OCTOBER TERM, 2002
Syllabus
ENTERGY LOUISIANA, INC.
v. LOUISIANA PUBLIC SERVICE
COMMISSION ET AL.
CERTIORARI TO THE SUPREME COURT OF LOUISIANA No. 02-299. Argued
April 28, 2003-Decided June 2, 2003
The Federal Energy Regulatory Commission (FERC), which regulates
the sale of electricity at wholesale in interstate commerce, must
ensure that wholesale rates are "just and reasonable," 16 U. S. C.
§ 824d(a). Under the filed rate doctrine, FERC-approved cost
allocations between affiliated energy companies may not be
subjected to reevaluation in state ratemaking proceedings.
Nantahala Power &
Light Co. v.
Thornburg,
476 U. S. 953;
Mississippi Power &
Light Co. v.
Mississippi
ex rel. Moore, 487 U. S. 354
(MP&L). Petitioner Entergy Louisiana, Inc. (ELI), one of
five public utilities owned by Entergy Corporation (Entergy),
shares capacity with its corporate siblings in other States, which
allows each company to access additional capacity when demand
exceeds the supply generated by that company alone. The resulting
costs are allocated among the companies; and that allocation is
critical to the setting of retail rates by state regulators, such
as respondent Louisiana Public Service Commission (LPSC). Entergy
allocates costs through a tariff approved by FERC called the system
agreement. Service Schedule MSS-1, which is included in the system
agreement, provides a formula under which those companies that use
more capacity than they contribute make payments to companies that
contribute more than their fair share of capacity. ELI has
typically made, rather than received, MSS-1 payments. In the
1980's, the operating committee initiated the Extended Reserve
Shutdown (ERS) program, which responded to systemwide overcapacity
by allowing some generating units not immediately necessary for
capacity needs to be effectively mothballed. Because ERS units
could be reactivated if needed, they were considered available for
purposes of calculating MSS-1 payments. On August 5, 1997, FERC
found that Entergy had violated the system agreement in classifying
ERS units as available, but determined that a refund was not due to
ELI customers as a result of MSS-1 overpayments by ELI to other
operating companies. FERC also approved an amendment to the system
agreement allowing an ERS unit to be treated as available under
MSS-1 if the operating committee determines it intends to return
the unit to service at a future date. In 1997, ELI made its annual
retail rate filing with the LPSC. One of the contested issues in
this proceeding was whether the cost of ERS units should be
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40 ENTERGY LA., INC.
v. LOUISIANA PUB. SERVo COMM'N
Syllabus
considered in setting ELI's retail rates. Confining its review
to MSS-1 payments made after August 5, 1997, the LPSC concluded
that it was not pre-empted from disallowing MSS-1 related costs as
imprudent subsequent to that date. Thus, ELI was not permitted to
charge retail rates that reflected the cost of its MSS-1 payments.
The State District Court denied ELI's petition for review, and the
State Supreme Court upheld the LPSC's decision.
Held: Nantahala and
MP&L rest on a foundation
that is broad enough to require pre-emption of the LPSC's order.
Pp.47-51.
(a) The filed rate doctrine requires "that interstate power
rates filed with FERC or fixed by FERC must be given binding effect
by state utility commissions determining intrastate rates,"
Nantahala, supra, at 962. In
Nantahala and
MP&L, this Court applied the doctrine to hold that
FERC-mandated cost allocations could not be second-guessed by state
regulators. The state order in
Nantahala, which involved two
corporate siblings, allocated more of Nantahala's purchases to
low-cost power than the proportion approved by FERC. By requiring
Nantahala to calculate its rates as if it needed to procure less
high-cost power than under FERC's order, the state order "trapped"
a portion of the costs incurred by N antahala in procuring its
power. This ran counter to the rationale for FERC approval of cost
allocations because, when costs under a FERC tariff are
categorically excluded from consideration in retail rates, the
regulated entity cannot fully recover its costs of purchasing at
the FERC-approved rate. In
MP&L, the Court concluded
that, contrary to the Mississippi Supreme Court's ruling, the
pre-emptive effect of FERC jurisdiction does not turn on whether a
particular matter was actually determined in FERC proceedings.
Pp.47-49.
(b) Applying
Nantahala and
MP&L here, the LPSC
order impermissibly "traps" costs that have been allocated in a
FERC tariff. That the operating committee has discretion to
classify ERS units, while
Nantahala and
MP&L
involved specific mandates, does not provide room for the LPSC's
imprudence finding. The Federal Power Act specifically allows for
the use of automatic adjustment clauses, and MSS-1 constitutes such
a clause. The Louisiana Supreme Court's other basis for upholding
the LPSC's order-that FERC had not specifically approved the MSS-1
cost allocation after August 5-revives precisely the same erroneous
reasoning advanced by the Mississippi Supreme Court in
MP&L. It matters not whether FERC has spoken to the
precise classification of ERS units, but only whether the FERC
tariff dictates how and by whom the classification should be made.
Because the amended system agreement clearly does so, the LPSC's
second-guessing of the
41
classification here is pre-empted. Finally, respondents advance
the contention that including ERS units in MSS-1 calculations
violated the amended agreement despite the LPSC's own prior holding
that it does not have jurisdiction to determine whether the
agreement was violated and the State Supreme Court's acceptance of
that concession. The question here is whether the LPSC order is
pre-empted under
Nantakala and
MP&L; that order
does not rest on a finding that the system agreement was violated.
Consequently, this Court has no occasion to address the question of
the exclusivity of FERC's jurisdiction to determine whether and
when a filed rate has been violated. Pp. 49-51.
815 So. 2d 27, reversed.
THOMAS, J., delivered the opinion for a unanimous Court.
David W Carpenter argued the cause for petitioner.
With him on the briefs were Virginia A. Seitz, J. Wayne
Anderson, and Kathryn Ann Washington.
Austin C. Schlick argued the cause for the United States as
amicus curiae urging reversal. With him on the brief were Solicitor
General Olson, Deputy Solicitor General Kneedler, Cynthia A.
Marlette, and Dennis Lane.
Michael R. Fontham argued the cause for respondents.
With him on the brief were Paul L. Zimmering, Noel J. Darce,
Dana M. Shelton, and Jason M. Bilbe. *
JUSTICE THOMAS delivered the opinion of the Court.
The Federal Energy Regulatory Commission (FERC) regulates the
sale of electricity at wholesale in interstate commerce. 16 U. S.
C. § 824(b). In this capacity, FERC must ensure that wholesale
rates are "just and reasonable," § 824d(a). 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)
(MP&L), the Court concluded that, under the filed rate
doctrine, FERCapproved cost allocations between affiliated energy
compa-
*Ckarles G.
Cole, Edward H. Comer, and
Barbara
A. Hindin filed a brief for Edison Electric Institute as
amicus curiae urging reversal.
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42 ENTERGY LA., INC.
v. LOUISIANA PUB. SERVo COMM'N
nies may not be subjected to reevaluation in state ratemaking
proceedings. We consider today whether a FERC tariff that delegates
discretion to the regulated entity to determine the precise cost
allocation similarly pre-empts an order that adjudges those costs
imprudent.
I
Petitioner Entergy Louisiana, Inc. (EL!), is one of five public
utilities owned by Entergy Corporation (Entergy), a multistate
holding company. ELI operates in the State of Louisiana and shares
capacity with its corporate siblings operating in Arkansas,
Mississippi, and Texas (collectively, the operating companies).
This sharing arrangement allows each operating company to access
additional capacity when demand exceeds the supply generated by
that company alone. But keeping excess capacity available for use
by all is a benefit shared by the operating companies, and the
costs associated with this benefit must be allocated among them.
State regulators establish the rates each operating company may
charge in its retail sales, allowing each company to recover its
costs and a reasonable rate of return. Thus, the cost allocation
between operating companies is critical to the setting of retail
rates.
Entergy allocates costs through the system agreement, a tariff
approved by FERC under § 205 of the Federal Power Act (FPA), 41
Stat. 1063, 16 U. S. C. § 824d. The system agreement is
administered by the Entergy operating committee, which includes one
representative from each operating company and one from Entergy
Services, a subsidiary of Entergy that provides administrative
services to the system. Service Schedule MSS-1, which is included
as § 10 of the system agreement, allows for cost equalization of
shared capacity through a formula that dictates that those
operating companies contributing less than their fair share, i.
e., using more capacity than they contribute, make payments
to the others
43
that contribute more than their fair share of capacity.l Those
making such payments are known as "short" companies, and those
accepting the payments are known as "long" companies. Each
operating company's capability is determined monthly, and payments
are made on a monthly basisa long company receives a payment equal
to its average cost of generating units multiplied by the number of
megawatts the company is long. Because the variables that determine
the MSS-1 cost allocation can change monthly, Service Schedule
MSS-1 is an automatic adjustment clause under § 205(f) of the FPA,
16 U. S. C. § 824d(f),2 which exempts it from the FP A's ordinary
requirements for tariff changes.
In order to determine whether an operating company is long or
short in a given month, one must know how much capacity that
operating company is making available to its siblings. The question
is not as easy as asking whether the generating facilities are on
or off, however, because in the mid-1980's the operating committee
initiated the Extended Reserve Shutdown (ERS) program. Responding
to systemwide overcapacity, ERS allowed some generating units to be
identified as not immediately necessary for capacity needs and
effectively mothballed. However, these units could be activated if
demand increased, meaning that the capacity they represented was
not forever placed out of reach of the operating companies. As a
result, ERS units were considered "available" for purposes of
calculating MSS-1 cost equalization payments. Counting ERS units as
available
1 Where, as here, public utilities share capacity, the
allocation of costs of maintaining capacity and generating power
constitutes "the sale of electric energy at wholesale in interstate
commerce." 16 U. S. C. §824(b)(1).
2 Section 824d(f)(4) provides the definition of "automatic
adjustment clause":
"a provision of a rate schedule which provides for increases or
decreases (or both), without prior hearing, in rates reflecting
increases or decreases (or both) in costs incurred by an electric
utility. Such term does not include any rate which takes effect
subject to refund and subject to a later determination of the
appropriate amount of such rate."
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44 ENTERGY LA., INC.
v. LOUISIANA PUB. SERVo COMM'N
has generally had the effect of making ELI, already a short
company, even more short, thus increasing its cost equalization
payments.
In December 1993, FERC initiated a proceeding under § 206 of the
FPA, 16 U. S. C. § 824e, to decide whether the system agreement
permitted ERS units to be treated as available. Respondent
Louisiana Public Service Commission (LPSC), which regulates ELI's
retail rates in Louisiana, participated in the FERC proceeding and
argued that customers of ELI were entitled to a refund as a result
of MSS-1 overpayments made by ELI after the alleged
misclassification of ERS units as available. FERC agreed that
Entergy had violated the system agreement in its classification of
ERS units as available, but determined that a refund was not
supported by the equities because the resultant cost allocations,
while violative of the tariff, were not unjust, unreasonable, or
unduly discriminatory.
Entergy Servs., Inc., 80 FERC ~
61,197, pp. 61,786-61,788 (1997) (Order No. 415). FERC also
approved, over the objection of the LPSC, an amendment to the
system agreement that allows an ERS unit to be treated as available
under MSS-1 if the operating committee determines it intends to
return the unit to service at a future date.3 The Court of Appeals
for the District of
3 Section 10.02 of the system agreement, as amended on August 5,
1997, pursuant to FERC Order No. 415 provides:
"A unit is considered available to the extent the capability can
be demonstrated and (1) is under the control of the System
Operator, or (2) is down for maintenance or nuclear refueling, or
(3) is in extended reserve shutdown (ERS) with the intent of
returning the unit to service at a future date in order to meet
Entergy System requirements. The Operating Committee's decision to
consider an ERS unit to be available to meet future System
requirements shall be evidenced in the minutes of the Operating
Committee and shall be based on consideration of current and future
resource needs, the projected length of time the unit would be in
ERS status, the projected cost of maintaining such unit, and the
projected cost of returning the unit to service." 80 FERC, at
61,788-61,789 (emphasis deleted).
45
Columbia Circuit denied the LPSC's petition for review of FERC
Order No. 415.
Louisiana Public Service Comm'n v. FERC,
174 F.3d
218 (1999). With respect to the amendment, the Court of Appeals
found that "FERC understandably concluded that [it] set out the
parameters of the operating committee's discretion, and that
discriminatory implementation of the amendment could be remedied in
a proceeding under FPA §206."
Id., at 231.
ELI made its annual retail rate filing with the LPSC in May
1997. One of the contested issues was "whether payments under the
System Agreement for the cost of generating units in Extended
Reserve Shutdown should be included or excluded from ELI's revenue
requirement." App. to Pet. for Cert. 25a. Given FERC's
determination that the inclusion of ERS units as available prior to
August 5, 1997 (the date FERC Order No. 415 issued), was just and
reasonable, the LPSC confined its review to MSS-1 payments made
after August 5, 1997. Its own staff argued before the LPSC that
after August 5, 1997, ELI and the operating committee violated
amended § 10.02(a) of the operating agreement by continuing
to count ERS units as available. The LPSC concluded, however, that
it was "pre-empted from determining whether the terms of a FERC
tariff have been met, for the issue of violation of or compliance
with a FERC tariff is peculiarly within FERC's purview."
Id., at 64a.
Nevertheless, the LPSC held that it was not pre-empted from
disallowing MSS-1-related costs as imprudent subsequent to August
5, 1997:
"[T]hough FERC has exclusive jurisdiction over the issue of
whether the System Agreement has been violated, there currently
exists no FERC order that has found that the Operating Committee's
decision is in compliance with the System Agreement. In the absence
of such FERC determination, this Commission can scrutinize the
prudence of the Operating Committee's decision
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46 ENTERGY LA., INC.
v. LOUISIANA PUB. SERVo COMM'N
without violating the [S]upremacy [C]lause insofar as that
decision affects retail rates." Id., at 65a.
The LPSC concluded that the operating committee's treatment of
ERS units after August 5, 1997, was imprudent and that ELI's MSS-1
payments would not be considered when setting ELI's retail rates in
Louisiana. In other words, though ELI made the MSS-1 payments to
its "long" corporate siblings, it would not be allowed to recoup
those costs in its retail rates.4
ELI petitioned for review of the LPSC's decision in State
District Court. That petition was denied, and ELI appealed to the
Supreme Court of Louisiana, which upheld the LPSC's decision.
2001-1725 (La. 4/3/02), 815 So. 2d 27. The Supreme Court of
Louisiana held that the LPSC's order was not barred by federal
pre-emption because the LPSC was not "attempting to regulate
interstate wholesale rates" or "challeng[ing] the validity of the
FERC's declination to order refunds of amounts paid in violation of
the System Agreement prior to the amendment."
Id., at 38.
Further, the court reasoned, "FERC never ruled on the issue of
whether ELI's decision to continue to include the ERS units [after
August 5, 1997, was] a prudent one" or made "it mandatory for the
[operating committee] to include the ERS units in its MSS-1
calculations."
Ibid.
We granted ELI's petition for writ of certiorari to address
whether the Court's decisions in
Nantahala and
MP&L lead to federal pre-emption of the LPSC's order.
537 U. S. 1152 (2003). We hold that
Nantahala and
MP&L "res[t] on a foundation that is broad enough,"
MP&L, 487 U. S., at 369, to require pre-emption of the
order in this case.
4The MSS-1 payments that were disallowed were, in fact, those
made in 1996, which were to be used in calculating 1997-1998 retail
rates by the LPSC. App. to Pet. for Cert. 76a.
47
II A
The filed rate doctrine requires "that interstate power rates
filed with FERC or fixed by FERC must be given binding effect by
state utility commissions determining intrastate rates."
Nantahala, 476 U. S., at 962. When the filed rate doctrine
applies to state regulators, it does so as a matter of federal
pre-emption through the Supremacy Clause.
Arkansas Louisiana Gas
Co. v.
Hall, 453 U. S. 571, 581-582
(1981).
In
Nantahala and
MP&L, the Court applied the
filed rate doctrine to hold that FERC-mandated cost allocations
could not be second-guessed by state regulators.
Nantahala
involved two corporate siblings, Nantahala Power & Light
Company and Tapoco, Inc., the former of which served retail
customers in North Carolina. Both Nantahala and Tapoco provided
power to the Tennessee Valley Authority (TV A), which in turn sold
power back to them pursuant to an agreement between all three
parties. But the power was not purchased at a uniform price.
Low-cost power was made available to both N antahala and Tapoco in
consideration for the right to pour all of their power into the TV
A grid. This low-cost power was apportioned 80% to Tapoco, which
served exclusively the corporate parent of Tapoco and Nantahala,
and 20% to N antahala. N antahala purchased the remainder of its
power requirements at higher prices. FERC approved this cost
allocation with a slight modification, so that N antahala received
22.5% of the low-cost entitlement power. However, the North
Carolina Supreme Court upheld the North Carolina Utilities
Commission's (NCUC) determination that Nantahala's share of the
low-cost power was properly 24.5%. This resulted in a lower cost
computation for Nantahala, and therefore lower rates for North
Carolina retail customers, than would have obtained if FERC's cost
allocation had been respected by NCUC.
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48 ENTERGY LA., INC.
v. LOUISIANA PUB. SERVo COMM'N
This Court held that the state cost allocation order was
pre-empted:
"Nantahala must under NCUC's order calculate its retail rates as
if it received more entitlement power than it does under FERC's
order, and as if it needed to procure less of the more expensive
purchased power than under FERC's order. A portion of the costs
incurred by N antahala in procuring its power is therefore
'trapped.'" 476 U. S., at 971.
Trapping of costs "runs directly counter," id., at 968, to the
rationale for FERC approval of cost allocations, the Court
concluded, because when costs under a FERC tariff are categorically
excluded from consideration in retail rates, the regulated entity
"cannot fully recover its costs of purchasing at the FERC-approved
rate ... ," id., at 970.
In
MP&L, the Court further defined the scope of filed
rate doctrine pre-emption in the cost allocation context.
Predecessors of the operating companies concerned here were jointly
involved in the construction of the Grand Gulf nuclear power plant
in Mississippi. The costs of the project turned out to be
significantly higher than had been originally planned, and as a
result the wholesale cost of power generated at Grand Gulf was much
higher than power available from other system generating units. But
the high fixed costs of building Grand Gulf had to be recouped, and
the operating companies agreed that each of them would purchase a
specific proportion of the high-cost power generated at Grand Gulf.
The original allocation was challenged before FERC, which
ultimately approved a modified tariff. That tariff required
Mississippi Power and Light (MP&L, now Entergy Mississippi) to
purchase 33% of the power produced at Grand Gulf.
Mississippi regulators allowed MP&L to pass along these
costs to consumers through retail rate increases. The Mississippi
Supreme Court, however, reasoned that "FERC's de-
49
termination that MP&L's assumption of a 33% share of the
costs associated with Grand Gulf would be fair to its sister
operating companies did not obligate the State to approve a
pass-through of those costs to state consumers without a prudence
review."
MP&L, 487 U. S., at 367. The Mississippi
Supreme Court distinguished
Nantahala by limiting the scope
of its holding to "matters
actually determined, whether
expressly or impliedly, by the FERC."
Mississippi ex rel.
Pittman v.
Mississippi Public Service Comm'n, 506 So. 2d
978, 986 (Miss. 1987) (citation omitted).
This Court disagreed, holding that the state court "erred in
adopting the view that the pre-emptive effect of FERC jurisdiction
turned on whether a particular matter was actually determined in
the FERC proceedings."
MP&L, 487 U. S., at 374. Although
FERC had not explicitly held that the construction of Grand Gulf
was prudent, the cost allocation filed with FERC pre-empted any
state prudence review, because "if the integrity of FERC regulation
is to be preserved, it obviously cannot be unreasonable for
MP&L to procure the particular quantity of high-priced Grand
Gulf power that FERC has ordered it to pay for."
Ibid.
B
Applying
Nantahala and
MP&L to the facts of
this case, we conclude that the LPSC's order impermissibly "traps"
costs that have been allocated in a FERC tariff. The amended system
agreement differs from the tariffs in
MP&L and
Nantahala because it leaves the classification of ERS units
to the discretion of the operating committee, whereas in
Nantahala and
MP&L the cost allocations were
specific mandates. The Louisiana Supreme Court concluded that this
delegated discretion provided room for the LPSC's finding of
imprudence where a mandated cost allocation would not. However,
Congress has specifically allowed for the use of automatic
adjustment clauses in the FP A, and it is uncontested that the
MSS-1 schedule constitutes such an
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50 ENTERGY LA., INC.
v. LOUISIANA PUB. SERVo COMM'N
automatic adjustment clause. We see no reason to create an
exception to the filed rate doctrine for tariffs of this type that
would substantially limit FERC's flexibility in approving cost
allocation arrangements.
The Louisiana Supreme Court's other basis for upholding the
LPSC's order was that FERC had not specifically approved the MSS-1
cost allocation after August 5, 1997, when it issued Order No. 415.
See 815 So. 2d, at 38 ("The FERC never ruled on the issue of
whether ELI's decision to continue to include the ERS units is a
prudent one"). In so holding, the Louisiana Supreme Court revived
precisely the same erroneous reasoning that was advanced by the
Mississippi Supreme Court in
MP&L. There this Court
noted that the "view that the pre-emptive effect of FERC
jurisdiction turn[s] on whether a particular matter was actually
determined in the FERC proceedings" has been "long rejected."
MP&L, supra, at 374. It matters not whether FERC has
spoken to the precise classification of ERS units, but only whether
the FERC tariff dictates how and by whom that classification should
be made. The amended system agreement clearly does so, and
therefore the LPSC's secondguessing of the classification of ERS
units is pre-empted.
Finally, we address respondents' contention that the inclusion
of ERS units in MSS-1 calculations was a violation of the amended
system agreement and that, consequently, the LPSC's order is
shielded from federal pre-emption. Curiously, respondents advance
this argument here despite the LPSC's own prior holding that it
does not have jurisdiction to determine whether the system
agreement was violated and the Louisiana Supreme Court's acceptance
of that concession. See App. to Pet. for Cert. 64a; 815 So. 2d, at
35-36. ELI and the United States maintain that the LPSC was correct
when it initially held that FERC has exclusive jurisdiction to
determine whether a FERC tariff has been violated and that state
regulatory agencies may not, consistent with the FP A, disallow
costs based on their own assessment of
51
noncompliance with a FERC tariff. But the question before us is
whether the LPSC's order is pre-empted under
Nantakala and
MP&L, and that order does not rest on a finding that the
system agreement was violated. The LPSC's express statement that it
had no jurisdiction to conclude that there had been a violation of
the system agreement confirms this. Consequently, we have no
occasion to address the question of the exclusivity of FERC's
jurisdiction to determine whether and when a filed rate has been
violated.
For the foregoing reasons, the judgment of the Louisiana Supreme
Court is reversed.
It is so ordered.
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