UNITED STATES OF AMERICA, PETITIONER V. CITY OF FULTON, ET AL. No. 84-1725 In the Supreme Court of the United States October Term, 1985 On Writ of Certiorari to the United States Court of Appeals for the Federal Circuit Reply Brief for the United States We demonstrated in our opening brief that both the relevant statutes and the contracts between the United States and respondents authorize the Secretary of Energy to place into effect interim increases in the rates paid by respondents for power generated by federal hydroelectric projects. Nothing in respondents' answering brief refutes our position. 1. At the outset, respondents plainly are incorrect in their view (Br. 13-25) that the meaning of the contract terms concerning rate increases can be distinguished from the scope of the statute governing the Secretary of Energy's authority to set rates for sales of hydroelectric power. As we showed in our opening brief (at 31-34), the contract provisions essentially incorporate the language of the relevant statute, Section 5 of the Flood Control Act of 1944, 16 U.S.C. 825s, and the only possible conclusion is that the contracts allow the Secretary to impose any rate increase that is authorized by the statute. Moreover, the duration of two of the contracts is 10 years and the term of the third contract is 20 years (see C.A. App. 103, 136, 171). It is especially unlikely that the government would have entered into long-term contracts limiting its rate-setting authority without specifically describing the particular limitation. The language of the contracts broadly authorizing rate changes "at any time" upon action by the Federal Power Commission also undercuts respondents' argument that the contracts impose such a limitation (C.A. App. 93, 127, 157). The contracts thus should be read to incorporate the terms of the statute; they do not impose a separate restriction upon the Secretary's rate-setting authority. Indeed, respondents themselves recognize the similarity between the contracts and the statute. They rely upon their interpretation of the statute to support their construction of the contract provisions (see Br. 22-23) and they invoke virtually identical arguments to justify their interpretation of the contract terms and the statutory language (compare Br. 16 with Br. 26-27). Respondents also implicitly acknowledge that the contract terms do not independently limit the government's authority. Thus, respondents do not contest the validity of the rate increase on the ground that the contracts require that a new rate must be proposed by the Secretary of the Interior and approved by the Federal Power Commission. Respondents therefore recognize that the contract language simply reflects the former statutory procedural requirements and has no independent force. /1/ At a minimum, in view of the close similarity between the contracts and the statute, respondents (who sued the government for breach of contract) had the burden of presenting evidence that the parties did not intend simply to incorporate the statutory rate-setting procedures into the contract. Since respondents presented no such evidence, there is no justification for construing the contracts as an independent limitation on the Secretary's authority. /2/ Finally, respondents' contention that the contracts specifically bar interim rate increases is plainly wrong. They first rely (Br. 16) upon the express language of the contracts, asserting that a rate increase cannot become effective until all administrative review of the rate is completed. However, the contracts themselves require only "confirmation and approval," and the Assistant Secretary of Energy expressly "confirmed" and "approved" the interim rate before it was placed into effect (U.S. Br. 7). Since the contracts, like the statute, do not require "final" confirmation and approval, interim rates obviously are permissible under the contracts. See pages 5-6, infra. Respondents also claim (Br. 17-18) that decisions construing other power sales agreements support their position, but these decisions actually reveal the flaw in respondents' argument. For example, one case concerned a contract permitting a rate increase in accordance with "a valid applicable order of any governmental authority;" the court held that a unilateral rate filing by the private utility did not satisfy this requirement. Louisiana Power & Light Co. v. FERC, 587 F.2d 671, 675 (5th Cir. 1979); see also City of Kaukauna v. FERC, 581 F.2d 993, 996 (D.C. Cir. 1978) (contract provision permitting new or changed rates "as are ultimately made effective through (FERC) proceedings and review"). Here, of course, the interim rate increase was "confirmed" and "approved" and placed into effect pursuant to an order issued by the Assistant Secretary. Since the interim rate was measured against the relevant statutory standard before it was placed into effect, it more closely resembles an order issued by the FERC than it does a unilateral filing by a private utility. Respondents' analogy thus demonstrates the permissibility of interim rate increases under their contracts. /3/ 2. Our principal argument (Br. 14-24) is that Section 5 of the Flood Control Act authorizes the Secretary to impose interim rate increase subject to a refund with interest if a lower permanent rate is adopted. Section 5 does not by its terms distinguish between interim rate increases and permanent rate increases, and Congress's clear intent to confer broad authority for the sale of power generated by federal hydroelectric projects leaves no doubt that the statute permits both types of rate increases. /4/ a. Respondents argue (Br. 26-29) that interim rate increases are barred because of the statutory requirement that rate schedules "become effective upon confirmation and approval by the Federal Power Commission." 16 U.S.C. (1976 ed.) 825s. Of course, this language does not expressly prohibit interim rate increases. Respondents' rather convoluted semantic argument boils down to their contention that the statute requires final approval of a rate increase before the rate increase can be placed into effect; in their view a rate schedule cannot be "confirmed" and "approved" when it remains subject to further review. Despite respondents' fervent efforts to read the statute to require "final" confirmation and approval before the implementation of a rate increase, Congress did not include that requirement in Section 5. See Pet. App. 59a. The statutory language permits the confirmation and approval of an interim rate pending the approval of a permanent rate. /5/ Contrary to respondents' claims, this result is not illogical. The Court approved a similar procedure in Trans Alaska Pipeline Rate Cases, 436 U.S. 631 (1978), upholding the Interstate Commerce Commission's authority in effect to establish interim rates (see U.S. Br. 25-26), and the practice is a common feature of rate-making. /6/ Moreover, just as a court may issue a temporary restraining order and a preliminary injunction and then revisit the substantive issue in the case when deciding whether to issue a permanent injunction, the FPC could review the relevant issues based on preliminary submissions and then finally determine the propriety of a rate upon a more complete record. This is in fact what the Commission did when it placed interim rates into effect. See, e.g., United States Department of the Interior, Bonneville Power Administration, 59 F.P.C. 1194 (1977); United States Department of the Interior, Southeastern Power Administration, 54 F.P.C. 1631, 1633 (1975) (characterizing Commission action as "conditional interim approval"). /7/ b. Respondents also contend (Br. 29-36) that the legislative history supports their narrow reading of the statute, but they do not dispute that Congress intended to endow the Secretary of the Interior and the Federal Power Commission with broad authority to set rates for hydroelectric power. In our view, the power to impose interim rates logically must be included in this broad grant of authority, especially in light of the fact that interim rates are often instrumental in satisfying the statutory requirement of recovering all costs. U.S. Br. 16-20. /8/ Respondents do not present a single legitimate policy objective that could have impelled Congress to withhold interim rate-setting authority. Respondents first argue that the statute should not be interpreted to permit the imposition of interim rates because Congress intended to broadly distribute to consumers the benefits of low-cost hydroelectric power. The statute itself answers this argument; it provides that power should be distributed "at the lowest possible rates to consumers consistent with sound business principles" (16 U.S.C. 825s (emphasis added)). Thus, Congress plainly placed primary importance on creating a sound rate structure that will result in revenues sufficient to recover the costs of producing the electricity, and, as we have discussed, interim rate authority is helpful in accomplishing that end (U.S. Br. 19-20). /9/ Respondents several times assert (Br. 9, 22-23, 34) that interim rates injure consumers even where, as here, a refund with interest is required if a lower permanent rate subsequently is placed into effect. We do not dispute that interim rates may well increase respondents' costs by preventing them from benefiting from delay in the regulatory process, but nothing in the statute or its legislative history indicates that Congress intended to allow purchasers of electric power to obtain that benefit at the expense to the government of revenues that would help recover costs. Although this Court has observed that refunds to customers in some circumstances may be an imperfect remedy (FPC v. Tennessee Gas Transmission Co., 371 U.S. 145, 154-155 (1962)), it made that statement with reference to an interim rate that was not subject to any regulatory scrutiny before it was placed into effect. In addition, the question in Tennessee Gas was whether the Commission had the authority to order a refund when the proceeding was not fully completed; the Court did not indicate that interim rates were an inappropriate regulatory device. The situation presented here is fundamentally different from Tennessee Gas because the interim rate in this case was subject to regulatory scrutiny, including public notice and comment, before it was placed into effect (see U.S. Br. 4-5, 6-7). Indeed, the interim rate increase at issue here was reduced from 42% to 33% pursuant to this regulatory process (see U.S. Br. 7). Thus, the requirement of refunds and regulatory review prior to the imposition of the interim rate increase provides substantial safeguards against consumer injury as a result of the imposition of unjustified interim rate increases. /10/ Respondents also contend that their interpretation of the statute is supported by the fact that Congress chose to permit the Federal Power Commission to confirm and approve rates and did not authorize the FPC to revise the rates submitted by the Secretary of the Interior. This theory suffers from the same flaw as respondents' argument concerning the language of the statute. Although it is clear that Congress intended to require FPC approval before rates were placed into effect, respondents cite nothing in the legislative history to demonstrate that a final determination by the FPC regarding the particular rate was a prerequisite to placing the rate into effect. If the Secretary requested the imposition of an interim rate, the FPC was thus free to confirm and approve the rate on a temporary basis pending future action relating to a permanent rate. /11/ c. Finally, respondents argue (Br. 36-39) that the fact that the FPC did not approve an interim rate increase until 1974 "is strong evidence" that "only final rates can be charged" (Br. 38). First, respondents' position is contradicted by the post-1974 interim rates increases (U.S. Br. 20-22). /12/ Second, as we noted in our opening brief (at 5), it was not until the rampant inflation of the early 1970s that interim rates became necessary to ensure that revenues would cover expenditures. Third, respondents' argument is based solely upon the absence of any interim rate increases; the FPC did not affirmatively state that it lacked the power to place rates into effect on an interim basis. In similar circumstances this Court has observed that "(t)he failure of (an agency) to act is not a binding administrative interpretation" of the scope of the agency's authority. United States v. E.I. du Pont de Nemours & Co., 353 U.S. 586, 590 (1957); see also Baltimore & O. Ry. v. Jackson, 353 U.S. 325, 331 (1957) (it is improper to "elevat(e) negative action to positive administrative decision"). /13/ Thus, respondent's interpretation of the statute on the basis of administrative inaction should be rejected. Instead, the statute should be construed in accordance with the interpretation affirmatively adopted by the Federal Power Commission and reaffirmed by the Secretary of Energy, the official now charged with the administration of the hydroelectric power marketing program (see U.S. Br. 29-30). d. Respondents do not dispute our showing (Br. 22-24) that the Department of Energy Organization Act transferred to the Secretary of Energy all authority under Section 5 of the Flood Control Act. See Resp. Br. 43-44 ("Congress gave to the Secretary of Energy both the rate proposal and the rate confirmation and approval function"). Accordingly, the Secretary may exercise the interim rate authority that was conferred on the Secretary of the Interior and the Federal Power Commission by Section 5. 3. We also demonstrated in our opening brief (at 25-27) that the Department of Energy Organization Act independently authorizes the imposition of the interim rates at issue here because it endows the Secretary of Energy with plenary authority over hydroelectric power rates. Since the statute consolidates all rate-setting authority in the Secretary, the Secretary could simply have delegated to the Assistant Secretary all authority to confirm and approve rates without providing for additional review by the FERC. It is therefore difficult to see how the additional review detracts from the Secretary's authority to place interim rates into effect. /14/ Interpreting the statute to invalidate the Secretary's order serves no policy goal and simply has the result of allowing respondents to gain the benefit of regulatory delay. In analogous situations, this Court has upheld the exercise of such ancillary interim rate-setting authority (see U.S. Br. 25-26). /15/ Respondents assert (Br. 40-41) that Congress did not intend to alter existing substantive authority by enacting the Department of Energy Organization Act, and that the Secretary therefore could not gain ancillary interim rate-setting authority as a result of the consolidation of the functions of the Secretary of the Interior and the Federal Power Commission. The flaw in this argument is that the Secretary has not gained additional substantive authority; the consolidation of all Section 5 rate-setting authority simply permits him to exercise the existing authority in a different manner. Here, the Secretary has determined that it is appropriate to bifurcate the process for setting power rates. Efficiencies of this type were precisely what Congress sought to achieve when it enacted the Department of Energy Organization Act (see U.S. Br. 23). Respondents also argue (Br. 43-44) that the Secretary cannot take such action because Section 5 bars a rate increase from being placed into effect when the rate increase is subject to further administrative review, even if the rate increase has been confirmed and approved. This argument rests on the view that Section 5 does more than just fails to confer interim rate-setting authority upon the Secretary; respondents can prevail only if they establish that the statute affirmatively prohibits the implementation of rates that have been confirmed and approved when such rates are subject to further administrative review. There is no basis for such a restrictive reading of the statute. As the Fifth Circuit observed in United States v. Tex-La Electric Cooperative, Inc., supra, that result would invalidate the Secretary's interim rate-setting procedure because "it gave litigants too much 'process' by giving them one last, truly independent review before the FERC" (Pet. App. 66a (emphasis in original)). Nothing in the statute or legislative history of Section 5 requires such a peculiar result. For the foregoing reasons and the reasons stated in our opening brief, the judgment of the court of appeals should be reversed. Respectfully submitted. CHARLES FRIED Solicitor General JANUARY 1986 /1/ Respondents claim (Br. 23-25) that their contracts were not altered by the enactment of the Department of Energy Organization Act. We do not contend that the meaning of the contracts was changed; both before and after the passage of the Act the contracts simply incorporated the statutory procedures for increasing power rates, with the result that any rate increase that is lawful under the relevant statute is permissible under the contracts. /2/ Respondents assert (Br. 17-19) that their interpretation of the contracts is supported by decisions construing rate-setting provisions in other power sales agreements under the Mobile-Sierra doctrine, but the cases upon which they rely are completely irrelevant. Most of these decisions address whether a particular contract allowed a private utility to effect a unilateral rate increase by utilizing the procedures of Section 205 of the Federal Power Act, 16 U.S.C. 824d, or Section 4 of the Natural Gas Act, 15 U.S.C. 717c. These statutes, and the underlying regulatory processes, are different from the provision of the Flood Control Act governing the rate changes at issue here. Whether some contractual term permitted a rate increase under these statutes therefore is not at all relevant to whether the contracts at issue here incorporate the provision of the Flood Control Act relating to rate increases. The one case cited by respondents that relates to the Flood Control Act is similarly inapposite. Arkansas Power & Light Co. v. Schlesinger, Civ. No. 79-1263 (D.D.C. Oct. 20, 1980), appeal dismissed, No. 80-2573 (D.C. Cir. Jan. 26, 1981), involved the interpretation of a contract that expressly limited the amount of rate increases for each five-year interval over the life of the contract. Respondents also contend (Br. 19-20) that the contracts should not be interpreted to authorize interim rates because they should be construed against the government, the party that drafted the agreements. However, that principle of contract interpretation applies only when a provision is "ambiguous" (United States v. Seckinger, 397 U.S. 203, 216 (1970)) and there is no ambiguity here; respondents' contracts simply incorporate the terms of the statute. /3/ Respondents also contend (Br. 20-21) that the government did not impose an interim rate increase until 1974 established a course of dealing between the parties that indicates that the contracts bar such rate increases. However, a course of dealing is a sequence of conduct "which is fairly to be regarded as establishing a common basis of understanding" for interpreting the contract (Restatement (Second) of Contracts Section 223 (1981) (emphasis added)). The conduct cited by respondents is ambiguous. There is no evidence that the government interpreted the contracts as barring interim rate increases; instead, the government simply had no need to exercise that authority (see page 10, infra). Respondents' unilateral assumption concerning the meaning of the contracts is not a ground for interpreting the contracts as precluding interim rate increases. Sperry Flight Systems Division of Sperry Rand Corp. v. United States, 548 F.2d 915, 922-923 (Ct. Cl. 1977). /4/ Respondents assert (Br. 7-8) that this argument is a departure from our prior position regarding the meaning of Section 5, but we presented this argument in the court below (C.A. Br. 34-37) and before the Fifth Circuit (C.A. Br. 38-40) in United States v. Tex-La Electric Cooperative, Inc., 693 F.2d 392 (1982). /5/ Indeed, the lengths to which it is necessary to go in order to interpret Section 5 as prohibiting interim rates are demonstrated by the "(g)rammatical" argument proffered by amicus Sam Rayburn Dam Electric Cooperative, Inc. (Br. 6-7 n.6). /6/ See W. Jones, Cases and Materials on Regulated Industries 123 (2d ed. 1976); F. Welch, Conduct of the Utility Rate Case 70-71 (1955); see also U.S. Br. 25 n.21 (decisions upholding interim rate authority). /7/ Respondents assert (Br. 28-29 & n.23) that the absence of express statutory language authorizing interim rates and refunds is determinative. As we explained in our opening brief (at 18 n.13), however, it is not surprising that Congress gave broad discretion to the Secretary of the Interior and the Federal Power Commission to define the process for setting rates in connection with this federal proprietary activity. /8/ Respondents attempt to rebut our argument concerning the usefulness of interim rates by asserting (Br. 8) that the Southwestern Power Administration (SWPA) rate at issue here must be presumed sufficient to recover the SWPA's costs because the rate was approved by the Federal Energy Regulatory Commission. Respondents ignore the fact that one reason the rate was sufficient to recover the SWPA's costs is that the rate was placed into effect on an interim basis and thus generated additional revenue for the 33 months it was in effect prior to implementation of the final rate. Contrary to respondents' statement (Br. 8), we do not contend that the statute should be construed to authorize interim rates simply because the SWPA has failed to collect revenues sufficient to cover its costs. This fact is not in any way essential to our argument; we believe it is relevant because it explains why the Secretary has chosen to invoke his interim rate authority, why this authority was not needed in the past, and why the use of this authority is consistent with Congress's goal of a rate structure based upon sound business principles. Moreover, respondent's argument that these facts are not in the record is beside the point. Even if the facts regarding the SWPA's financial condition are considered adjudicative facts rather than legislative facts, the sources that we cite (see U.S. Br. 5-7) surely are subject to judicial notice (see Fed. R. Evid. 201). Finally, respondents make the rather silly claim (Br. 8 n.6) that we have "abandoned" our position that more than $500 million might be subject to refund under the rule adopted by the courts below. As the exchange of letters in the appendix to respondents' brief clearly shows, we stated that we would not rely on this fact in our brief on the merits because it was relevant only to the question whether certiorari should be granted. We stand by the Department of Energy's estimate of the government's potential liability. /9/ Of course, it may be possible to recoup revenue lost because of delay in the implementation of a rate increase in a subsequent rate increase, but the additional delay would result in a further postponement of the obligation to meet all costs and repay the investment of the United States in power generating facilities (see U.S. Br. 2-3). Moreover, it is most "consistent with sound business principles" to allocate the costs of generating electricity to those who use that electricity, not to future users. /10/ Respondents claim (Br. 9) that interim rates should be disfavored because they remove an incentive for expeditious agency action and because purchasers face the dilemma of whether to pass the increases through to their customers. First, there is no reason to bar interim rates, and thereby subject the government to a monetary penalty, in order to reduce regulatory delay. Less draconian measures, such as time limits for agency action, plainly are more appropriate. Second, whatever choice respondents make in structuring their own rates, they are assured of recovering their payments to the government pursuant to the interim rate. /11/ The testimony of Secretary of the Interior Ickes, upon which respondents place great emphasis (Br. 34-36), does not support a contrary conclusion. Secretary Ickes simply confirmed that the FPC had "final authority" regarding a rate increase because FPC action was required before a rate could be placed into effect. /12/ These interim rate increases are indistinguishable from the rate increase at issue here; they were not the sort of interim increases described by respondents (Br. 36 n.30). /13/ Contrary to respondents' claim (Br. 38), we are not "hard pressed" to explain the Interior Department's comments regarding the 1975 interim rate increase. We explain in our opening brief (at 21 n.16) that the Interior Department's objection was based upon the fact that the Secretary of the Interior had not proposed an interim rate; Interior did not claim that the FPC had no authority to confirm and approve interim rates. Indeed, it is respondents who are hard pressed to explain away the interim rate orders issued pursuant to the virtually identical language of the Bonneville Project Act (see U.S. Br. 21-22). Their unsupported assertions (Br. 39 n.31) do not undermine the relevance of these administrative actions in interpreting Section 5 of the Flood Control Act. It is especially peculiar that respondents view the legislative history of the Bonneville Project Act as probative of the proper interpretation of Section 5, but assert that the administrative practice under the Bonneville statute is irrelevant. /14/ Indeed, the function attributed to the Federal Power Commission by respondents (Br. 8-9 & n.7) -- the protection of consumers from excessive rate increases -- had been performed before the interim rate at issue here was placed into effect; the proposed increase was reduced from 42% to 33%. It was the FERC that at first rejected the rate because it was too low. See U.S. Br. 7. /15/ Respondents claim (Br. 42-43) that the Secretary of Energy does not exercise plenary authority over rates because the Secretary of the Interior's rate-proposing function is excercised by the administrators of the Power Marketing Administrations (PMAs). However, the statute states that this authority "shall be exercised by the Secretary" (42 U.S.C. 7152(a)(2)) and provides that the Secretary has the authority to appoint the administrators (ibid.). It is thus clear that the Secretary controls the exercise of this authority. Respondents contend (Br. 43) that the Secretary's exercise of interim rate authority is barred by Section 501(a)(1) of the Department of Energy Organization Act, 42 U.S.C. 7191(a)(1). But, as we demonstrated in our opening brief (at 28-29 & n.22), Section 501(a)(1) relates only to procedural requirements.