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 � 63,030, pp. 65, 170-65, 173 (1985) (1982 System
Agreement);
Middle South Energy, Inc., 26 FERC � 63,044,
pp. 65, 105-65, 108 (1984) (UPSA).
FERC consolidated the decisions of the Administrative Law Judges
for review and issued its decision in June, 1985.
Middle South
Energy, Inc., 31 FERC � 61,305. The Commission acknowledged
that it had before it difficult cost allocation issues, and that
there were "no easy answers." After extensive review, FERC
concluded that the most equitable result would be to adopt ALJ
Liebman's formula for allocating Grand Gulf costs.
The Commission affirmed and adopted the findings of the
Administrative Law Judges that MSU is a highly integrated and
coordinated power pool. It concluded that the result of this
integration and coordination was "planning, construction, and
operations which [were] conducted primarily for the system as a
whole."
Id. at 61,645. Because it found that
Page 487 U. S. 363
nuclear units on the System had been "planned to meet overall
System needs and objectives," it concluded
"that some form of equalization of nuclear plant costs [was]
necessary to achieve just, reasonable, and nondiscriminatory rates
among the MSU operating companies."
Id. at 61,655. The Commission agreed with the judges
that the 1982 System Agreement and the UPSA as filed would not
together produce proper cost allocation, but concluded that the
1982 System Agreement, in conjunction with ALJ Liebman's allocation
of capacity costs associated with Grand Gulf, would "achieve just
and reasonable results."
Ibid. Thus, FERC affirmed the
allocation of 33% of Grand Gulf's capacity costs to MP&L as
just and reasonable. Although it did not expressly discuss the
"prudence" of constructing Grand Gulf and bringing it on line, FERC
implicitly accepted the uncontroverted testimony of the MSU
executives who explained why they believed the decisions to
construct and to complete Grand Gulf 1 were sound, and approved the
finding that
"continuing construction of Grand Gulf Unit No. 1 was prudent,
because Middle South's executives believed Grand Gulf would enable
the Middle South system to diversify its base load fuel mix and, it
was projected, at the same time, produce power for a total cost
(capacity and energy) which would be less than existing
alternatives on the system."
26 FERC, at 65, 112-65, 113;
see 31 FERC, at 61,666
(affirming ALJ Liebman's decision to the extent not modified).
The Commission later clarified certain aspects of its previous
order in the course of considering several petitions for rehearing.
It rejected contentions that its exercise of jurisdiction would
destroy effective state regulation of retail rates. Specifically,
FERC rejected claims that it could not exercise jurisdiction
because such action would result in States' being "precluded from
judging the prudence of Grand Gulf costs, and denied any say in the
rate of return imposed as part of these costs," and "imping[e] on
the State's paramount
Page 487 U. S. 364
authority in certification decisions regarding need, type, and
costs of construction of new generating facilities." 32 FERC �
61,425, p. 61,951 (1985). FERC asserted that its opinion was "the
result of a careful balancing of the state and Federal interests
involved," and that it had paid "careful heed to the impact [its]
decision would have on the states."
Id. at 61,951-61,952.
FERC went on to reject the argument that allocation of Grand Gulf
costs should be based on whether individual companies
needed Grand Gulf capacity. Since Grand Gulf had been
constructed to meet the needs and serve the goals of the entire
system, FERC reasoned that
"the allocation of Grand Gulf power must rest not on the 'needs'
of an individual company, but rather on the principles of just,
reasonable, nondiscriminatory, and nonpreferential rates."
Id. at 61,958. FERC emphasized that the parties had
entered the pooling agreement voluntarily, and that its decision
did no more than
"alter, in as limited a means as possible, the agreed-upon cost
scheme in order to achieve just, reasonable, nondiscriminatory and
non-preferential rates."
Id. at 61,961.
On review, the United States Court of Appeals for the District
of Columbia Circuit affirmed FERC's order that the four operating
companies share the cost of the system's investment in nuclear
energy in proportion to their relative demand for energy generated
by the system as a whole. The court first rejected various
challenges to FERC's authority to restructure the parties'
agreed-upon allocations, holding that the Federal Power Act (FPA)
gave FERC the necessary authority. The court then affirmed FERC's
allocation of Grand Gulf capacity and costs as both rational and
within the Commission's range of discretion to remedy unduly
discriminatory rates.
Mississippi Industries v. FERC, 257
U.S.App.D.C. 244, 285, 808 F.2d 1525, 1566 (1987). [
Footnote 8]
Page 487 U. S. 365
The State Proceedings
On November 16, 1984, before the FERC proceedings were
completed, MP&L filed an application for a substantial increase
in its retail rates. The major portion of the requested increase
was based on the assumption that MP&L would be required to
purchase 31.63% of the high-cost Grand Gulf power when the unit
began operating on July 1, 1985, in accordance with the terms of
the UPSA. After public hearings, on June 14, 1985, the Mississippi
Commission entered an order allowing MP&L certain additional
revenues, but denying MP&L any retail rate relief associated
with Grand Gulf Unit 1. App. to Juris. Statement 33a.
On June 27, 1985, MP&L applied for rehearing of the order
insofar as it denied any rate relief associated with Grand Gulf. As
expected, Grand Gulf went on line on July 1, 1985, and MP&L
became obligated consistent with FERC's allocation to make net
payments of about $27 million per month for Grand Gulf capacity.
After public hearings on the rehearing petition, the MPSC found
that MP&L would become insolvent if relief were not granted,
and allowed a rate increase to go into effect to recover a
projected annual revenue deficiency
Page 487 U. S. 366
of about $327 million. The increase was predicated entirely on
the company's need for revenues to cover the purchased power
expenses associated with Grand Gulf 1.
See id. at 39a.
In its order the MPSC noted that petitions for rehearing were
pending before FERC, in which the MPSC was continuing to challenge
the allocation of 33% of Grand Gulf's power to MP&L.
Id. at 28a. It stated that it intended "to vigorously
pursue every available legal remedy challenging the validity and
fairness of the FERC allocation to MP&L,"
id. at 51a,
and that appropriate rate adjustments would be made if that
allocation was changed. The order made no reference to the prudence
of the investment in Grand Gulf.
The Attorney General of Mississippi and certain other parties
representing Mississippi consumers appealed to the Mississippi
Supreme Court. Under Mississippi law, the MPSC has authority to
establish just and reasonable rates which will lead to a fair rate
of return for the utility. Miss.Code Ann. § 77-3-39 (Supp.1987). "A
fair return is one which, under prudent and economical management,
is just and reasonable to both the public and the utility."
Southern Bell Tel. & Tel. Co. v. Mississippi Public Service
Comm'n, 237 Miss. 157, 241,
113 So. 2d
622, 656 (1959);
Mississippi Public Service Comm'n v.
Mississippi Power Co., 429 So. 2d
883 (Miss.1983). The appealing parties charged,
inter
alia, that the MPSC had exceeded the scope of its authority by
adopting "retail rates to pay Grand Gulf expenses without first
determining that the expenses were prudently incurred."
Mississippi ex rel. Pittman v. Mississippi Public Service
Comm'n, 506 So. 2d
978, 979 (Miss.1987). The State Supreme Court agreed, rejecting
the argument that requiring the MPSC to review the prudence of
incurring costs associated with Grand Gulf would violate the
Supremacy Clause of the United States Constitution. The court
concluded that MP&L and its sister and parent companies
were
Page 487 U. S. 367
using the jurisdictional relationship between state and federal
regulatory agencies to completely evade a prudency review of Grand
Gulf costs by either state or federal agencies, and remanded the
case to the MPSC for further proceedings. The court held that
FERC's determination 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. [
Footnote 9]
The court rejected MP&L's argument that the decision of this
Court in
Nantahala Power & Light Co. v. Thornburg,
476 U. S. 953
(1986), which barred the State of North Carolina from setting
retail rates that did not take into account FERC's allocation of
power between two related utility companies, foreclosed a state
prudence review.
Nantahala, the state court concluded,
simply did not force the
"MPSC to set rates based on the construction and operation of a
plant (nuclear or otherwise) that generates power that is not
needed at a price that is not prudent."
506 So. 2d at 985. The court assumed that only the fact that
Grand Gulf was owned by an out-of-state corporation, as opposed to
MP&L, created a
Page 487 U. S. 368
question whether a state prudence determination was preempted,
and concluded that that fact was not enough to rob it of authority.
The court distinguished
Nantahala because that case
concerned an agreement allocating low-cost power, and the prudence
of purchasing the available low-cost hydroelectric power was never
at issue.
The state court adopted the view that, in determining whether a
particular aspect of state regulation was preempted by FERC action,
the state court should "
examine those matters actually
determined, whether expressly or impliedly, by the FERC.'" 506
So. 2d at 986 (quoting Appeal of Sinclair Machine Products,
Inc., 126 N. H. 822, 833, 498 A.2d 696, 704 (1985)). It
concluded that ,
"'[a]s to those matters not resolved by the FERC, State
regulation is
not preempted provided that regulation would
not contradict or undermine FERC determinations and federal
interests, or impose inconsistent obligations on the utility
companies involved.'"
506 So. 2d at 986. The court then noted that FERC "was never
presented with the question of whether the completion of Grand
Gulf, or its continued operation, was prudent"
id. at 986,
and that the Court of Appeals, in affirming FERC's allocation, had
"made no finding with regard to prudency,
because the issue was
not presented."
Id. at 987 (emphasis in original).
Consistent with this analysis, the Mississippi Supreme Court
remanded the case to the MPSC "for a review of the prudency of the
Grand Gulf investment." The court specified that this review
should
"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."
Ibid. Thus, the MPSC was directed to examine the
prudence of the investment of both domestic and foreign
corporations in Grand Gulf "
in light of local conditions."
Ibid. (emphasis in original).
Appellant MP&L contends that our decision in
Nantahala, the FPA, and the Commerce Clause require the
MPSC, in
Page 487 U. S. 369
setting retail electric rates, to recognize that expenses
incurred under FERC wholesale rate decisions that allocate
interstate wholesale costs are reasonably incurred operating
expenses. [
Footnote 10] In
essence appellant asserts that FERC's allocation of Grand Gulf
power preempts the jurisdiction of state regulatory agencies to set
retail rates that do not recognize the costs associated with that
allocation as reasonable. Appellees contend that the Supremacy
Clause does not preclude review of MP&L's managerial prudence,
and that the effect of preemption would be to create a regulatory
gap not contemplated by Congress, the Constitution, or this
Court.
II
We hold that our decision in
Nantahala rests on a
foundation that is broad enough to support the order entered by
Page 487 U. S. 370
FERC in this case, and to require the MPSC to treat MP&L's
FERC-mandated payments for Grand Gulf costs as reasonably incurred
operating expenses for the purpose of setting MP&L's retail
rates. The Mississippi Supreme Court's judgment ordering the MPSC
to conduct proceedings to determine whether some or all of the
costs were not prudently incurred is preempted by federal law, and
must be reversed. [
Footnote
11] In
Nantahala, we considered the preemptive effect
of a FERC order that reallocated the respective shares of two
affiliated companies' entitlement to low-cost power. Under an
agreement between the two affiliated companies, Nantahala, a public
utility selling to both retail and wholesale customers in North
Carolina, had been allocated 20% of the low-cost power purchased
from the Tennessee Valley Authority, while 80% was reserved for the
affiliate whose only customer was their common parent. FERC found
that the agreement was unfair to Nantahala, and ordered it to file
a new wholesale rate schedule based on an entitlement to 22.5% of
the low-cost power purchased from TVA. Subsequently, in a retail
rate proceeding, the North Carolina Regulatory Commission
reexamined the issue and determined that any share less than 24.5%
was unfair, and therefore ordered Nantahala to calculate its costs
for retail ratemaking purposes as though it had received 24.5% of
the low-cost power. The effect of the State Commission's order was
to force Nantahala to calculate its retail rates as though FERC had
allocated it a greater share of the low-cost power and to deny
Nantahala the right to recover a portion of the costs it had
incurred in paying rates that FERC had determined to
Page 487 U. S. 371
be just and reasonable. Although the North Carolina Supreme
Court acknowledged FERC's exclusive jurisdiction over wholesale
rates, it held that the State Commission's
de facto
reallocation of low-cost power was
""well within the field of exclusive state ratemaking authority
engendered by the
bright line' between state and federal
regulatory jurisdiction under the Federal Power Act.""
Nantahala, 476 U.S. at
476 U. S. 961
(quoting
State ex rel. Utilities Comm'n v. Nantahala Power
& Light Co., 313 N.C. 614, 687-688,
332 S.E.2d
397, 440-441 (1985)). The state court emphasized that its order
did not require Nantahala to violate the FERC order, and that it
was not expressly contradicting a FERC finding. We rejected these
arguments. The reasoning that led to our decision in
Nantahala applies with equal force here, and compels the
same conclusion -- States may not alter FERC-ordered allocations of
power by substituting their own determinations of what would be
just and fair. FERC-mandated allocations of power are binding on
the States, and States must treat those allocations as fair and
reasonable when determining retail rates.
Our decision in
Nantahala relied on fundamental
principles concerning the preemptive impact of federal jurisdiction
over wholesale rates on state regulation. First, FERC has exclusive
authority to determine the reasonableness of wholesale rates. It is
now settled that
"'the right to a reasonable rate is the right to the rate which
the Commission files or fixes, and, . . . except for review of the
Commission's orders, [a] court can assume no right to a different
one on the ground that, in its opinion, it is the only or the more
reasonable one.'"
Nantahala, 476 U.S. at
476 U. S.
963-964 (quoting
Montana-Dakota Utilities Co. v.
Northwestern Public Service Co., 341 U.
S. 246,
341 U. S.
251-252 (1951)). This principle binds both state and
federal courts, and is in the former respect mandated by the
Supremacy Clause. 476 U.S. at
476 U. S. 963.
Second, FERC's exclusive jurisdiction applies not only to rates,
but also to power allocations that affect wholesale rates.
Id. at
476 U. S.
966.
Page 487 U. S. 372
Third, States may not bar regulated utilities from passing
through to retail consumers FERC-mandated wholesale rates.
"The filed rate doctrine ensures that sellers of wholesale power
governed by FERC can recover the costs incurred by their payment of
just and reasonable FERC-set rates. When FERC sets a rate between a
seller of power and a wholesaler-as-buyer, a State may not exercise
its undoubted jurisdiction over retail sales to prevent the
wholesaler-as-seller from recovering the costs of paying the
FERC-approved rate. . . . Such a 'trapping' of costs is
prohibited."
Id. at
476 U. S. 970.
These principles led us to hold in
Nantahala that the
North Carolina Utilities Commission's order "trapping" federally
mandated costs was preempted. Today they compel us to hold that the
MPSC may not enter an order "trapping" the costs MP&L is
mandated to pay under the FERC order allocating Grand Gulf power,
or undertake a "prudence" review for the purpose of deciding
whether to enter such an order. [
Footnote 12]
The facts of this case and
Nantahala are not
distinguishable in any way that has relevance to the operation of
the principles stated above. Both cases concern FERC orders
adjusting in the interest of fairness voluntary allocations of
power among related entities.
Nantahala involved a FERC
order fixing the utility's right to acquire low-cost power; this
case involves a FERC order fixing MP&L's obligation to acquire
high-cost power. In
Nantahala, FERC had
"determined
Page 487 U. S. 373
that Nantahala's average cost of power obtained from TVA should
be based on a particular allocation of entitlements power,
and
no other,"
id. at
476 U. S. 971
(emphasis added); in this case FERC has determined that MP&L's
cost of power obtained from Grand Gulf should be based on a
particular allocation, and no other. In
Nantahala, the
state court attempted to approve retail rates based on the
assumption that Nantahala was entitled to more low-cost power than
FERC had allocated to it. Here, the state court seeks to permit the
State to set rates based on an assumption that MP&L is
obligated to purchase less Grand Gulf power than FERC has ordered
it to purchase.
In this case, as in
Nantahala, we hold 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. . . . Once FERC sets such a
rate, 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' desire to give FERC plenary
authority over interstate wholesale rates, and to ensure that the
States do not interfere with this authority."
Nantahala, 476 U.S. at
476 U. S. 965,
476 U. S. 966.
Thus, we conclude that the Supremacy Clause compels the MPSC to
permit MP&L to recover as a reasonable operating expense costs
incurred as the result of paying a FERC-determined wholesale rate
for a FERC-mandated allocation of power.
Appellees seek to characterize this case as falling within facts
distinguished in
Nantahala. Without purporting to
determine the issue, we stated in
Nantahala:
"[W]e may assume 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."
Id. at
476 U. S. 972
(emphasis in original). As we assumed, it might well be
unreasonable for a utility to purchase unnecessary quantities
Page 487 U. S. 374
of high-cost power, even at FERC-approved rates, if it had the
legal right to refuse to buy that power. But 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.
Just as Nantahala had no legal right to obtain any more low-cost
TVA power than the amount allocated by FERC, it is equally clear
that MP&L may not pay for less Grand Gulf power than the amount
allocated by FERC.
The Mississippi Supreme Court erred in adopting the view that
the preemptive effect of FERC jurisdiction turned on whether a
particular matter was actually determined in the FERC proceedings.
See 506 So. 2d at 986. We have long rejected this sort of
"'case-by-case analysis of the impact of state regulation upon the
national interest'" in power regulation cases.
Nantahala,
476 U.S. at
476 U. S. 966
(quoting
FPC v. Southern California Edison Co.,
376 U. S. 205,
376 U. S.
215-216 (1964)). Congress has drawn a bright line
between state and federal authority in the setting of wholesale
rates and in the regulation of agreements that affect wholesale
rates. States may not regulate in areas where FERC has properly
exercised its jurisdiction to determine just and reasonable
wholesale rates or to insure that agreements affecting wholesale
rates are reasonable. FERC's jurisdiction to adjust the allocations
of Grand Gulf power in the UPSA has been established. [
Footnote 13] Mississippi, therefore,
may not, consistent with the Supremacy Clause, conduct any
proceedings that challenge the reasonableness of FERC's
allocation.
Page 487 U. S. 375
The reasonableness of rates and agreements regulated by FERC may
not be collaterally attacked in state or federal courts. The only
appropriate forum for such a challenge is before the Commission or
a court reviewing the Commission's order. The Mississippi Supreme
Court attached considerable significance to the fact that the
prudence of investing in Grand Gulf and bringing it on line was not
discussed either in the proceedings before FERC or on review by the
United States Court of Appeals for the District of Columbia
Circuit. The question of prudence was not discussed, however,
because no party raised the issue, not because it was a matter
beyond the scope of FERC's jurisdiction. The Mississippi Supreme
Court characterized the conduct of MP&L and its sister
companies as an effort to
"us[e] the jurisdictional relationship between state and federal
regulatory agencies to completely evade a prudency review of Grand
Gulf costs by either agency."
506 So. 2d at 979. The facts of this case, however, offer no
evidence of such subterfuge. The very parties who are appellees
here, and who urged the Mississippi Supreme Court to order the MPSC
to conduct a prudence review, were also participants in the
proceedings before FERC. The parties to the FERC proceedings
recognized the impact that FERC's order would have on the
jurisdiction of the state regulatory agencies.
See Middle South
Energy, Inc., 32 FERC � 61,425, pp. 61,951-61,952 (1985).
Despite that recognition, appellees failed to raise the matter of
the prudence of the investment in Grand Gulf before FERC, though it
was a matter FERC easily could have considered in determining
whether to permit MSE to recoup 100% of the costs of Grand Gulf in
the wholesale rates it charged to the four operating companies, and
in allocating Grand Gulf power.
See New England Power Co.,
31 FERC � 61,047, pp. 61,081-61,084 (1985),
enf'd, 800
F.2d 280 (CA1 1986).
Page 487 U. S. 376
In fact, FERC did consider and reject some aspects of the
prudence review the Mississippi Supreme Court directed the MPSC to
conduct. The state court emphasized that the MPSC was to determine
whether "MSU and its subsidiaries made reasonable decisions
in
light of local conditions." 506 So. 2d at 987. FERC rejected,
however, the argument that decisions about the allocation of Grand
Gulf costs should be made in light of the needs of any one of the
operating companies. It emphasized that
"the Middle South companies appropriately approach power
planning on a system-wide basis, whereby the individual companies'
needs are the component parts of the System power plan, [and that]
[i]mplementation of the System plan . . . require[d] that the
individual companies' needs be subsumed by the greater interests of
the entire System."
32 FERC, at 61,958. Thus, FERC's order specifically bars a state
regulatory agency from evaluating the prudence of Grand Gulf "in
light of local conditions" alone. The state court also directed a
"complete review of the transactions between MP&L, [MSE], and
MSU, and their effect on Grand Gulf expense." These transactions,
however, comprise the very System Agreements between MSU and the
operating companies and UPSA evaluated by FERC in the exercise of
its jurisdiction over wholesale rates. The MPSC lacks jurisdiction
to reevaluate the reasonableness of those transactions. The MPSC
cannot evaluate either the prudence of MSU's decision to invest in
Grand Gulf and bring it on line or the prudence of MP&L's
decision to be a party to agreements to construct and operate Grand
Gulf without traversing matters squarely within FERC's
jurisdiction. [
Footnote
14]
Page 487 U. S. 377
There "can be no divided authority over interstate commerce . .
. the acts of Congress on that subject are supreme and exclusive."
Missouri Pacific R. Co. v. Stroud, 267 U.
S. 404,
267 U. S. 408
(1925). Consequently, a state agency's "efforts to regulate
commerce must fall when they conflict with or interfere with
federal authority over the same activity."
Chicago and North
Western Transp. Co. v. Kalo Brick & Tile Co., 450 U.
S. 311,
450 U. S.
318-319 (1981). Mississippi's effort to invade the
province of federal authority must be rejected. The judgment of the
Mississippi Supreme Court is reversed.
It is so ordered.
[
Footnote 1]
The other operating companies owned by MSU are Louisiana Power
and Light (LP&L), New Orleans Public Service, Inc. (NOPSI), and
Arkansas Power and Light Company (AP&L).
[
Footnote 2]
Prior to the events that gave rise to the instant controversy,
each generating unit on the system was owned, financed,
constructed, and operated by a single operating company, despite
the fact that new generating units were planned and constructed in
accordance with the needs of the system as a whole, not merely the
needs of the particular operating company.
Middle South Energy,
Inc., 31 FERC � 61,305, p. 61,653 (1985).
[
Footnote 3]
Originally, AP&L was assigned to build and operate two
nuclear facilities in Arkansas, ANO 1 and ANO 2; LP&L undertook
the construction of Waterford 3 and 4; MP&L was assigned to
build and operate Grand Gulf l; and NOPSI was to construct a unit
near New Orleans. Although the two ANO units were completed without
incident, regulatory delays, additional construction requirements,
and severe inflation led to serious problems in the construction of
the remaining units. Plans to construct Waterford 4 quickly failed,
and severe costs overruns marred the completion of Waterford 3. The
site for the NOPSI facility proved unsuitable, and responsibility
for construction of that unit, Grand Gulf 2, was transferred to
MP&L.
[
Footnote 4]
The MPSC's Order Granting Certificate of Public Convenience and
Necessity reflected the MPSC's appreciation of the interstate
dimensions of the MSU system. It stated, in part:
"Middle South Utilities, Inc. ('Middle South') is a holding
company registered under the Public Utility Holding Company Act of
1935. It owns all of the outstanding common stock of each of its
principal operating subsidiaries: Arkansas Power & Light
Company (Arkansas), Arkansas-Missouri Power Company (Ark-Mo),
Louisiana Power & Light Company (Louisiana), [MP&L], and
New Orleans Public Service Inc. (NOPSI). . . . Middle South and all
of its subsidiaries constitute the Middle South Utilities System
(Middle South System). The electric properties of the System
operating companies constitute an integrated public utility
system."
"
* * * *"
"The generating facilities of the Middle South System have been
strategically located with a reference to the availability of fuel,
protection of local loads and other controlling economic factors.
The size of these units has been determined basically by the
projected load growth of the Middle South System. [MP&L's]
present rate and capital structure obviously cannot support
construction of this magnitude."
"In order to finance this construction on a basis that will be
in the best interests of both its investors and the investors in
its subsidiaries, and to insure adequate and dependable electric
service to the customers and service areas of its subsidiaries,
including Company, and without unnecessarily complicating its
financial structure, Middle South [Middle South Energy, Inc.] has
been organized."
App. to Motion to Dismiss 27-28, 30-31.
[
Footnote 5]
It was originally estimated that the cost per kilowatt of
capacity would be about $500; by the time commercial operations
began, that cost amounted to $2,933. The original estimate for the
cost of two nuclear units at Port Gibson was approximately $1.2
billion. Regulatory delays, additional construction requirements
imposed after the Three Mile Island disaster, and severe inflation,
however, ran up Grand Gulf costs to more than $3 billion for the
single unit.
See Mississippi Industries v. FERC, 257
U.S.App.D.C. 244, 250, 808 F.2d 1525, 1531 (1987).
[
Footnote 6]
Section 205 of the Federal Power Act declares unlawful any rate
charged in any transaction within FERC's jurisdiction that is not
just and reasonable. 49 Stat. 851, as amended, 16 U.S.C. § 824d(a).
Section 206 of the Act provides that, when FERC determines after a
hearing that
"any rate, charge, or classification, demanded, observed,
charged, or collected by any public utility for any transmission or
sale subject to the jurisdiction of the Commission, or that any
rule, regulation, practice, or contract affecting such rate,
charge, or classification is unjust, unreasonable, unduly
discriminatory or preferential, the Commission shall determine the
just and reasonable rate, charge, classification, rule, regulation,
practice, or contract to be thereafter observed and in force, and
shall fix the same by order."
16 U.S.C. § 824e(a). Because FERC determined that the UPSA
allocating Grand Gulf power among the four operating companies was
a contract affecting the wholesale rates of those operating
companies, § 206 of the FPA imposed on FERC an obligation to fix
terms that would render the contract "just and reasonable."
See
Mississippi Industries, 257 U.S.App.D.C. at 259-260, 808 F.2d
at 1540-1541.
[
Footnote 7]
Administrative Law Judge Liebman, who reviewed the UPSA,
"concluded that the evidence was overwhelming that the Middle
South system is a single integrated and coordinated electric system
operating in Louisiana, Mississippi, Arkansas, and Missouri. He
found that the Grand Gulf project was initiated in the 1970's to
meet the then projected load demand of the
system, and not
just the load of any Middle South operating company or companies,
and further, that every unit on the Middle South system had been
constructed to meet system load. Therefore, he concluded that the
costs of Grand Gulf capacity and energy should be shared equitably
by all four operating companies and their customers,"
and that the allocations in the UPSA were "unjust, unreasonable
and unduly discriminatory."
Middle South Energy, Inc., 31
FERC, at 61,632-61,633 (emphasis in original);
Middle South
Energy, Inc., 26 FERC � 63,044, pp. 65, 106-65, 108 (1984). He
concluded that the allocation proposal submitted by the Louisiana
Public Service Commission was the most equitable. Under that
proposal, each operating company would be allocated a share of the
cost of nuclear capacity on the MSU system roughly in proportion to
each company's relative share of system demand, as fixed in 1982.
26 FERC, at 65,109. This approach allocated 33% of Grand Gulf's
capacity costs to MP&L, a percentage slightly higher than that
contained in the UPSA, which had distributed costs among only three
of the operating companies.
Administrative Law Judge Head, who presided in the proceedings
involving the 1982 System Agreement, advocated equalizing
production costs on the basis of annual demand. Although he
characterized Grand Gulf as an "anomaly," he reached conclusions
similar to ALJ Liebman's about the relationship of Grand Gulf to
the system:
"[Grand Gulf] was planned, licensed, and constructed as a
system plant, intended to supply power not only in
Mississippi but throughout the entire MSU system. . . . [T]he
financial responsibility and production cost responsibility for
Grand Gulf should be borne by all the operating companies. . .
."
"
* * * *"
". . . Grand Gulf [should be integrated] into the 1982 System
Agreement by having each of the four operating companies pay for
the production costs of the Grand Gulf facility based on the ratio
that the individual operating company's total annual demand bears
to the total annual system demand."
Middle South Services, Inc., 30 FERC � 63,030, p. 65,
172 (1985) (emphasis added).
Both judges considered and rejected MP&L's proposition that
costs should be allocated in accordance with the 1973 System
Agreement. Under the 1973 Agreement, the cost to be borne by each
operating company would depend on the percentage of Grand Gulf
capacity that company needed to meet the demands of its customers.
Thus, companies owning capacity sufficient to meet their needs,
"long" companies, would not bear any of the cost, while "short"
companies, companies that have to purchase additional capacity to
meet their needs, would bear the total cost. Responsibility would
shift as particular operating companies became "shorter" or
"longer." Since MP&L is predicted to be a long company until
sometime in the 1990's, under the 1973 System Agreement, it would
not have had to bear any costs associated with Grand Gulf until
depreciation had substantially reduced the cost of Grand Gulf
power.
[
Footnote 8]
Judge Bork agreed with most of the majority's decision, but
dissented from the panel's affirmance of FERC's specific allocation
of Grand Gulf costs on the ground that FERC had failed adequately
to explain its criteria for determining undue discrimination and
why the allocation it adopted was not unduly discriminatory. The
panel voted to deny rehearing, but the court granted rehearing en
banc to consider the issues raised by the dissent, and vacated the
portions of the panel opinion concerning the specific allocation of
costs.
Mississippi Industries v. FERC, 259 U.S.App.D.C.
244, 814 F.2d 773 (1987). Later, the en banc court vacated its
order granting rehearing. 262 U.S.App.D.C. 41, 822 F.2d 1103
(1987). At the same time, the panel vacated its order denying
rehearing, granted rehearing, reversed FERC's order, vacated the
part of its opinion concerning specific cost allocations, and
remanded to FERC for reconsideration of the decision to equalize
capacity costs and for an explanation of what constitutes undue
discrimination and why FERC's order was not unduly discriminatory.
Mississippi Industries v. FERC, 262 U.S.App.D.C. 42, 822
F.2d 1104 (1987). On remand, FERC has issued an opinion reaffirming
and further explaining the basis for its previous allocation.
See System Energy Resources, Inc., 41 FERC � 61,238
(1987).
[
Footnote 9]
The court pointed out that approval to build Grand Gulf in the
State of Mississippi had been secured on the strength of certain
assumptions:
"the first unit was to be operational in 1980, the two units
were to cost $1.227 billion, and Mississippi ratepayers were not to
pay for any more of its capacity than they needed."
506 So. 2d at 984. Reliance on these assumptions proved
unjustified:
"Unit 1 began operation in July, 1985; the cost of Unit 1 alone
was over $3.5 billion; and the MSU-controlled operating companies
agreed among themselves that Mississippians should pay for 1/3 of
its cost."
Ibid. (emphasis omitted). Of course, the failure of the
assumptions made by both MP&L and the State at the time
construction of Grand Gulf was approved has little to do with the
preemption question before us. We note, however, that the failure
was not the result of any deception on the part of MP&L, MSU,
or MSE. At the time construction of Grand Gulf was initiated, no
one anticipated the enormous cost overruns that would be associated
not only with that plant but also with virtually every nuclear
power facility being constructed in the United States.
See
nn.
2 and |
2 and S. 354fn5|>5,
supra.
[
Footnote 10]
Appellant asserted in its jurisdictional statement that the
Mississippi Supreme Court had rejected its challenge to the
constitutionality of Miss.Code Ann. § 77-3-39 (Supp.1987), and that
this Court had appellate jurisdiction under 28 U.S.C. § 1257(2).
Relying on this assertion and on the substantial federal question
presented, we postponed further consideration of the question of
jurisdiction to the hearing of the case on the merits. 484 U.S. 813
(1987). On further review of the decision of the Mississippi
Supreme Court and of the briefs submitted by appellant to that
court, however, we are of the view that appellant never challenged
the constitutionality of § 77-3-39; rather, it merely argued that
the MPSC's exercise of jurisdiction to determine prudence would
violate the Supremacy Clause. Although appellant's argument
implicitly called into question the scope of any state statutes
that speak to the MPSC's jurisdiction, it was not the type of
express challenge to the constitutionality of the state statute
required for this Court's exercise of jurisdiction under § 1257(2).
See Peralta v. Heights Medical Center, Inc., 485 U. S.
80,
485 U. S. 84, n.
4 (1988). Consequently, we dismiss the appeal for want of
jurisdiction. However, because the papers do present a substantial
federal question,"construing the papers filed as a petition for a
writ of certiorari, we now grant the petition."
Addington v.
Texas, 441 U. S. 418,
441 U. S.
422-423 (1979);
see 28 U.S.C. § 2103. As we
have in previous cases in which we have construed a jurisdictional
statement as a petition for certiorari, for convenience, we
continue to refer to the parties as appellant and appellees.
See Peralta, 485 U.S. at
485 U. S. 84, n.
4;
Kulko v. California Superior Court, 436 U. S.
84,
436 U. S. 90, n. 4
(1978).
[
Footnote 11]
Appellees contend that the judgment of the Mississippi Supreme
Court is not "final" within the meaning of 28 U.S.C. § 1257 because
further proceedings will be held on remand. The critical federal
question -- whether federal law preempts such proceedings while the
FERC order remains in effect -- has, however, already been answered
by the State Supreme Court, and its judgment is therefore ripe for
review.
See Cox Broadcasting Corp. v. Cohn, 420 U.
S. 469,
420 U. S. 477
(1975).
See also R. Stern, E. Gressman, & S. Shapiro,
Supreme Court Practice 129 (6th ed., 1986).
[
Footnote 12]
It is clear that the only purpose of the prudence review ordered
by the Mississippi Supreme Court was to determine whether the costs
FERC had directed MP&L to pay for its allocation of Grand Gulf
power should be "trapped" or passed on to MP&L's retail
customers. The Mississippi Supreme Court's judgment ordering the
review itself had the effect of "trapping" some Grand Gulf costs,
since the MPSC responded to the judgment by rescinding the
previously approved rate increase and ordering MP&L to submit a
plan for refunding to its customers all of its prior recovery of
Grand Gulf expenses. To prevent this trapping, we granted a stay of
the Mississippi Supreme Court's judgment.
Mississippi Power
& Light Co. v. Mississippi ex rel. Pittman, 483 U.S. 1013
(1987).
[
Footnote 13]
Appellant and other parties unsuccessfully challenged the
jurisdiction of FERC over the UPSA in the FERC proceedings, and on
appeal to the United States Court of Appeals for the District of
Columbia Circuit. After thorough consideration at every level of
administrative and judicial review, this challenge was rejected.
See 26 FERC, at 65, 113-65, 117; 31 FERC, at
61,643-61,644; 32 FERC, at 61,943-61,951; 257 U.S.App.D.C. at
258-262, 808 F.2d 1539-1543.
[
Footnote 14]
In addition to arguing that the Supremacy Clause does not bar an
MPSC prudence inquiry, appellees argue that MP&L should be
equitably estopped from arguing that the prudence review ordered by
the Mississippi Supreme Court is preempted by federal law. In
acquiring a license from the State of Mississippi to construct
Grand Gulf, MSU and MP&L made certain representations to the
MPSC as to how Grand Gulf costs and power would be allocated.
Appellees do not claim that these representations were false when
made, Brief for Appellee State of Mississippi 39, or that FERC was
bound by the representations made in the state proceedings,
id. at 42; rather, they argue that MSU should have
been
"denied standing . . . to file an application with FERC, or
enforce any allocation against the Mississippi service area other
than originally represented to secure the necessary construction
certificate,"
id. at 43. This argument has no relevance to the
preemption question before us. Representations in state
proceedings, even ones that were false when made, cannot subvert
the operation of the Supremacy Clause. The appropriate place to
contend that MSU and or MP&L lacked standing before the FERC
was in the Commission proceedings, and the argument was in fact
raised and rejected in those proceedings.
See 257
U.S.App.D.C. at 268-269, 808 F.2d at 1549-1550.
JUSTICE SCALIA, concurring in the judgment.
I concur in the judgment of the Court, but write separately to
discuss more fully what is to me the critical issue in this case:
whether FERC had jurisdiction to determine whether MP&L's
agreement to participate in the construction of Grand Gulf 1 and to
purchase power from that facility was prudent.
It is common ground that, if FERC has jurisdiction over a
subject, the States cannot have jurisdiction over the same subject.
See Nantahala Power & Light Co. v. Thornburg,
476 U. S. 953,
476 U. S.
962-967 (1986). FERC has determined that, when two or
more utilities form a joint venture or pool to share electrical
generating capacity, including construction of
Page 487 U. S. 378
a new facility, the resulting transfers of power are wholesales
of electricity subject to FERC's jurisdiction under the Federal
Power Act, 16 U.S.C. § 791a
et seq. It is not disputed
that, in reviewing the wholesale rates charged to the participants
in such a venture, FERC has jurisdiction to determine whether the
venture was prudent as a whole. Nor is it seriously contested that,
in general, FERC has jurisdiction to determine a fair allocation of
the cost of the facility among the utilities in the pool.
Cf.
Nantahala, supra, at
476 U. S. 966.
The central controverted issue in the present case is whether FERC
has jurisdiction to determine the prudence
of a particular
utility's participation in the pool.
FERC has asserted that it has such jurisdiction in the context
of a pool of affiliated companies. In
AEP Generating Co.,
36 FERC � 61,226 (1986), FERC was asked to consider the prudence,
"in light of the availability of alternative power supplies," of
Kentucky Power Company's agreement to purchase 15% of the capacity
of a generating facility as part of a pooling agreement with other,
affiliated, utilities.
Id. at 61,549. FERC agreed to do
so, concluding that fair allocation of costs among the utilities
was inseparable from some inquiry into the prudence of Kentucky
Power's entering into the pooling arrangement in light of available
alternative power supplies.
Id. at 61,550-61,551. FERC
explained that
"the transaction involves affiliated, jurisdictional utilities,
which are members of an integrated, interstate holding company
arrangement,"
and that,
"[u]nder these circumstances, more complex, interrelated
questions arise and, whether one characterizes the questions as
related to prudence, interpretation [of the basic system
agreements], or cost allocation, they are clearly matters most
appropriately resolved by the Commission as part of its overriding
authority to evaluate and implement all applicable wholesale rate
schedules."
Id. at 61,550.
AEP Generating Co. makes plain that, for the type of
arrangement at issue in this case,
see ante at
487 U. S. 357
and n. 1 -- a
Page 487 U. S. 379
joint venture or pooling agreement among affiliated companies --
FERC asserts jurisdiction to inquire into the prudence of a
particular utility's entering the arrangement. Nothing the
Commission said or did in the present case is inconsistent with
that assertion of jurisdiction. Its statement that allocation of
the costs of Grand Gulf was not to be based on the "needs" of
particular utilities,
Middle South Energy, Inc., 32 FERC �
61,425, p. 61,958 (1985), merely rejects allocating costs according
to the
current needs of the utilities, which would be
incompatible with the utilities' agreement to approach power
planning on a system-wide basis. That has nothing to do with
whether the prudence of a utility's joining the system in the first
place can be examined. It is true, of course, that FERC did not
conduct such an examination in the present case; but, as the Court
discusses,
see ante at
487 U. S. 375,
neither did any party ask it to do so. That failure to ask does not
take the issue out of FERC's jurisdiction and recommit it to the
States.
*
Page 487 U. S. 380
What the case comes down to, then, is whether FERC's asserted
jurisdiction to examine the prudence of a particular utility's
joining a pooling arrangement with affiliated companies is
supported by the provisions of the Federal Power Act. If so, there
is no regulatory gap for the States to fill, and they are preempted
from examining that question of prudence in calculating the rates
chargeable to retail customers. In considering the Federal Power
Act question, we will defer, of course, to FERC's construction if
it does not violate plain meaning and is a reasonable
interpretation of silence or ambiguity.
See, e.g., K mart Corp.
v. Cartier, Inc., 486 U. S. 281,
486 U. S.
291-292 (1988);
Chevron U.S.A. Inc. v.
Natural Resources Defense Council, Inc.,
467 U. S. 837,
467 U. S.
842-844 (1984).
Contrary to the dissent,
post at
487 U. S.
386-387, we have held that this rule of deference
applies to an agency's interpretation of a statute designed to
confine its authority.
See, e.g., Japan Whaling Assn. v.
American Cetacean Society, 478 U. S. 221,
478 U. S. 226,
478 U. S. 233
(1986);
Chemical Manufacturers Assn.
v.
Page 487 U. S. 381
Natural Resources Defense Council,
Inc., 470 U. S. 116,
470 U. S. 123,
470 U. S. 125,
470 U. S. 126
(1985). In particular, it is settled law that the rule of deference
applies even to an agency's interpretation of its own statutory
authority or jurisdiction.
See Commodity Futures Trading Comm'n
v. Schor, 478 U. S. 833,
478 U. S.
844-845, (1986);
NLRB v. City Disposal Systems,
Inc., 465 U. S. 822,
465 U. S. 830,
n. 7 (1984) ("We have never . . . held that such an exception [for
issues of statutory jurisdiction] exists to the normal standard of
review . . .; indeed, we have not hesitated to defer . . .");
see also, e.g., City of New York v. FCC, 486 U. S.
57,
486 U. S. 64
(1988);
Capital Cities Cable, Inc. v. Crisp, 467 U.
S. 691,
467 U. S. 700
(1984);
CBS, Inc. v. FCC, 453 U.
S. 367,
453 U. S. 382
(1981);
Red Lion Broadcasting Co. v. FCC, 395 U.
S. 367,
395 U. S.
379-381 (1969);
FTC v. Bunte Brothers, Inc.,
312 U. S. 349,
312 U. S. 352
(1941) (dictum). In fact, the arguments relied on by the dissent
post at
487 U. S.
386-387, have been expressly rejected by this Court --
namely, that agencies can claim no special expertise in
interpreting their authorizing statutes if an issue can be
characterized as jurisdictional,
see Schor, supra, at
478 U. S. 845,
and that the usual reliance on the agency to resolve conflicting
policies is inappropriate if the resolution involves defining the
limits of the agency's authority,
see, e.g., City of New York
v. FCC, supra, at
486 U. S. 64,
rather than (what is really no different) defining the limits of
application of authority it plainly has. Rather, it is plain that
giving deference to an administrative interpretation of its
statutory jurisdiction or authority is both necessary and
appropriate. It is
necessary because there is no
discernible line between an agency's exceeding its authority and an
agency's exceeding authorized application of its authority. To
exceed authorized application is to exceed authority. Virtually any
administrative action can be characterized as either the one or the
other, depending upon how generally one wishes to describe the
"authority."
Cf. NLRB v. City Disposal Systems, Inc.,
supra, at
465 U. S. 830,
n. 7. And deference is appropriate, because it is consistent with
the general rationale for deference: Congress would naturally
expect
Page 487 U. S. 382
that the agency would be responsible, within broad limits, for
resolving ambiguities in its statutory authority or jurisdiction.
Cf. Chevron U.S.A. Inc. v. Natural Resources Defense Council,
Inc., supra, at
467 U. S.
843-844. Congress would neither anticipate nor desire
that every ambiguity in statutory authority would be addressed
de novo by the courts. To be sure, in defining agency
jurisdiction, Congress sometimes speaks in plain terms, in which
case the agency has no discretion. But the dissent concedes that,
in this case, "[i]f agency deference applied, . . . these prudency
issues are sufficiently intertwined that we should defer to FERC's
conclusion."
Post at
487 U. S.
386.
FERC's interpretation in the present case satisfies the
conditions for deference. Under 16 U.S.C. § 824e(a), FERC is
responsible for assuring that the rates charged to purchasers of
electric energy at wholesale, and the contracts affecting such
rates, are not "unjust, unreasonable, unduly discriminatory or
preferential." Perhaps (we need not decide the point today) it
cannot be considered "unjust, unreasonable, unduly discriminatory
or preferential" to hold the participant in a joint venture to that
fair proportion of the costs which it contracted in arm's-length
negotiations to bear, even though its entry into the contract may
have been imprudent. But I think it assuredly can be considered
"unjust, unreasonable, unduly discriminatory or preferential" (for
purposes of the ends served by the Federal Power Act) to make a
participant bear such costs under an imprudent contract it was
essentially assigned, through a process in which the overall
interests of the affiliated group, rather than the particular
interest of the individual affiliate, was paramount. It is entirely
reasonable to think that the fairness of rates and contracts
relating to joint ventures among affiliated companies cannot be
separated from an inquiry into the prudence of each affiliate's
participation.
Appellees rely upon the language in § 824(b)(1), which states
that FERC
"shall not have jurisdiction, except as specifically
Page 487 U. S. 383
provided in this subchapter [the FPA] . . over facilities used
for the generation of electric energy."
But this does not plainly contradict FERC's assertion of
jurisdiction. First, it is reasonable to regard FERC's § 824e(a)
authority to set wholesale rates as precisely an example of
jurisdiction "specifically provided." And second, it is reasonable
to say that FERC is not exercising jurisdiction over the electrical
generating facility, but merely over the sale of the power created
by that facility.
After today, the battle will no longer be over who has
jurisdiction, FERC or the States, to evaluate the prudence of a
particular utility's entering pooling arrangements with affiliated
companies for the sharing of electrical generating capacity or the
creation and wholesaling of electrical energy. FERC has asserted
that jurisdiction and has been vindicated. What goes along with the
jurisdiction is the responsibility, where the issue is
appropriately raised, to protect against allocations that have the
effect of making the ratepayers of one State subsidize those of
another.
* The dissent's assertion that,
"[i]n conducting this litigation, FERC originally took the
position that it had no jurisdiction over the prudence of a pool
member's purchase decision,"
post at
487 U. S. 388,
is contradicted by the passage cited by the dissent from the
Administrative Law Judge hearings. To be sure, appellees asserted
before the ALJ that FERC had no jurisdiction over this prudency
issue,
see App. to Motion to Dismiss 52-53, 54, 56, 60,
61, 62, but the ALJ gave clear indications that he would address
such an issue if a party pressed it:
"MR. EASTLAND [for MPSC]: . . . [W]hat we say we can do is that
you set a wholesale charge, . . . but it is not necessarily proper
or prudent for that utility, for purposes of utilizing that power
in retail sales, to buy that power."
"That's what we're saying that we have the jurisdiction to make
decisions with respect to."
"PRESIDING JUDGE: . . . I would not get into a prudency argument
unless one of the Intervenors raises a prudency question."
"I mean, we have prudency questions in the gas cases now all
over the place, with customers screaming that the purchasing
practices of the pipelines were imprudent, and those prudency
issues have been set for hearing in rate cases as an initial
determination as to the justness and reasonableness of the rates
and rate design, and what you should do if there is imprudence. So
it comes into the justness and reasonableness."
"But if you are not going to argue that -- if the Intervenors
themselves are not going to argue imprudence on behalf of the
company, MSE or the operating companies, I'm not going to get into
that issue."
"MR. VINCE [for Council of the City of New Orleans (not a party
here)]: Would your Honor be examining the issue of prudency in the
subject of allocation?"
"PRESIDING JUDGE: Not unless you raise it."
"MR. VINCE: Your Honor, New Orleans . . . would perhaps propose
to take this one step further, and say that the allocation, first
of all with reference to AP&L, was imprudent, and secondly,
with reference to the individual operating companies, was
imprudent, and the methodology for the allocation was
imprudent."
"PRESIDING JUDGE: Okay. If you raise that question, then I will
have to decide the prudency issue in the context of deciding
whether or not such alleged imprudency would justify a finding of
unjust unreasonableness in the allocation or discrimination with
respect to the allocation."
"So you are raising the prudency issue?"
"MR. VINCE: With respect to allocation, yes."
"PRESIDING JUDGE: Okay. So it's in."
Id. at 60-62.
JUSTICE BRENNAN, with whom JUSTICE MARSHALL and JUSTICE BLACKMUN
join, dissenting.
This case involves two separate prudency issues: one is governed
by
Nantahala Power & Light Co. v. Thornburg,
476 U. S. 953
(1986); the other is not. The first issue is whether the state
utility commission has jurisdiction to determine whether, treating
appellant's participation in the Grand Gulf project as a given, it
was imprudent for appellant to purchase such a high amount of
expensive Grand Gulf power. I agree with the Court that the
portions of the Mississippi Supreme Court's opinion suggesting that
the state commission does have this jurisdiction are in error.
Mississippi ex rel. Pittman v. Mississippi Public Service
Comm'n, 506 So. 2d
978, 984-985 (1987). The State cannot second-guess the prudency
of the amount of power purchased because FERC's order imposed this
allocation of power on appellant. The issue is precisely analogous
to that decided in
Page 487 U. S. 384
Nantahala, where a state utility commission setting
retail rates refused to allow a utility to recover its full
wholesale costs on the theory that the utility should have
purchased more low-cost power than it was allocated under a FERC
order. Just as in
Nantahala the utility's purchases of
high-cost power could not be deemed unreasonably large, because the
utility could not have purchased any more low-cost power than FERC
had allocated it, 476 U.S. at
476 U. S.
972-973, so here, given that appellant had entered into
and completed the Grand Gulf project, appellant's purchases of
high-cost power could not be deemed unreasonably large, because it
could not have purchased any less high-cost power than FERC's
allocation order compelled it to purchase.
That issue is distinct, however, from the issue whether, to the
extent appellant's decision to participate in the Grand Gulf
project involved the purchase decision of a retail utility, a state
utility commission has jurisdiction to review the prudency of that
purchase. This issue cannot be resolved by simple reference to
Nantahala, for FERC did not order appellant to participate
in the Grand Gulf project, and although FERC's order determines the
allocation of the costs incurred in the project, the question
remains whether appellant imprudently incurred those costs in the
first place. I am convinced that the state utility commission does
have jurisdiction over this prudency issue, and thus I would affirm
the Mississippi Supreme Court's judgment remanding for a prudency
determination. The question is, however, a complicated one, which
forces us to confront the issue of how the normal jurisdictional
principles of the Federal Power Act apply to the rather special
situation of an interstate electricity pool.
In direct response to decisions of this Court concluding that,
under the Commerce Clause, States can regulate interstate sales of
energy at retail but not at wholesale, Congress enacted the Federal
Power Act, which filled the regulatory gap and incorporated the
wholesale/retail line by providing
Page 487 U. S. 385
FERC with regulatory jurisdiction over wholesale interstate
sales of electricity and leaving retail sales to state regulation.
See 16 U.S.C. §§ 824(a) and (b)(1);
Arkansas Electric
Cooperative Corp. v. Arkansas Public Service Comm'n,
461 U. S. 375,
461 U. S.
377-380 (1983). Where retailing and wholesaling
utilities are independent, the impact of this wholesale/retail
division on federal and state jurisdiction to conduct prudency
review is clear and undisputed. FERC has jurisdiction to determine
whether a wholesaling utility has incurred costs imprudently.
See, e.g., Arizona Public Service Co., 27 FERC � 61,185
(1984). If FERC determines that costs were prudently incurred, it
allows the wholesale rates to reflect those costs; otherwise, the
wholesale rates cannot reflect those costs, and the wholesaler's
stockholders, rather than its customers, must bear the burden of
the utility's imprudence.
See, e.g., Violet v. FERC, 800
F.2d 280 (CA1 1986). FERC does not, however, have jurisdiction to
determine whether it might be imprudent, given other purchasing
options, for a retailing utility to purchase power at the
FERC-approved wholesale rate.
See, e.g., Southern Company
Services, Inc., 28 FERC � 61,349 (1984). The state utility
commissions have jurisdiction to determine, for example, that the
retail utility does not need the power, or could obtain power from
other sources at a lower cost.
Nantahala, supra, at
476 U. S. 972.
Thus, although a state utility commission cannot decide that a
retail utility should have bought wholesale power from a given
source at other than the FERC-approved wholesale rate, it can
decide that the utility should not have bought power from that
source at all.
See, e.g., Pike County Light & Power Co. v.
Pennsylvania Public Utility Comm'n, 77 Pa.Commw. 268, 273-274,
465 A.2d 735, 737-738 (1983). In short, the reasonableness of
charging a rate as a wholesaler is distinct from the reasonableness
of incurring that charge as a purchaser.
See, e.g., Appeal of
Sinclair Machine Products, Inc., 126 N. H. 822, 498 A.2d 696
(1985).
Page 487 U. S. 386
Interstate electricity pools, however, present special
difficulties for the wholesale/retail division of jurisdiction,
because the "wholesale" transaction is from the pool to the
utilities belonging to the pool, and thus the entities wholesaling
the power are the same ones purchasing and retailing that power. As
a result, a member utility's decision to participate in the pool's
building or operation of a powerplant is simultaneously a decision
to purchase the power generated by that plant. The purchasing
aspects of such a decision would seem to be within the jurisdiction
of state utility commissions to determine whether a retail
utility's decision to purchase power is prudent under state law
standards before those purchase costs can be passed on to retail
customers. On the other hand, FERC would seem to have jurisdiction
to determine the prudency of incurring these building or operation
costs in order to determine whether those costs can be reflected in
the wholesale rates the pool charges the member utilities.
If agency deference applied, I would conclude that these
prudency issues are sufficiently intertwined that we should defer
to FERC's conclusion that it has exclusive jurisdiction to
determine all prudency issues concerning the participation of a
retail utility in an interstate pool. I cannot, however, agree with
JUSTICE SCALIA's conclusion that courts must defer to an agency's
statutory construction even where, as here, the statute is designed
to confine the scope of the agency's jurisdiction to the areas
Congress intended it to occupy.
Ante at
487 U. S.
380-382. Our agency deference cases have always been
limited to statutes the agency was "entrusted to administer."
Chevron U.S.A. Inc. v.
Natural Resources Defense Council, Inc.,
467 U. S. 837,
467 U. S. 844
(1984);
see also id. at
467 U. S. 842;
Japan Whaling Assn. v. American Cetacean Society,
478 U. S. 221,
478 U. S. 233
(1986);
Chemical Manufacturers Assn. v. Natural Resources
Defense Council, Inc., 470 U. S. 116,
470 U. S. 125
(1985). Agencies do not "administer" statutes confining the scope
of their jurisdiction, and such statutes are not "entrusted"
Page 487 U. S. 387
to agencies. Nor do the normal reasons for agency deference
apply. First, statutes confining an agency's jurisdiction do not
reflect conflicts between policies that have been committed to the
agency's care,
compare City of New York v. FCC,
486 U. S. 57,
486 U. S. 65
(1988);
Chevron, supra, at
467 U. S.
843-845;
Capital Cities Cable, Inc. v. Crisp,
467 U. S. 691,
467 U. S. 700
(1984), but rather reflect policies in favor of limiting the
agency's jurisdiction that, by definition, have not been entrusted
to the agency, and that may indeed conflict not only with the
statutory policies the agency
has been charged with
advancing, but also with the agency's institutional interests in
expanding its own power. Second, for similar reasons, agencies can
claim no special expertise in interpreting a statute confining its
jurisdiction. Finally, we cannot presume that Congress implicitly
intended an agency to fill "gaps" in a statute confining the
agency's jurisdiction,
Chevron, supra, at
467 U. S.
843-844, since, by its nature, such a statute manifests
an unwillingness to give the agency the freedom to define the scope
of its own power.
Compare Commodity Futures Trading Comm'n v.
Schor, 478 U. S. 833,
478 U. S.
841-847 (1986) (citing statutory language and
legislative history demonstrating that the agency was delegated
broad authority to determine which counterclaims to adjudicate);
NLRB v. City Disposal Systems, Inc., 465 U.
S. 822,
465 U. S. 829
(1984) (deferring to agency interpretation of statute defining the
scope of employees' right to engage in concerted activities under
the National Labor Relations Act). It is thus not surprising that
this Court has never deferred to an agency's interpretation of a
statute designed to confine the scope of its jurisdiction.
In this case, it could not be plainer that the statutes at issue
were designed to confine the scope of FERC's jurisdiction by
prohibiting FERC from regulating matters within the sphere of
authority States had to regulate retail utilities under our old
Commerce Clause cases.
See supra, at
487 U. S.
384-385. The Act provides that "Federal Regulation [is]
to extend only to those matters which are not subject to
regulation
Page 487 U. S. 388
by the States," 16 U.S.C. § 824(a), and that
"[t]he provisions of this subchapter shall apply to the
transmission of electric energy in interstate commerce and to the
sale of electric energy at wholesale in interstate commerce, but
[with an exception not relevant here] shall not apply to any other
sale of electric energy,"
16 U.S.C. § 824(b)(1). The intent evident from the face of the
statute is only reinforced by the legislative history, which, as we
have noted before, shows a "constant purpose to protect . . . [the]
authority of the states."
Connecticut Light & Power Co. v.
FPC, 324 U. S. 515,
324 U. S.
525-527 (1945).
See also S.Rep. No. 621, 74th
Cong., 1st Sess., 48 (1935) ("[T]he policy of Congress [is] . . .
not to impair or diminish the powers of any State commission");
H.R.Rep. No. 1318, 74th Cong., 1st Sess., 7, 8, 27 (1935) ("The
bill takes no authority from State commissions"). Deference is
particularly inappropriate where, as here, the statute is designed
not merely to confine an agency's jurisdiction, but to preserve the
jurisdiction of other regulators, for Congress could not have
intended courts to defer to one agency's interpretation of the
jurisdictional division where the policies in conflict have
purposely been committed to the care of different regulators.
Furthermore, FERC's statutory construction in this area has not
been consistent, and was not contemporaneous with the enactment of
the Federal Power Act.
See generally INS v.
Cardoza-Fonseca, 480 U. S. 421,
480 U. S.
446-447, n. 30 (1987);
Schor, supra, at
478 U. S.
844-845. In conducting this litigation, FERC originally
took the position that it had no jurisdiction over the prudence of
a pool member's purchase decision and over whether the costs could
be passed on to retail customers. App. to Motion to Dismiss 52-66.
* Since then,
Page 487 U. S. 389
FERC has, as JUSTICE SCALIA notes,
ante at
487 U. S.
378-379, issued an opinion concluding that, in
regulating an integrated interstate pool, FERC's determination
regarding the prudence of a wholesaler's costs inevitably
determines the prudence of the wholesale purchase and the decision
to enter into a pooling agreement. But FERC specifically noted in
that opinion that its present conclusion differs from the position
it took earlier in that very litigation.
AEP Generating
Co., 36 FERC � 61,226, p. 61,550 (1986).
I thus examine the jurisdictional issue without any special
deference to the agency's position. I note at the outset that
FERC's position rests on an already shaky jurisdictional
foundation. FERC does not, after all, have any jurisdiction over a
utility that simply builds its own generating facility and retails
the electricity. FERC nonetheless asserts jurisdiction over
transactions between a pool's generating facility and the utilities
belonging to the pool on the theory that the pool and the member
utilities are sufficiently separate to deem the transaction a
wholesale transaction, rather than an internal transfer. In some
tension with this position, it then asserts jurisdiction to
allocate power in a way that forces purchases from the pool on the
theory that the member utilities are sufficiently integrated in the
pool so that it is merely allocating costs, rather than forcing
purchases on retail utilities. The United States Court of Appeals
for the District of Columbia Circuit upheld FERC's jurisdiction on
both counts.
Mississippi Industries v. FERC, 257
U.S.App.D.C. 244, 258-262, 264-266, 808 F.2d 1525, 1539-1543,
1545-1547,
cert. denied, 484 U.S. 985 (1987). Now FERC
seeks to complete the jurisdictional circle by asserting that the
state
Page 487 U. S. 390
utility commissions do not even have the authority to question
whether retail utilities have made imprudent purchase decisions by
deciding to participate in pool projects, even though those
decisions are what leaves the retail utilities in the position to
have part of the incurred costs allocated onto them by FERC via
forced purchases.
The jurisdictional decisions of the United States Court of
Appeals for the District of Columbia Circuit are not before us, and
I do not question them. Indeed, it makes a great deal of sense to
read the statute as allowing FERC to exercise jurisdiction over the
allocation of costs among interstate pool members, because
otherwise every state commission would have a parochial incentive
to claim that the costs must be imposed on the utilities located in
other States. A neutral federal mediator is needed. The issue of
allocation is logically distinct, however, from the issue of
whether the costs allocated to a particular utility should be borne
by the retail customers, through increased rates, or by the
utility's stockholders. The latter issue is the type over which
States traditionally exercise jurisdiction, and there are no
special reasons counseling for a neutral federal intermediary. Nor,
given that FERC's asserted authority to force intrapool purchases
by retail utilities already lies at the farthest reaches of its
jurisdiction, is there any reason to read this allocative authority
expansively to encompass matters within the traditional purview of
the States.
To be sure, in regulating the wholesale rates of an integrated
interstate pool and determining the prudence of the costs the pool
incurred as the wholesaler, FERC will examine many of the same
factors a state utility commission would examine in reviewing the
prudence of the decision to purchase that is part of entering into
and continuing a pool project. But the issues are not identical.
For example, if one retail utility happens to have a low-cost
source and enters into an agreement to build a medium-cost plant,
the construction of the medium-cost plant may not involve any
imprudently
Page 487 U. S. 391
incurred costs from the wholesaling perspective, but the
medium-cost purchase would be imprudent for the retail utility with
the low-cost source. Even to the extent the prudency issues do
overlap, I see no reason why FERC's review should bar States from
applying state law standards of prudency to the purchase decisions
that are an integral part of a member retail utility's
participation in an interstate pool. FERC's interpretation of the
Act would divest States of authority to determine the prudence of
costs incurred by retail utilities whenever those utilities belong
to an interstate pool -- a result that I do not think can be
squared (particularly given FERC's shaky jurisdictional foundation)
with the clear intent of Congress to preserve the authority of
States to regulate retail utilities.
See supra at
487 U. S.
387-388. Moreover, allowing only FERC review of
interstate pool decisions would effectively allow retail utilities
that either belong to interstate pools or span more than one State
to pick and choose between state and federal regulation by deciding
whether to form subsidiaries to operate their generating facilities
and sell them "wholesale" electricity.
I thus conclude that, regardless of FERC's jurisdiction to
allocate incurred costs among member utilities and regardless of
its jurisdiction to review the prudency of an interstate pool's
projects in order to set wholesale rates for intrapool
transactions, state utility commissions retain jurisdiction to
determine whether incurring those costs involved prudent purchase
decisions that can be passed on to retail customers. I thus dissent
from the Court's decision to reverse the Mississippi Supreme
Court's judgment remanding for a prudency determination.
* Although JUSTICE SCALIA cites language from the Administrative
Law Judge hearing demonstrating that the ALJ indicated his
willingness to address certain "prudency issues,"
ante at
487 U. S. 379,
n., the ALJ stressed throughout the hearing the distinction between
prudency issues relevant to setting wholesale rates and issues
regarding the prudency of power purchases and their effect on
retail rates, and stated several times that he and FERC would and
could only address the former. App. to Motion to Dismiss 61, 63,
66. At any rate, regardless of FERC's position in this case (and it
was, at best, unclear), FERC has certainly not demonstrated a
consistent agency interpretation, nor one that was contemporaneous
with the enactment of the Federal Power Act.