MISSISSIPPI POWER & LIGHT COMPANY, APPELLANT V. STATE OF MISSISSIPPI EX REL. EDWIN LLOYD PITTMAN, ATTORNEY GENERAL OF MISSISSIPPI, AND MISSISSIPPI LEGAL SERVICES COALITION No. 86-1970 In the Supreme Court of the United States October Term, 1987 On Appeal From the Supreme Court of Mississippi Brief For the United States and the Federal Energy Regulatory Commission as Amici Curiae TABLE OF CONTENTS Question presented Interest of the United States and the Federal Energy Regulatory Commission Statement A. The Middle South system and Grand Gulf Unit No. 1 B. Federal proceedings C. Mississippi state proceedings Discussion Conclusion QUESTION PRESENTED Whether Nantahala Power & Light Co. v. Thornburg, No. 86-568 (June 17, 1986), requires a state public utility commission to allow an electric utility to recover, in retail rates, its share, as determined by the Federal Energy Regulatory Commission, of the costs of an electric power generating facility that supplies power to the utility and sister utilities in three other states. INTEREST OF THE UNITED STATES AND THE FEDERAL ENERGY REGULATORY COMMISSION The Federal Power Act, 16 U.S.C. 791a et seq., gives the Federal Energy Regulatory Commission (FERC) exclusive regulatory authority over the sale of electric energy at wholesale in interstate commerce. FERC is responsible for ensuring that all rates or charges made, demanded, or received by a public utility for or in connection with the transmission or sale of electric energy in interstate commerce are "just and reasonable" (16 U.S.C. 824d(a)). This case was preceeded by a determination by FERC that the four operating companies in a public utility holding company system must share the costs of the holding company's investment in nuclear power, in proportion to their relative demand for the energy generated by the system as a whole, by purchasing power from a particular plant in proportions specified by FERC. The Mississippi Supreme Court held in this case that the Mississippi state public utility commission may not allow the Mississippi operating company to raise its retail rates to recover its FERC-allocated share of the cost of purchasing this power unless the state commission first determines the "prudency" of that purchase. If allowed to stand, the Mississippi Supreme Court's decision would effectively nullify FERC's allocation of power and costs among the four companies. FERC participated as amicus curiae in Nantahala Power & Light Co. v. Thornburg, No. 85-568 (June 17, 1986), because the decision of the state supreme court in that case similarly threatened to nullify an exercise of FERC's exclusive statutory authority. STATEMENT In a FERC administrative proceeding in which the Mississippi Public Service Commission (MPSC) and the Mississippi Attorney General participated, FERC allocated the power and costs of a jointly planned nuclear power plant, Grand Gulf Unit No. 1 (Grand Gulf 1), among the four wholly owned electric utility subsidiaries of Middle South Utilities, Inc. (MSU): Mississippi Power & Light Company (MP&L), which operates in Mississippi and three other utilities that operate in three other states. FERC concluded that its allocation would result in a just and reasonable sharing of the costs among the four companies. In a review proceeding in which MPSC and the Mississippi Attorney General again participated, the Court of Appeals for the District of Columbia Circuit affirmed FERC's determination that it had jurisdiction to determine the proportions in which the four companies shall bear these costs. In the present case, the Mississippi Supreme Court ruled that MPSC may not permit MP&L to increase its charges to retail customers in Mississippi, to reflect the Grand Gulf 1 costs allocated to MP&L by FERC, "without first determining that the expenses were prudently incurred" (J.S. App. 2a). A. The Middle South System And Grand Gulf Unit No. 1 Appellant MP&L is one of four operating electric utility companies that are wholly-owned subsidiaries of MSU, an integrated public utility holding company established in 1949 under Title I of the Public Utility Holding Company Act of 1935, 15 U.S.C. 79 et seq. The other subsidiary operating companies are Louisiana Power & Light Co., Arkansas Power & Light Co., and New Orleans Public Service, Inc. The four companies operate as a highly integrated power pool. They sell and exchange electricity at wholesale across state lines, to each other as well as to outside companies, and they also sell electricity at retail in separate service areas in four states. All capacity and energy on the Middle South system is centrally dispatched from the system's dispatch center at Pine Bluff, Arkansas. J.S. App. 3a-4a; Middle South Services, Inc., 30 F.E.R.C. paragraph 63,030, at 65,141-65,142 (1985); Middle South Energy, Inc., 26 F.E.R.C. paragraph 63,044, at 65,095 (1984). In the late 1960s, the Middle South system sought to meet projected increases in demand and to diversify its fuel base (principally oil and gas) by adding coal and nuclear generating units. The Middle South system initiated the Grand Gulf nuclear power project in the early 1970s for these purposes. Under the original plan, MP&L would have been responsible for financing and constructing Grand Gulf 1, and New Orleans Public Service, Inc. (NOPSI), would have been responsible for financing and constructing Grand Gulf Unit No. 2 (Grand Gulf 2). Responsibility for construction of both units soon shifted to MP&L, however, because of siting problems within NOPSI's jurisdiction. When it subsequently became apparent that MP&L could not finance the construction, MSU made a system decision in 1974 to form a generation subsidiary, Middle South Energy (MSE) (now Systems Energy Resources, Inc.), to finance the project MSE acquired from MP&L all of its right, title, and interest in the Grand Gulf project. J.S. App. 118a. By the late 1970s, it became evident that Grand Gulf's capacity would not be needed immediately to meet demand, which was lower than predicted in earlier forecasts. MSU continued to build Grand Gulf 1 on the assumption that the overall cost (fixed plus variable) per kilowatt hour would be less than that of alternative energy sources. The investment cost of Grand Gulf, however, continued to increase dramatically because of regulatory delay, additional construction requirements, inflation, and increased financing costs. As a result, although the investment cost of both Grand Gulf units had been projected to be $1.2 billion, the investment cost of Grand Gulf 1 alone was approximately $3 billion. The investment and other fixed costs associated with Grand Gulf 1 are substantially higher per kilowatt than the costs of other power generated by the MSU system (with the exception of one other nuclear plant). Although fuel costs are lower for Grand Gulf 1 than for most other system power sources, the overall cost per kilowatt hour is higher for Grand Gulf 1 than for other system sources. 30 F.E.R.C. at 65,144-65,145; 26 F.E.R.C. at 65,101-65,103; see J.S. App. 122a. /1/ B. Federal Proceedings Under Part II of the Federal Power Act, 16 U.S.C. 824 et seq., FERC has exclusive regulatory authority over the transmission of electric energy in interstate commerce and the wholesale sale of electric energy in interstate commerce. FERC is responsible for ensuring that all rates or charges, made, demanded, or received by any public utility for or in connection with the transmission or sale of electric energy in interstate commerce, as well as all rules, regulations, practices, and contracts affecting those rates or charges, are just and reasonable (16 U.S.C. 824(a)). 1. Transactions among the operating companies in the Middle South system have been governed by a series of "System Agreements" that must be filed with FERC. In 1982, MSU filed with FERC a 1982 System Agreement, which set forth the terms and conditions for transactions among the four operating companies (except the sale of power from Grand Gulf) and a Unit Power Sales Agreement (UPSA), which established wholesale rates for MSE's sale of power from Grand Gulf 1; the UPSA obliged Louisiana Power & Light, MP&L, and NOPSI, but not Arkansas Power & Light, to purchase specified amounts of its capacity and energy. Pursuant to 16 U.S.C. 824d(a), FERC assigned the two contracts to two different administrative law judges to consider whether the contracts were "just and reasonable," as required by the Federal Power Act. MPSC and the Mississippi Attorney General participated in both administrative proceedings. a. FERC reviewed the initial decisions of the two administrative law judges, rendered in February 1984 and February 1985, /2/ and issued its decision in June 1985. Middle South Energy, Inc., 31 F.E.R.C. paragraph 61,305 (J.S. App. 74a-152a), on reh'g, 32 F.E.R.C. paragraph 61,425 (J.S. App. 154a-195a), aff'd, Mississippi Industries v. FERC, 808 F.2d 1525 (1987), reh'g granted and vacated in part, No. 85-1611 (D.C. Cir. June 24, 1987) (Orders 1 & 2), petitions for cert. pending, Nos. 86-1380 & 86-1424. FERC concluded that the 1982 System Agreement and the UPSA would result in unjust and unreasonable allocations of costs between the operating companies and "that some form of equalization of nuclear plant costs is necessary to achieve just, reasonable, and non-discriminatory rates among the MSU operating companies" (J.S. App. 122a (footnote omitted)). FERC determined, moreover, that the 99most equitable allocation" would be for the operating companies to share in the system's total investment in nuclear capacity (four units, including Grand Gulf 1) "roughly in proportion to each company's share of System demand" (id. at 123a (footnote omitted). On that basis, FERC ordered the following allocation of Grand Gulf 1 costs and power: Arkansas Power & Light, 36%; Louisiana Power & Light, 14%; MP&L, 33%; and NOPSI, 17% (ibid.). /3/ FERC's decision rested on two principal factual findings. First, FERC found that "the Middle South companies constitute a highly coordinated integrated electric system," which historically has "roughly equalized" generating costs among the four operating companies (J.S. App. 104a, 121a). FERC stressed that "this coordination and integration results in planning, construction, and operations which are conducted primarily for the system as a whole" (id. at 104a). FERC specifically found (id. at 115a-120a) that Grand Gulf had been planned "to meet MP&L's needs, to meet System needs and to meet the System goal of diversifying fuel mix." Second, FERC found that Grand Gulf 1 was part of a reasonable system plan to diversify the fuel base by developing nuclear power to meet anticipated growth in demand (id. at 115a-126a). FERC rejected contentions advanced by several parties, including MP&L, against the proposed allocation and in favor of other allocations more favorable to their interests. FERC rejected arguments by MPSC and the Mississippi Attorney General that the proposed allocation violated the doctrine of equitable estoppel because it was contrary to representation made by MP&L and MSE to MPSC, which MPSC relied upon in granting a certificate of public convenience and necessity to construct Grand Gulf 1 (J.S. App. 90a). According to FERC, "a State (C)ommission could not reasonably rely on representations in State proceedings * * * , since (FERC) alone has jurisdiction over the (allocation issue)" and, in any event, "the doctrine cannot operate to bind (FERC) since (it) made no representation in and w(as) not a party to any of the State certification proceedings" (id. at 103a). FERC also rejected a proposal of the Mississippi parties that the power and costs of Grand Gulf 1 be allocated instead under the terms of the 1973 System Agreement. FERC determined that allocation on that basis would be "inadequate and discriminatory because it would result in MP&L avoiding all responsibility for Grand Gulf for approximately 10 years, after which time it would enjoy the benefits of the project in the less expensive years" (J.S. App. 124a-125a n.19). b. FERC subsequently clarified its June 1985 decision in the course of denying several petitions for rehearing (J.S. App. 154a-195a); FERC took that occasion to reject submissions that it lacked authority to reallocate the obligation to purchase Grand Gulf power and that FERC's allocation failed to consider the needs of individual operating companies (id. at 172a-192a). According to FERC (id. at 184a), when, as in the Middle South system, the operating companies "approach power planning on a system-wide basis, whereby the individual companies' needs are the component parts of the System power plan(,) (i)mplementation of the System plan * * * requires that the individual companies' needs be subsumed by the greater interests of the entire System." For this reason, FERC concluded, no one operating company could now avoid financial responsibility for Grand Gulf, which they jointly decided to build, finance, and allocate, as if the one company were in independent entity free to consider only its own immediate needs (id. at 157a; see 26 F.E.R.C. at 65,113). 2. On petition for review of FERC's orders, MPSC and the Mississippi Attorney General and parties from the other three states challenged FERC's jurisdication to allocate Grand Gulf 1 power and costs and the allocation FERC made. The Court of Appeals for the District of Columbia Circuit unanimously affirmed as to FERC's jurisdiction but ultimately vacated the allocation itself, remanding to FERC for a fuller explanation. Mississippi Industries v. FERC, 808 F.2d 1525 (1987), reh'g granted and vacated in part, No. 85-1611 (D.C. Cir. June 24, 1987) (Orders 1 & 2), petitions for cert. pending, Nos. 86-1380 & 86-1424. a. Relying on this Court's decisions in Nantahala Power & Light Co. v. Thornburg, No. 85-568 (June 17, 1986), and Pennsylvania Water & Power Co. v. FPC, 343 U.S. 414, 422-423 (1952), the court of appeals upheld FERC's authority under the Federal Power Act to allocate the power and costs of Grand Gulf 1 (808 F.2d at 1539-1543). The court emphasized that "(a) consistent line of judicial precedent supports FERC's authority to approve and/or modify the terms of the pooling and coordination agreements of closely integrated power systems" (id. at 1545) and that Grand Gulf 1 was "built and planned on a profoundly integrated basis" (id. at 1540). The court of appeals, like FERC, specifically rejected the various objections raised by the Mississippi parties -- MPSC, the Mississippi Attorney General, and Mississippi Legal Services Coalition -- to FERC's allocation. The court agreed with FERC that there was no merit to their claim that the doctrine of equitable estoppel -- based on prior representations by MSU and MP&L to the MPSC -- limited FERC's reallocation authority (808 F.2d at 1549-1550). The court also concluded (id. at 1563-1565), with "little difficulty," that FERC had properly rejected the Mississippi's proposed allocation of the power and costs of Grand Gulf 1. Finally, the court rejected (id. at 1548) suggestions that the potential impact of FERC's allocation on retail rates required its invalidation. b. The court of appeals initially affirmed, over Judge Bork's partial dissent, FERC's specific allocation of Grand Gulf capacity and energy (808 F.2d at 1553-1566); subsequently, however, the court granted rehearsing and vacated the portion of its judgment concerning the specific allocation, and the related portions of its opinion. See Mississippi Industries v. FERC, No. 85-1611 (D.C. Cir. June 24, 1987) (Order # 2); see 808 F.2d at 1568-1569 (Bork, J., dissenting). In accordance with Judge Bork's dissent, the court remanded the case to FERC "for reconsideration of the decision to equalize the capacity costs of all nuclear plants, and for an explanation of the criteria used to determine what constitutes 'undue discrimination' and of why (FERC's) ultimate decision is not unduly discriminatory" (Order # 2). /4/ C. Mississippi State Proceedings 1. Since Grand Gulf 1 went into service in July 1, 1985, MSE has billed the four operating companies, including MP&L, on a monthly basis in accordance with FERC's allocation. MP&L accordingly sought approval from MPSC to recover its Grand Gulf payments (about $27 million per month) in retail rates. MPSC granted full retail recovery of those costs but "phased in" the increase over a ten-year period, so that consumers would pay less than the full amount during an initial period and gradually pay the difference (plus financing charges) over a later period. J.S. App. 30a-31a. 2. On appeal by the Mississippi Attorney General, the Mississippi Supreme Court reversed (J.S. App. 2a-22a). The court ruled that under Mississippi law (Miss. Code Ann. section 77-2-39 (1972) MPSC "must review the prudency of an investment such as Grand Gulf before it can enact rates based on its cost" to "determine whether MP&L, MSE(,) and MSU acted reasonably when they constructed Grand Gulf 1, in light of the change in demand for electric power in this state and the sudden escalation of costs" (J.S. App. 19a-20a). The state supreme court rejected (J.S. App. 14a-16a) MP&L's claim that MPSC was required, under Nantahala, to allow it to pass through the FERC-allocated costs of Grand Gulf in retail rates without undertaking any independent "prudency" review. According to the state court (J.S. App. 15a), MPSC would plainly have jurisdiction to consider "prudency" if MPSC had itself built Grand Gulf, and the court did not believe that the Supremacy Clause required a different result just "because Grand Gulf is owned by an out-of-state corporation." The court argued (ibid. (quoting Nantahala, slip op. 19) (emphasis omitted)) that Nantahala was not to the contrary because in Nantahala the Court had assumed "that a particular quantity of power procured by a utility from a particular source could be deemed unreasonably excessive if lower-cost power is available elsewhere," but concluded that no lower-cost alternative was available in the circumstances of that particular case. The state court found (J.S. App. 15a (emphasis omitted)) that in this case, unlike Nantahala, "there is no doubt that Mississippians do not need the power provided by Grand Gulf, and that lower cost power is available elsewhere (in fact, by plants owned by MP&L)." Finally, the state court concluded (J.S. App. 17a-18a) that preemption was inappropriate because FERC was never presented with, and never addressed, the question whether it was prudent to complete Grand Gulf 1 and continue its operation. The court stated (id. at 17a) that FERC had simply assumed that it was appropriate to complete construction of Grand Gulf 1, the D.C. Circuit had never addressed the issue in reviewing FERC's decision, and, as a result, the state court had "yet to see MP&L, MSE(,) or MSU justify putting Grand Gulf on line at its exorbitant cost to ratepayers." /5/ Justice Robertson dissented (J.S. App. 23a). Relying on this Court's decision in Nantahala, he concluded that "our decision this day is in an area wholly preempted by authority granted by the Congress to (FERC)" (ibid.). 3. On remand, MPSC rescinded (J.S. App. 199a-200a) its September 16, 1985, rate increase and ordered MP&L to submit a plan for refunding all of its prior recovery of Grand Gulf 1 expenses from the retail ratepayers. On June 1, 1987, this Court granted a stay of the Mississippi Supreme Court's judgment conditioned upon MP&L posting a good and sufficient bond, in manner and amount to be determined by the Mississippi Supreme Court. On June 23, 1987, this Court granted a stay of the Mississippi Supreme Court's subsequent order that MP&L could not recover its Grand Gulf expenses until it had posted the required bond. DISCUSSION The decision of the Mississippi Supreme Court is flatly inconsistent with this Court's decision in Nantahala. In Nantahala, this Court affirmed the rule that "a state utility commission setting retail prices must allow, as reasonable operating expenses, costs incurred as a result of paying a FERC-determined wholesale price" (slip. op. 11). "(A) State may not conclude in setting retail rates that the FERC-approved wholesale rates are unreasonable" (id. at 13). In the FERC proceedings here, in which MPSC and the Mississippi Attorney General participated, FERC determined the wholesale price to be paid by MP&L for power it acquires: FERC ruled that MP&L, which draws all of its power from a variety of sources within the MSU system, should purchase 33% of the power of Grand Gulf 1. FERC's power to impose this obligation and associated costs on MP&L was squarely affirmed by the D.C. Circuit. The decision below, barring MP&L from passing the cost of purchasing its share of Grand Gulf 1 power on to its customers and therefore forcing that cost to be paid instead by its parent, MSU, or its sister utilities in other states, would, if allowed to stand, effectively nullify a FERC decision in which the State of Mississippi fully participated. The Mississippi Supreme Court justified its conclusion on the ground that no one has authoritatively determined that it was "prudent" to build Grand Gulf 1 and that Nantahala leaves a state utility commission free to determine that the quantity of power procured from a particular sourcre is excessive, because the utility's needs can be met from less expensive sources, even though the price of the higher cost power has been approved by FERC and must therefore be accepted as reasonable. But apart from the fact that the State of Mississippi issued a certificate of convenience and necessity and otherwise participated in the decision to build Grand Gulf 1, this argument is wrong for two reasons. First, the so-called "prudency" review traverses matters squarely within the exclusive jurisdiction of FERC. Second, this is a case like Nantahala itself, where all of the relevant sources of electric power are within the utility system and the sole question -- one that only FERC can fairly resolve -- is how the benefits and burdens of those sources should be shared between affiliated companies doing business in different states. For these reasons we join appellant in urging further review by this Court. Because, moreover, the reasoning of the Mississippi court is plainly inconsistent with this Court's decision in Nantahala, we too believe that summary reversal would be appropriate. 1. FERC exercised its exclusive jurisdiction under the Federal Power Act to review the 1982 System Agreement and the UPSA filed by MSU. FERC determined that the terms of their allocation of Grand Gulf 1 were "unjust, unreasonable, unduly discriminatory (and) preferential." FERC accordingly exercised its remedial authority under Section 205 and 206(a) of the Federal Power Act (16 U.S.C. 824d, 824e (a)) to determine and fix just and reasonable terms by ordering each of the four operating companies, including MP&L, to purchase an amount of Grand Gulf 1 power that would result in the companies sharing the costs of MSU's investment in nuclear generation in proportions based on their relative demand for energy on the system as a whole. On that basis, FERC allocated 33% of the power and costs of Grand Gulf 1 to MP&L. FERC's authority to impose just and reasonable obligations on the four companies was squarely affirmed by the D.C. Circuit in Mississippi Industries v. FERC, 808 F.2d at 1539-1543. The Mississippi parties -- including MPSC, the Mississippi Attorney General, and Mississippi Legal Services Coalition -- fully participated both in the FERC proceedings and in the review proceedings in the D.C. Circuit. The Mississippi Supreme Court nevertheless concluded that MPSC could not allow MP&L to pass that FERC-without first making its own inquiry into whether the cost was prudently incurred. The Mississippi Supreme Court apparently expects MPSC to consider either (1) whether Grand Gulf 1 was an imprudent undertaking for the Middle South system as a whole, so that some or all of its costs should be borne by MSU's shareholders rather than by the operating companies' ratepayers, or (2) whether Grand Gulf 1 was imprudent for MP&L in some way that makes it appropriate for some or all of MP&L's share of the costs to be borne by the ratepayers of the other utilities in the other states. (There are no other possible sources of payment of MP&L's share.) But MPSC has no jurisdiction to consider either question. First, MPSC has no jurisdiction to decide that Grand Gulf 1 was an imprudent undertaking for the Middle South system as a whole and that MSU and its shareholders must therefore bear some or all of its costs. The question whether MSU and its subsidiary MSE, which owns Grand Gulf 1, may charge the operating companies the full costs of Grand Gulf 1 as part of the price of the power that facility supplies to them is a question of the justness and reasonableness of the terms of interstate wholesale transactions in electric power, and it is within the exclusive jurisdiction of FERC. FERC had jurisdiction to consider the argument that Grand Gulf 1 costs were imprudently incurred and should not be passed through to operating utilities that are, for this purpose, its wholesale customers. /6/ FERC determined that the full costs should be borne by the operating companies in specified proportions, and "a State may not conclude in setting retail rates that the FERC-approved wholesale rates are unreasonable. A state must rather give effect to Congress's desire to give FERC plenary authority over interstate wholesale rates, and to ensure that the States do not interfere with this authority." Nantahala, slip op. 13. /7/ Second, MPSC has no jurisdiction to determine that Grand Gulf 1 was imprudent for MP&L in some way that makes it appropriate for more of the power and costs to be allocated to the three other utilities and their ratepayers. The allocation is the exact issue that FERC decided. FERC specifically rejected (J.S. App. 172a-192a), as did the D.C. Circuit in reviewing FERC's order (see 808 F.2d at 1547-1550), the contention that the needs of individual states should dictate an operating company's just and reasonable share of Grand Gulf 1. The D.C. Circuit expressly recognized (id. at 1548) that the direct consequences of FERC's allocation of power and costs to the four utilities would be corresponding increases in retail rates, and squarely upheld FERC's authority to bring about that consequence. The suggestion that an individual state public service commission may now revisit the allocation outside the federal administrative and judicial proceedings and, in effect, veto FERC's decision is flatly contradicted by the congressional decision to provide FERC with exclusive jurisdiction over these multistate controversies. As explained by the D.C. Circuit (id. at 1549 (citation and footnote omitted)), Congress concluded that FERC would be "in the best position to reach the most equitable result and to act in the public interest, rather than to be controlled by the necessarily parochial concerns of the States.'" 2. The Mississippi Supreme Court's attempt to distinguish this case from Nantahala is unavailing. /8/ In Nantahala, this Court assumed arguendo "that a particular quantity of power procured by a utility from a particular source could be deemed unreasonably excessive if lower-cost power is available elsewhere, even though the higher-cost power actually purchased is obtained at a FERC-approved, and therefore reasonable, price" (slip op. 19 (emphasis in original)). In Nantahala, the Court concluded that no such inquiry could appropriately be undertaken by the state public utility commission because "(n)o (other) source of power * * * is said to be available * * *" (ibid.). In this case, the Mississippi court argues, MPSC may determine that the quantity of Grand Gulf power procured by MP&L was excessive. The problem, of course, is that the quantity of power to be allocated to MP&L is exactly what FERC determined. This is not a case of the kind envisioned in the arguendo assumption in Nantahala, where a utility purchases power from an affiliate at a FERC-approved price while "lower-cost power is available elsewhere" (slip op. 19 (emphasis added)). Rather, this is a case like Nantahala itself, where all of the relevant sources of power, some of which are more expensive than others, are within the utility system and the sole question -- one that only FERC can fairly resolve -- is how the benefits and burdens of those sources should be shared between affiliated companies doing business in different states. FERC did not simply determine the reasonableness of the price of power from a particular source. Pursuant to its authority over wholesale transactions in interstate commerce, FERC determined that MP&L was obliged to bear the cost of purchasing a specified percentage of the power of Grand Gulf 1. FERC specifically rejected the alternative of MP&L's purchasing less or none of that power and relying instead on lower cost sources, such as the system power pool. Hence, to paraphrase Nantahala (slip op. 14-15), the Mississippi court's "assertion that (MP&L) should have obtained (less) of the (high)-cost, FERC-regulated power than (MP&L) is in fact (obliged) to claim under FERC's order * * * runs directly counter to FERC's order, and therefore cannot withstand the pre-emptive force of FERC's decision." Because MP&L is not free under FERC's order to avoid that obligation by seeking out a lower-cost source of power, MPSC (and the Mississippi courts) cannot deem MP&L imprudent for failing to do so. The Mississippi Supreme Court's mistaken reliance on the arguendo assumption in Nantahala stems from the court's failure to apprehend the implications for MPSC's jurisdiction of MP&L's involvement in the Middle South system. The Mississippi court treated MP&L as though it were an independent, autonomous company. FERC, however, based its allocation of financial responsibility on its finding that MP&L and the three other operating companies are all wholly-owned subsidiaries of MSU, their operations are highly coordinated and integrated, and they were all deeply involved in every aspect of the planning of Grand Gulf, which they intended to serve the system as a whole (J.S. App. 104a, 113a, 181a). FERC found that because of those joint efforts, the operating companies must be held jointly responsible for Grand Gulf; contrary to the Mississippi court's assumption, they were not, FERC found, autonomous companies that could opt out of sharing in the cost of Grand Gulf based on their own individual needs (id. at 184a-185a). See id. at 181a; 26 F.E.R.C. at 65,110-65,111, 65,113. In this case therefore, as in Nantahala (slip op. 15), there is no occasion for a state public utility commission to "substitute its own conception of what allocation of * * * power would have been * * * fair" on the ground that the utility should have looked "elsewhere" for power. In both cases, FERC's allocation necessarily precluded the option of looking "elsewhere." /9/ 3. The D.C. Circuit's recent decision (see pages 8, 9 and note 4, supra) to vacate FERC's order allocating the costs of Grand Gulf 1 and remand for further FERC consideration of certain issues does not diminish the importance or alter the proper outcome of this case. First, the court of appeals left intact most of its opinion and judgment, including its affirmance of FERC's exclusive jurisdiction over the allocation question. The remand requires FERC only to consider whether its specific allocation among the operating companies should be in somewhat different proportions; the fact that FERC will be revisiting the allocation of the costs of Grand Gulf 1 merely underscores MPSC's lack of jurisdiction to do so. More important, the FERC allocation remains in effect until modified by FERC, imposing daily on MP&L costs that must either be passed on to MP&L's retail customers or "trapped" (see Nantahala, slip op. 17). The decision of the D.C. Circuit reversed and remanded FERS's order establishing the allocation, but the filed rate containing that allocation is still in effect under the filed rate doctrine until changed by FERC, /10/ and therefore must still be honored at the retail level under Nantahala. The possibility that FERC might, on remand, adjust its allocation of Grand Gulf 1 costs in a way that affects MP&L's share obviously does not justify disregarding FERC's decision in the interim. /11/ Similarly, any question of refunds to MP&L for past Grand Gulf payments involves wholesale rates and hence is beyond the jurisdiction of MPSC. Of course, should MP&L receive refunds for its Grand Gulf 1 payments at any stage, MPSC can, as it recognized when it initially granted MP&L partial rate relief in this case (see J.S. App. 51a), require that those refunds be passed through to retail ratepayers. CONCLUSION Probable jurisdiction should be noted. Summary reversal would be appropriate. Respectfully submitted. CHARLES FRIED Solicitor General LOUIS R. COHEN Deputy Solicitor General RICHARD J. LAZARUS Assistant to the Solicitor General CATHERINE C. COOK General Counsel JEROME M. FEIT Solicitor JOHN N. ESTES III Attorney Federal Energy Regulatory Commission JULY 1987 /1/ Grand Gulf 2 has not commenced operation, and allocation of its costs is not at issue in this case. /2/ See Middle South Services, Inc., 30 F.E.R.C. paragraph 63,030 (1985) (1982 System Agreement); Middle South Energy, Inc., 26 F.E.R.C. paragraph 63,044 (1984) (UPSA). /3/ FERC's allocation of the "capacity" of Grand Gulf 1 includes a share of its power and its costs (both fixed capacity costs and variable energy costs). /4/ On April 3, 1987, the panel had previously denied rehearing and the court of appeals had granted rehearing en banc to consider the terms of FERC's allocation (814 F.2d at 773). On June 24, 1987, the court of appeals issued two separate orders. In the first, the court, sitting en banc, vacated its prior order setting the case for rehearing en banc and reinstated the portions of the opinion and judgment it had earlier vacated. In the second, the panel vacated its earlier order denying the petitions for rehearing, granted the petitions, and reversed a portion of its opinion and judgment of January 6, 1987, concerning FERC's allocation. We have lodged copies of the two orders with the Clerk. /5/ The state court also ruled (J.S. App. 21a-22a) that MPSC must join MSU, the parent holding company, and MSE, the company that owns Grand Gulf 1, as parties in its review of the prudence of the Sales Agreement. In support, the court suggested an additional basis for its broader ruling that MPSC's authority had not been preempted by federal law. The court concluded that where, as in this case, agreements between the operating companies, including MP&L, were "suspect" because of the absence of arms-length bargaining, Nantahala requires only preemption of a state public utility commission's evaluation of a 99FERC approved rate( )" (J.S. App. 21a (quoting Nantahala slip op. 12); Nantahala did not, the court said, eliminate the state commission's jurisdiction to examine the "prudency" of the "suspect" agreements (J.S. App. 21a). /6/ None of the parties, including those from Mississippi, argued before FERC that the costs of Grand Gulf 1 were not prudently incurred. FERC found (J.S. App. 115a-126a), moreover, that Grand Gulf 1 was part of a reasonable system plan to diversify the fuel base by developing nuclear power to meet anticipated growth in demand. FERC also explicitly affirmed and adopted (id. at 122a, 146a) the findings and conclusions of its administrative law judge who determined that MSU's decisions both to begin and to complete construction of Grand Gulf 1 were prudent (see 26 F.E.R.C. at 65,112-65,113). If FERC had instead found that those decisions were imprudent, FERC could have determined that it was not just and reasonable for MSU and MSE to charge the four operating utilities the full cost of Grand Gulf 1 power. In that circumstance, MSU's shareholders would have had to absorb those costs. See New England Power Co., 31 F.E.R.C. paragraph 61,047, at 61,084 (1985), aff'd, 800 F.2d 280 (1st Cir. 1986). The Mississippi parties, however, made no such argument before FERC, FERC made no such finding, and the state public service commissions have no jurisdiction with respect to the issue. /7/ The Mississippi Supreme Court asserted (J.S. App. 17a) that preemption was not warranted because "(s)everal aspects of prudency have never been addressed with respect to Grand Gulf, either by state or federal authorities." But "'(u)nder the filed rate doctrine, (FERC) alone is empowered to make that judgment (of reasonableness), and until it has done so, no rate other than the one on file may be charged.'" Nantahala, slip op. 10 (quoting Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571, 581-582 (1981) (brackets in original)). "'(T)he Supremacy Clause (does) not permit'" a state to "'usurp( ) a function that Congress has assigned to a federal regulatory body'" (ibid.). /8/ We do not believe that FERC's statements (J.S. App. 102a, 180a) in its federal administrative proceedings that "Nantahala is not directly on point" and "(t)he facts of Nantahala are clearly distinguishable from those here" suggest otherwise. Both statements occurred prior to this Court's decision in Nantahala and each referred to factual distinctions between these cases that are relevant only to a subsidiary legal issue and not to the issues in this case. /9/ The Mississippi court also suggested that MPSC "had the authority, indeed, the duty, to inquire into the prudency of the() (UPSA and another FERC-filed system agreement)" because neither "fall(s) under the category of FERC approved rates" (J.S. App. 21a; see note 5, supra). The court argued that in the context of purchases by closely related entities Nantahala endorsed preemption only of state utility commission review of "'FERC approved rates'" (J.S. App. 21a (quoting Nantahala, slip op. 12)). Nantahala, however, supports no such limitation on the preemption scope of FERC's allocation decisions. To the contrary, the Court expressly ruled (slip op. 13 (emphasis in original)) that "the filed rate doctrine is not limited to 'rates' per see." The statutory touchstone for FERC's jurisdiction is whether an agreement "affects" interstate wholesale rates (see 16 U.S.C. 824e(a)). /10/ See System Energy Resources, Inc., 40 F.E.R.C. paragraph 61,078 (1987); see also Burlington Northern, Inc. v. United States, 459 U.S. 131, 141 (1982) ("federal-court authority to reject Commission rate orders for whatever reason extends to the orders alone, and not to the rates themselves"). /11/ Nor is there any realistic possibility that the outcome on remand will moot this case or reduce its importance. The issues to be considered on remand do not suggest the possibility that FERC will adopt an allocation under which MP&L's share of Grand Gulf costs is very small or zero.