCO or its purchase of coal from

SOCCO. 111 8S. Ct. at 422 & n3. See also id. at 423

(Stevens, J., concurring) (“The [SEC’s and FERC’s]

requirements limit Ohio Power’s financial relationships

® Section 10(e) of the Administrative Procedure Act, 5 U.S.C.

§ 706(2) (A).

10 See pages 16-18, infra.

with different parties—its supplier and its customers.

The two requirements also concern different aspects of

fuel costs—the amount Ohio Power must pay for its fuel

and how much of those fuel costs it can recover directly

from its customers.’’).

b. The lower court’s interpretation of PUHCA Section

13(b) undermines this Court’s interpretation of FPA Sec-

tion 318, which is the one provision in the Public Utility

Act of 1935 that expressly addresses “|c]lonflict{s] of

jjurisdiction” (16 U.S.C. § 825q) between the SEC and

FERC. Arcadia established that Section 318 is not “a

general conflicts provision, policing the entire regulatory

border between the two agencies,” 111 S. Ct. at 421 (foot-

note omitted!, and that it does not limit F ERC ratemaking

jurisdiction in the event of alleged conflicts with SEC

jurisdiction under PUHCA Section 13(b). Although the

lower court claimed it was relying on “the plain language”

of Section 13(b)," that provision, unlike FPA Section 318,

makes no mention of FERC jurisdiction. Moreover, the

language of PUHCA Section 13(b) is very different from

the bah of FPA Sections 205 and 206. The latter pro-

visions articulate a comprehensive ratemaking scheme;

Section 13(b) does not. Compare 16 U.S.C. $$ 824d and

S24e wi % - USC. s 79m(b). The lower court’s statutory

nation that t “the economic relationship between Onio Power

and SOCCO” should be regulated by one rather than two

federal agencies. 954 F.2d at 784 (Arcadia Pet. App.,

bla). 7 his was the same policy on which the court previ-

ously relied for its expansive application of Section 318

to the FERC order at issue. Ohio Power I, 880 F.2d at

1406, 1408-10.

The lower court’s sweeping approach to statutory in-

terpretation, unless reversed, would render this Court’s

interpretation of Section 318 a nullity. In Arcadia, the

11 Ohio Power II, 954 F.2d at 784 (Arcadia Pet. App., lla).

Court rejected the. ruling in Ohio Power J that the words

”

‘s °

or any other subject matter” in Section 318 constituted

a catch-all category, because this: would “render! | the

section’s careful enumeration of subjects superfluous.”

lil S. Ct. at 419. Yet, the lower court has now relied on

its own policy judgment to supplement Section 318 with

an additional limit on FERC’s jurisdiction. A statutory

scheme of overlapping SEC and FERC jurisdiction. in

Which the SEC’s jurisdiction is stated to be paramount as

to several “carefull{ly| enumeratied] . . . subjects,” id.,

does not permit lower courts to imply, on the basis of their

policy preferences, additional limits on the jurisdiction of

one agency.

ce. In Arcadia, the Court adopted a reading of Section

318 which was “confirmed by long-time understanding

and practice” (111 S. Ct. at 420), including 50 years of

KPC and FERC decisions under that provision (id. at

120-21). Ohio Power II’s holding that PUHCA Section

i5sibd) divests FERC of ratemaking authority under FPA

Sections 205 and 206 is as inconsistent with the half

century of agency administration of those provisions as

was Ohio Power I’s interpretation of Section 318. IMPA’s

counsel are aware of no FERC, FPC or SEC decisions

which have interpreted Section 13(b) or Sections 205 and

206 as they have now been interpreted on remand. All of

the cases are to the contrary.

Prior to the development of the market-price test that

was applied to Ohio Power, FERC’s predecessor, the FPC,

required public utilities to eliminate from their books and

their rates excessive payments made to supplier affiliates.

The FPC’s “no profits to affiliates” rule was applied to

operating utilities within holding company systems, even

though sales to such utilities by affiliated service com-

panies and fuel suppliers were subject to regulation by the

SEC under PUHCA. E.g., California Oregon Power Co, v.

FPC, 150 F.2d 25, 27-28 (9th Cir. 1945), cert. denied, 326

U.S. 781 (1946)." In McDowell County Consumers Coun-

cil, Ince. v. American Electric Power Co., 54 F.P.C. 36},

304 (1975), the FPC instituted an investigation into

“[t}he reasonableness and prudence of AEP’s and its

affiliate’s coal purchase policies and practices as well as all

factors influencing or affecting the delivered price of coal”

whether purchased from affiliates or non-affiliates. The

PC stated (id. at 363):

APCO [Appalachian Power Company, an AEP

operating company subsidiary] contends that the

prices charged for coal by affiliated companies is

[sic] subject to the regulation of the SEC. The in-

vestigation herein instituted is for the purpose of

fulfilling this Commission’s statutory obligation as

expressed |tnter alia| in Sections . . . 205 [and]

206... of the Federal Power Act which are in no

Way repugnant to the exercise of any authority which

the SEC may choose to assert under its statute.

In a 1975 letter, Chairman Nassikas of the FPC re-

sponded to inquiries by the Chairmen of two Subcomittees

of the Senate Committee on Government Operations, re-

garding the respective jurisdictions of the FPC and the

SEC “where owned or controlled fuel sources exist within

a registered public utility holding company system.” The

Utilities Act of 1975: Hea rings on S. 594 Before the Sub-

comm. on Intergevernmental Relations and the Subcomm.

On Re ports, Accounting and Management of the Senate

Conm. on Government Operations, 94th Cong., Ist Sess.

900, 515 (1975) (letter of FPC Chairman John N.

Nassikas to Senator Lee Metcalf dated May 15, 1975).

Chairman Nassikas specifically noted, as an example, the

captive coal mining operations of Ohio Power and other

| ‘2 The FPC originally developed the “no profits to affiliates” rule

in the early 1930's, in regulating hydroelectric licenses under the

Federal Water Power Act of 1920 (now Part I of the FPA). After

the enactment of the Public Utility Act of 1935, the FPC applied

this rule to the regulation of interstate electric utilities. California

Oregon Power Co. v. FPC, 150 F.2d at 27.

ALP operating company subsidiaries. Jd. at 516-17. He

explained the respective jurisdictions of the FP@ and SEC

follows:

Concerning fuel prices from owned or controlled coal

producing subsidiaries or affiliates, the SEC exercises

fhreshold Jurisdiction of a transactional nature.

That is the SiC, pursuant to Section 13(b) of the

PUHC Act, 15 U.S.C. 79m(b), is authorized to pre

scribe rules and regulations which permit the creation

of and contracting by fuel producing subsidiaries

Within the holding company system.

* * * +

The SliC does not regard its authority as extend

ing to regulation of the rates charged by a_ utility

company for the electricity it sells at retail or whole-

sale, and accordingly does not prescribe what effect

shall be gui Hi, through a fuel adjustment clause or

otherwise, to the elements of cost in the inte rcom pany

transactions determined under the PUHC Act. Fuel

costs for ratemaking purposes are governed by the

relevant state and federal rate regulatory agencies,

including this Commission.

| must emphasize that this Commission and SEC

have long endeavored to resolve conflict of jurisdic-

tion issues on an informal basis. This inter-agency

COOP ration is indicative of the mutual resp el for

hie re hatrve CM rtisc ws eh our tivo sist r ae pie i S

hold tor one another.

Id. at 517-19 (emphasis supplied; footnote omitted).

Chairman Nassikas’ statements about the SEC’s views

of its jurisdiction are consistent with the SEC’s orders

and decisions. That agency has concluded that its juris-

diction to approve requests to establish or reorganize fue!

supplier affiliates does not affect the jurisdiction of FERC

or the FPC ‘or the jurisdiction of the appropriate state

retail ratemaking authority) to protect ratepayers from

excessive inter-affiliate fuel prices. E£.9., Central and

South West: Fuels, Inc., HCAR No. 23876, 34 S.E.C.

Docket 500, 503 (Oct. 23, 1985). The SEC has observed

that interested parties could seek relief under Section

I3(b) in the future from above-cost prices paid to af-

filates for coal. or petition the appropriate ratemaking

authorities to serutinize the inter-affiliate transactions in

setting rates, or both. T'he North American Co., 29 S.E.C.

921, 5387 n.26 (1949) + Appalachian Electric Power Co.,

ec? S.E.C. 1029, 1034-35 (1948). See also Georgia Power

Co., HCAR 23448 31 5.E.C. Docket 62 , 623, 624 (Oct.

10, 1984) (SKC Jurisdiction ‘under Seetion 13(b) over

inter-affiliate supply of construction services did not limit

review of retail rates by the Georgia Public Service Com-

mission),

The lower court has Suggested that FERC jurisdiction

to disallow a portion of the payments to SOCCO in Ohio

Power’s rates would exist, if at all only if the .SEC

had granted an exemption under Section lS(b). 954 F.2d

at 785 n.5 (Arcadia Pet. App., 12a) ; see also Ohio Power

/, 880 F.2d aft 1407, 1408. However, in Now England

Electric System, HCAR £2309, 24 S.E.C. Docket 29%

(Dee. 9, 1981), the SEC concluded that it could exempt. a

proposed joint venture to construct and operate cog]

transportation facilities from Section 13(b) without

harming consumers because FERC’s ratemaking authority

Was inde pe ndent of Section I3(b). 24 SEC. Docket at

307-08. The SEC stated that FERC had the authority to

“include the entire cost of transportation ,:., if FERC

Should determine that it is just and reasonable. or some

other amount.” Jd.

Even as to subject matters which are within the scope

of FPA Section 318 security issuances and other securi-

ties transactions, and acquisitions and dispositions of fa-

cilities and other assets by and among registered holding

1’ The lower court misread this case when it concluded, in Ohio

Power I, that in Neu England Electric Sustem the SEC may have

been stating that FEBC would have jurisdiction heca the SEC

Was granting a Sectfon 123(b exemption. 880 F.2d at 1407

Pa ee

wos art

company affiliates ''—-the SEC has recognized that PUHCA

was not intended to supplant FERC’s responsibility to

ensure that rates reflect only the costs of reasonable util-

ity operations. For instance, the SEC frequently has de-

clared that the reasonableness of a construction program

or of a particular allocation of construction costs among

operating utilities is a matter within the jurisdiction and

expertise of the FPC/FERC (or the appropriate state

commission, with regard to a utility’s retail rates). Geor-

gia Power Co., 31 S.E.C. Docket at 624; Georgia Power

Co., HCAR No. 23330, 30 S.E.C. Docket 934, 935-36

(June 15, 1984); The Southern Company, HCAR No.

21665, 20 S.E.C. Docket 799, 801-02 (July 24, 1980) ;

Georgia Power Co., HCAR No. 18750, 5 S.E.C. Docket

24, 25 (Dec. 31, 1974). See Arcadia, 111 S.Ct. at 423

(Stevens, J., concurring) (discussing the SEC’s and

FERC’s respective fields of expertise).

d. Even apart from its inconsistency with Arcadia and

with SEC and. FERC/FPC administration of PUHCA

and the FPA, the lower court’s opinion should be re-

viewed because itshas misapplied the “field preemption”

rule promulgated by this Court in Nantahala Power &

Light v. Thornburg and Mississippi Power & Light v.

Mississippi, supra note 6. Those cases teach that a state

is preempted from disallowing, in retail rates, the price

of wholesale electric power, and power costs allocated

among affiliated companies by means of wholesale power

agreements, because those costs are regulated by FERC,

a Federal ratemaking agency, under the FPA. The

SEC’s role under PUHCA is not analogous to FERC’s

role under the FPA. In the Publie Utility Act of 1935,

Congress delegated to FERC (then the FPC) jurisdic-

tion over wholesale electric rates and services. Although

jurisdiction over retail electric rates and services was left

to the states, they were not authorized to disallow costs

already subject to FERC’s ratemaking jurisdiction at a

4 Arcadia, 111 S. Ct. at 419-20.

prior stage of the economic process of producing, trans-

mitting and distributing electricity. The SEC, by con-

trast, is not a ratemaking agency."® Ohio Power II has

turned Nantahala and Mississippi on their heads by

reducing FERC’s role from preeminent regulator of elec-

trie rates and services to a litigant in proceedings be-

fore the SEC. The lower court dismissed Justice Stevens’

concerns about a regulatory gap’ by declaring that

“FitRC may attempt to affect the price-approval process”

by submitting comments in SEC proceedings or by peti-

tioning the SEC to initiate an investigation. 954 F.2d

at 786 (Arcadia Pet. App., 14a). Such a drastic re-

structuring of the regulatory process hardly is required

to protect the legitimate expectation interests of Ohio

Power and of AEP investors. FERC’s statutory man-

date to ensure that utility rates are just and reasonable

obligates it to balance the interests of consumers and in-

vestors. F'PC v. Hope Natural Gas Co., 320 U.S. 591. 603

(1949). Ratemaking decisions of FERC can be reviewed

by the courts to ensure that they are supported by sub-

stantial evidence and are not arbitrary or capricious or

an abuse of discretion. 16 U.S.C.:§ 825/(b): 5 U.S.C.

S$ 706(2) (A).

' FERC’s exclusive jurisdiction over wholesale electric transac-

tions is established by the “filed rate doctrine,” which provides that

a FERC-filed tariff for wholesale electric rates binds the affected

utilities, and state and Federal governmental bodies (including

FERC itself), unless and until the tariff is modified by FERC

Nantahala Power & Light v. Thornburg, 476 U.S. at 962 67: Mis-

sissippi Power & Light v. Mississippi, 487 U.S. at 371-72. The filed

rate doctrine is inapplicable to Section 13(b) of PUHCA. That

provision, and the SEC’s rules, do not establish a system of filed

tariffs and rate review. Ohio Power I, 880 F.2d at 1408. By con-

trast, the FPA requires utilities to file tariffs specifving their whole-

sale electric rates and services, and all contracts affecting those

rates and services. 16 U.S.C. § 824d(c) and (d). The FPA also

provides for public notice, FERC review of the reasonableness of

tariffs and contracts filed, and refund protection from excessive

rates. 16 U.S.C. §$ 824d(e) and &24e.

' Arcadia, 1118S. Ct. at 423-24.

2. An independent ground for the lower court’s de-

cision to vacate the FERC order under review was its

interpretation of FERC’s fuel adjustment clause regula-

tion, 18 C.F.R. § 35.14(a) (7). IMPA concurs with the

petitioners that this ruling should not insulate the lower

court’s jurisdictional holding from review. IMPA also

agrees with the petitioners that the court’s interpretation

of Section 35.14{a) (7) is erroneous and presents inde-

pendent grounds for the issuance of a writ of certiorari.

Section 35.14(a) (7) provides, inter alia:

Where the utility purchases fuel from a company-

owned or controlled source, the price of which is

subject to the jurisdiction of a regulatory body, such

cost shall be deemed to be reasonable and includable

in the adjustment clause.

Yan

The lower court rejected FERC’s contention that that

word “deemed” was meant to be a rebuttable rather than

conclusive presumption, even though FERC and the FPC

have consistently adopted that interpretation in their ad-

ministration of the regulation. The court reasoned that

“deemed” was unambiguous because “courts construing

the word ‘deemed’ have generally found that it establishes

a conclusive presumption.” Ohio Power II, 954 F.2d at

783 (Arcadia Pet. App., 8a), quoting Ohio Power I, 880

F.2d at 1413 (Mikva, J., coneurring in the judgment)

(emphasis supplied). This reasoning is a non sequitur.

There is no black-letter rule of law that “deemed” always

creates a conclusive or irrebutable presumption.

The words “deem” and “deemed” when used in stat-

utes have been construed to establish a conclusive

presumption in some instances, but only a rebuttable

presumption in other cases, depending largely upon

the context in which they are used.

Brimm v. Cache Valley Banking Co., 269 P.2d 859, 863

(Utah 1954) (citation omitted). How courts generally

construe the word “deemed” does not justify forcing on

FERC an interpretation of one of its own regulations

which flies in the face of the agency’s consistent adminis-

tration of that regulation.

The agency interpretation rejected by the lower court

is no recent invention. Less than a year after the regula-

tion was promulgated by FPC Order No. 517.'7 the FPC

initiated an investigation of allegations that an operating

subsidiary of AEP was passing excessive inter-affiliate

fuel costs through its fuel adjustment clause. McDowell

County Consumers Council, Ine. v. American Electric

Power Co., supra. The FPC declarea -hat the investiga-

tion would include inter-affiliate purchases which its

recently-enacted regulation had “deemed” reasonable:

“The coal contracts subject to this investigation shall

include al! coal contracts whether or not required to be

submitted pursuant to Commission Order No. 517.” 54

F.P.C. at 365 n.4.°% The FPC also distinguished its obli-

gation under FPA Sections 205 and 206 from SEC

regulation under PUHCA. Id. at 363.

In a letter responding to inquiries from two Senate

Subcommittes, FPC Chairman Nassikas—who also was

Chairman when the fuel clause regulation was promul-

gated in 1974 '*—stated that Section 35.14(a) (7) creates

a “presumption of reasonableness as to [the] price [of

fuel]” when the price is subject to the jurisdiction

of another agency. The Utilities Act of 1975: Hear-

ings on S. 594 Before the Subcomm. on Intergovernmental

Relations and the Subcomm. on Reports, Accounting and

Management of the Senate Comm. on Government Opera-

17 Fuel Adjustment Clauses in Wholesale Rate Schedule, 52 F.P.C.

1304 (1974).

1818 C.F.R. § 35.14(a)(7), promulgated by FPC Order No. 517.

requires that affiliate fuel contracts be filed with the FPC (now

FERC) when they are not subject to other regulatory authority.

Fuel Adjustment Clauses in Wholesale Rate Schedule, 52 F.P.C.

at i304

ara ei i) RT is), amas eae oni si ws Agen, 4 eR

tions, at 514, In his concurrence to the judgment reversed

in -lrcad’a, Judge Mikva stated that Chairman Nassikas’

letter did not “specify| | whether the presumption is re-

buttable or conclusive.” S80 F.2d at 1414. However,

Chairman Nassikas referred, in the same letter, to the

allegations of excessive inter-affiliate coal purchases by the

AEP system which the FPC was investigating. Hearings

at 506. He also referred to the SEC’s jurisdiction under

PUHCA Section 13(b) as “threshold jurisdiction of a

transactional nature,” id, at 517, and added:

The SEC does not regard its authority as extending

to the regulation of the rates charged by a_ utility

company for the electricity it sells at retail or whole-

sale, and accordingly does not prescribe what effect

shall be given, through a fuel adjustment clause or

otherwise, to the elements of cost in the intercompany

transactions determined under the PUHC Act. Fuel

costs for ratemaking purposes are governed by the

relevant state and. federal rate regulatory agencies,

including this Commission. ;

Id. at 518. Thus, when it promulgated the regulation, the

FPC could not have thought that it was establishing a

conclusive presumption that- transactions were reasonable

if they were subject to SEC regulation under PUHCA.

Finally, IMPA submits that the Commission’s ability

to amend its regulation in the future, if this Court re-

verses the lower court’s jurisdictional holding, would

provide inadequate protection from excessive costs of

inter-affiliate transactions. Unless the lower court’s in-

terpretation of Section 35.14(a)(7) as currently written

is reversed, future amendment of the regulation would

not protect utility customers from excessive fuel costs

that had been charged to them in the meantime.

CONCLUSION

The petitions of Arcadia, Ohio, et al. and of the Federal

nergy Regulatory Commission for writs of eertiorari

should be granted.

Respectfully submitted,