Miss. P. & L. Co. v. Miss. ex rel. Moore
487 U.S. 354 (1988)

Annotate this Case

U.S. Supreme Court

Miss. P. & L. Co. v. Miss. ex rel. Moore, 487 U.S. 354 (1988)

Mississippi Power & Light Co. v. Mississippi ex rel. Moore

No. 86-1970

Argued February 22, 1988

Decided June 24, 1988

487 U.S. 354

APPEAL FROM THE SUPREME COURT OF MISSISSIPPI

Syllabus

Appellant (MP&L), a subsidiary of Middle South Utilities (MSU), engages in wholesale sales of electricity, which are regulated by the Federal Energy Regulatory Commission (FERC), and in retail sales, which are subject to the jurisdiction of the Mississippi Public Service Commission (MPSC). MSU formed a new subsidiary, Middle South Energy, Inc. (MSE), to undertake the construction of a nuclear powerplant, Grand Gulf, in Mississippi. Although appellant was to operate the plant, Grand Gulf was planned and designed to meet the need of the entire MSU system for a diversified and expanded fuel base. The MPSC approved the application of MP&L and MSE to build Grand Gulf. As Grand Gulf neared completion, MSU filed for FERC's approval agreements allocating Grand Gulf's capacity among its four operating subsidiaries and setting forth, inter alia, wholesale rates for the sale of Grand Gulf's capacity and energy. Following extensive hearings in which parties representing consumer interests and various state regulatory agencies, including the MPSC, participated, FERC entered an order allocating Grand Gulf costs among the members of the MSU system in proportion to their relative demand for energy generated by the system as a whole. The order required appellant to purchase 33% of the plant's output at rates determined by FERC to be just and reasonable. On review, the United States Court of Appeals for the District of Columbia Circuit affirmed. After public hearings, the MPSC granted appellant an increase in its retail rates to enable it to recover the costs of purchasing its FERC-mandated allocation of Grand Gulf power. The Mississippi Attorney General and certain other parties representing Mississippi consumers appealed to the Mississippi Supreme Court, charging that, under state law, the MPSC had exceeded its authority by adopting retail rates to pay Grand Gulf expenses without first determining that the expenses were prudently incurred. The court agreed and remanded the case, concluding that requiring the MPSC to review the prudence of management decisions incurring costs associated with Grand Gulf would not violate the Supremacy Clause of the Federal Constitution. The court rejected appellant's argument that a state prudence review was foreclosed by the decision in Nantahala Power & Light Co. v. Thornburg,

Page 487 U. S. 355

476 U. S. 953, which barred a State from setting retail rates that did not take into account FERC's allocation of power between two related utility companies.

Held: The FERC proceedings preempted a prudence inquiry by the MPSC. The decision in Nantahala rests on a foundation that is broad enough to support the order entered by FERC here, and to require the MPSC to treat appellant's FERC-mandated payments for Grand Gulf costs as reasonably incurred operating expenses for the purpose of setting appellant's retail rates. Nantahala relied on the fundamental preemption principles, applicable here, that FERC has exclusive authority to determine the reasonableness of wholesale rates; that FERC's exclusive jurisdiction applies not only to rates, but also to power allocations that affect wholesale rates; and that States may not bar regulated utilities from passing through to retail consumers FERC-mandated wholesale rates. The Supremacy Clause compels the MPSC to permit appellant to recover as a reasonable operating expense costs incurred as a result of paying a FERC-determined wholesale rate for a FERC-mandated allocation of power. The Mississippi Supreme Court erred in adopting the view that the preemptive effect of FERC jurisdiction turned on whether a particular matter (here, the "prudence" question) was actually determined in the FERC proceedings. The reasonableness of rates and agreements regulated by FERC may not be collaterally attacked in state or federal courts. Here, the question of prudence was not discussed in the proceedings before FERC or on review by the Court of Appeals, because no party raised the issue, not because it was a matter beyond the scope of FERC's jurisdiction. Moreover, FERC did, in fact, consider and reject some aspects of the prudence review that the Mississippi Supreme Court directed the MPSC to conduct. Pp. 487 U. S. 369-377;

506 So.2d 978, reversed.

STEVENS, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and WHITE, O'CONNOR, and KENNEDY, JJ., joined. SCALIA, J., filed an opinion concurring in the judgment, post, p. 487 U. S. 377. BRENNAN, J., filed a dissenting opinion, in which MARSHALL and BLACKMUN, JJ., joined, post, p. 487 U. S. 383.

Page 487 U. S. 356

JUSTICE STEVENS delivered the opinion of the Court.

On July 1, 1985, Grand Gulf Unit 1, a major nuclear powerplant located in Port Gibson, Mississippi, began commercial operations. An order entered by the Federal Energy Regulatory Commission (FERC) required Mississippi Power and Light Company (MP&L) to purchase 33% of the plant's output at rates determined by FERC to be just and reasonable. The Mississippi Public Service Commission (MPSC) subsequently granted MP&L an increase in its retail rates to enable it to recover the cost of its purchases of Grand Gulf power. On appeal, the Mississippi Supreme Court held that it was error to grant an increase in retail rates without first examining the prudence of the management decisions that led to the construction and completion of Grand Gulf 1. The question presented to us is whether the FERC proceedings have preempted such a prudence inquiry by the State Commission. For reasons similar to those set forth in Nantahala

Page 487 U. S. 357

Power & Light Co. v. Thornburg,476 U. S. 953 (1986), we conclude that the state proceedings are preempted, and therefore reverse.

I

MP&L is one of four operating companies whose voting stock is wholly owned by Middle South Utilities (MSU), a public utility holding company. [Footnote 1] The four companies are engaged both in the wholesale sale of electricity to each other and to companies outside the MSU system and in the retail sale of electricity in separate service areas in Louisiana, Arkansas, Missouri, and Mississippi. Through MSU the four companies operate as an integrated power pool, with all energy in the entire system being distributed by a single dispatch center located in Pine Bluff, Arkansas. Wholesale transactions among the four operating companies historically have been governed by a succession of three "System Agreements," which were filed with FERC in 1951, 1973, and 1982. The System Agreements have provided the basis for planning and operating the companies' generating units on a single-system basis, and for equalizing cost imbalances among the four companies.

The retail sales of each of the operating companies are regulated by one or more local regulatory agencies. For example, Arkansas Power and Light Company (AP&L) sells in both Arkansas and Missouri, and therefore is regulated by both the Arkansas Public Service Commission and the MPSC. MP&L's retail rates are subject to the jurisdiction of the MPSC.

Through the 1950's and into the 1960's, most of the MSU system's generating plants were fueled with oil or gas. In the late 1960's, the MSU system sought to meet projected increases in demand and to diversify its fuel base by adding coal and nuclear generating units. It was originally contemplated

Page 487 U. S. 358

that each of the four operating companies would finance and construct a nuclear power facility. [Footnote 2] Consistent with this scheme, MP&L was assigned to construct two nuclear power facilities at Port Gibson, Mississippi, Grand Gulf 1 and 2. [Footnote 3] The Grand Gulf project, however, proved too large for one operating company to finance. MSU therefore formed a new subsidiary, Middle South Energy, Inc. (MSE), to finance, own, and operate Grand Gulf. MSE acquired full title to Grand Gulf, but hired MP&L to design, construct, and operate the facilities.

In April, 1974, MSE and MP&L applied to MPSC for a certificate of public convenience and necessity authorizing the construction of the plant. The State Commission granted the certificate, noting that MP&L was part of "an integrated electric system," and that

"the Grand Gulf Project [would] serve as a major source of baseload capacity for the company and the entire Middle South System pooling arrangement. [Footnote 4]"

App. to Motion to Dismiss 36-37.

Page 487 U. S. 359

By the late 1970's, it became apparent that system-wide demand in the ensuing years would be lower than had been forecast, making Grand Gulf's capacity unnecessary. Moreover, regulatory delays, additional construction requirements, and severe inflation frustrated the project Management decided to halt construction of Grand Gulf 2, but to complete Grand Gulf 1, largely on the assumption that the relatively low cost of nuclear fuel would make the overall cost of Grand Gulf power per kilowatt hour lower than that of alternative energy sources. As it turned out, however, the cost of completing Grand Gulf construction was about six times greater than had been projected. [Footnote 5] Consequently, the

Page 487 U. S. 360

wholesale cost of Grand Gulf's power greatly exceeds that of power produced in other system facilities.

The four operating companies considered various methods of allocating the cost of Grand Gulf's power. In 1982, MSU filed two agreements with FERC. The first was a new System Agreement, which set forth the terms and conditions for coordinated operations and wholesale transactions among the four companies, including a scheme of "capacity equalization payments," which were designed to ensure that each company contribute proportionately to the total costs of generating power on the system. Transactions related to the purchase of power from Grand Gulf 1, however, were not included in the 1982 System Agreement. The second agreement filed with FERC was the Unit Power Sales Agreement (UPSA), which provided wholesale rates for MSE's sale of Grand Gulf 1 capacity and energy. Under the UPSA, AP&L was not obligated to purchase any of Grand Gulf's capacity; LP&L was obligated to purchase 38.57%, NOPSI 29.8%, and MP&L 31.63%.

The FERC Proceedings

FERC assigned the agreements to two different Administrative Law Judges, who were charged with the task of determining whether the agreements were "just and reasonable" within the meaning of the Federal Power Act. [Footnote 6] Extensive

Page 487 U. S. 361

hearings were held by each ALJ, in which numerous parties representing consumer interests and the various state regulatory agencies participated. Both judges concluded that, because Grand Gulf was designed to serve the needs of the entire MSU system, the failure to distribute the costs associated with Grand Gulf among all members of the system rendered the agreements unduly discriminatory, and that costs should be allocated in proportion to each company's relative system demand. [Footnote 7] Middle South Services, Inc., 30

Page 487 U. S. 362

FERC

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