Mississippi Power & Light Company v. Mississippi ex rel. Moore – Oral Argument – February 22, 1988

Media for Mississippi Power & Light Company v. Mississippi ex rel. Moore

Audio Transcription for Opinion Announcement – June 24, 1988 in Mississippi Power & Light Company v. Mississippi ex rel. Moore

del

William H. Rehnquist:

We will hear argument first this morning in Number 86-1970, Mississippi Power & Light Company v. Mississippi Ex Rel.

Michael C. Moore, Et Al.

Mr. Lee, you may proceed.

Rex E. Lee:

Mr. Chief Justice, and may it please the Court:

The sole issue in this case was squarely decided two terms ago by this Court’s unanimous holding in Nantahala v. Thornburgh that the Federal Power Act requires state and local regulators, when they set retail electric rates, to include within those rates wholesale power supply costs which the Federal Energy Regulatory Commission has determined to be just and reasonable.

The Court left open the possibility of one narrow exception which was inapplicable in Nantahala and, for reasons that I will explain in just a moment, is clearly inapplicable here.

At the center of the dispute is a nuclear power plant, Grand Gulf I, which is owned by an integrated electric system, Middle South Utilities, whose four wholly-owned public utilities serve parts of four separate states.

FERC found that the Grand Gulf plant was constructed to meet the needs of the system as a whole, including the diversification of its fuel sources, which, until the mid-1970s, were limited to oil and gas.

Because of circumstances unforeseen at the time Grand Gulf was originally planned, its fixed costs, and therefore its total costs, were among the highest on the Middle South system, even though its operating expenses are the lowest.

For this reason, this case presents a circumstance that is very common throughout the country today and indeed, is inevitable in any integrated interstate electric system.

In an effort to diversify its fuel sources and to provide for the long-range needs of its customers, any integrated system is going to end up with several different generation sources and the costs of some are going to be substantially higher than others.

Moreover, the source that is the most expensive today will not necessarily be the most expensive a few years from now, depending on such variables as the world price of oil.

Each of the states served by such a system would, of course, like to have for itself and its customers as much of the system’s low-cost power and as little of its high-cost power as possible.

Someone has to decide who gets how much of each.

Fortunately, the Federal Power Act entitles the Federal Energy Regulatory Commission to allocate these widely differing costs among the companies and the states involved; and FERC’s authority to make those allegations is not at issue in this case.

For the purpose of this case, it is a given.

Sandra Day O’Connor:

Mr. Lee, I am anxious to ask you a question or two about this case.

As I understand it, the Federal Power Act does not grant FERC any jurisdiction over generating facilities.

So it is not possible to apply to FERC in the first instance to get permission to build a nuclear generating facility.

Right?

Rex E. Lee:

That is correct.

Sandra Day O’Connor:

And that application for a certificate of convenience and necessity was made to the State of Mississippi, which granted it.

Rex E. Lee:

Again correct.

Sandra Day O’Connor:

Now, what if a state refuses the permission to build and yet the plant is built elsewhere and under the system’s agreement some allocation is made to a Mississippi utility company that is part of the system, and FERC says the rates are just and reasonable.

Does that mean that then the State of Mississippi has to accept and allow that quantity of power to be sold in the state at those FERC-approved rates?

Rex E. Lee:

In the context of an integrated system such as this one is.

Sandra Day O’Connor:

Even if they had denied the permission?

Rex E. Lee:

That is correct.

The division of authority is between the initial authorization to construct the plant, as you have correctly stated, and the authorization to set the wholesale rates for the power that comes from that plant once it is constructed.

And Mississippi can say no, and that means that it won’t be built in Mississippi.

Rex E. Lee:

It does not mean that it won’t be built in some other state.

And the interstate allocations are clearly under the jurisdiction of the Federal Energy Regulatory Commission.

Sandra Day O’Connor:

Is there any indication that FERC ever decided that this allocation was prudent and that the construction of the facility was prudent?

Rex E. Lee:

We believe, for reasons stated in our brief, and for reasons stated in FERC’s brief itself, that the answer to that question is yes.

Sandra Day O’Connor:

It didn’t do it in so many words, did it?

Rex E. Lee:

That is correct.

It is susceptible of either interpretation.

It is somewhat persuasive that FERC itself believes that it decided the prudence issue.

But the more important point is that, regardless of whether it was done or not, the only entity that has the authority under the Federal Power Act to deal with those contracts affecting wholesale rates is FERC itself.

So that if prudence is going to be decided, it must be decided by the Federal Energy Regulatory Commission and not on a state to state basis.

William H. Rehnquist:

I don’t see that follows as the night the day, as you apparently think it does.

Rex E. Lee:

Well, let me just give you two factors for your consideration, Mr. Chief Justice.

The one is, that is exactly what happened in Nantahala.

You had there not an integrated system of the type that we have here, but you did have two wholly-owned subsidiaries of a single company… Alcoa… and they had two different sources… one lower cost and one higher cost.

And the question was whether FERC’s allocation of, in that case the lower cost power, was binding on the North Carolina Utilities Commission at the time that it set the retail rates for that commission.

And this Court held that the power to set retail rates necessarily meant the power to make these allocations.

Antonin Scalia:

It isn’t the allocation that is the source of the controversy here.

As I understand it, the state was willing to accept that if this was a prudent investment, we are stuck with 33 percent of it, or whatever the figure is.

You can acknowledge the FERC is entitled to allocate without acknowledging that FERC is entitled to decide whether the investment was prudent to begin with, can’t you?

Rex E. Lee:

That brings us to the core legal question that is raised by this case.

And that is whether there prudency determinations can be made by the states on a case-to-case basis in the wake of a determination of an allocation by FERC.

We submit, number one, that that issue was determined by Nantahala, which did involve an allocation case, and number two, that any other scheme permitting these allocations to be redone by the states in the wake of an allocation that has already been done by FERC would simply nullify the FERC allocations that have already been made and make a shambles of the Federal Energy Regulatory Commission’s function.

And that is particularly true in an integrated system such as this one.

The prudence issue is relevant only in those instances where a utility has a choice to make, and then chooses the more expensive alternative.

But it is irrelevant to FERC allocations of system capacity among the operating subsidiaries of a public utility holding company, for this reason.

Mississippi Power & Light really has no alternative to Grand Gulf power, because Mississippi Power & Light is part of the Middle South system which planned and built Grand Gulf to meet system needs as a whole.

The question is how that system’s capacity, including Grand Gulf, is to be allocated among the operating companies.

Sandra Day O’Connor:

The thing that is so basically troublesome, though, is that under your view, admittedly the Federal Power Act does not let FERC decide in the first instance to review generating facilities if a new one is going to be built.

FERC doesn’t review that.

It is left to the states.

Sandra Day O’Connor:

And yet, even if the states refuse to permit it to be built, you say that a subsequent FERC determination about rates precludes any review by the state as to the prudence of a new facility when FERC itself doesn’t review it.

That just means nobody does.

Rex E. Lee:

Oh, no.

It doesn’t mean nobody does.

It means that if it is to be done, then the procedures which are provided by the Federal Power Act which permit anyone, including states, to participate and indeed to initiate those proceedings, must do so before FERC.

Take the steps, Justice O’Connor, one at a time.

The first is the authorization of the plant.

And that one is vested in the states.

The second step, then, is the determination of just and reasonable wholesale rates.

And Nantahala clearly held that the allocation of sources among wholly-owned subsidiaries is included within the setting of retail rates… excuse me, of wholesale rates.

Now, once that allocation has been made, if the individual states can then come along in the wake of that determination and make their own allocation, then each state will necessarily favor its own parochial interests and the careful plan of the Federal Power Act to vest those wholesale rate determinations in one disinterested tribunal, the only tribunal that does not have a constituency to serve will have been frustrated.

And indeed, the very argument that Mississippi makes in this case shows why it is that prudence determinations, that the prudence issue simply is not an issue at all for anyone, either state or Federal, in a case like this which involves an integrated interstate system.

William H. Rehnquist:

Mr. Lee, you are really arguing for a very drastic departure from the traditional method of regulating utilities.

I mean, the return on the fair rate of the utility is based on its prudent investment… that has always been a state matter before.

Now, you are saying all of that is simply taken away from the states.

Rex E. Lee:

No.

William H. Rehnquist:

I think you are.

If a state can’t determine the prudence of an investment, one of its main controls over fixing utility rates is gone.

Rex E. Lee:

Well, prudence is simply not an issue in the one narrow instance in which you have an integrated system such as we have here, serving several different states in which you have several different power sources, and all of those have to be allocated among the separate states by some governmental entity.

And it has been done by FERC.

This leaves for the state all of the traditional regulatory authority that they always had with the exception of one narrow function.

And that is that once the wholesale power supply costs have been determined by FERC, then those necessarily become costs for retail, they become part of the revenue requirements for the retail ratemakers.

Sandra Day O’Connor:

Mr. Lee, aren’t all these nuclear plants serving more than one state?

Rex E. Lee:

In most instances, they are.

Sandra Day O’Connor:

Sure.

So it is a concern to know how states can protect themselves from what they perceive today to be a likely scenario of big cost overruns and concerns.

How are the states going to protect themselves?

Rex E. Lee:

And the way they can protect themselves is precisely by what Section 206 of the Federal Power Act says.

And that is to participate before FERC and to make an argument before the only entity that has the authority to make that determination.

And that is exactly what they did.

Rex E. Lee:

The FERC determination, the FERC allocation in this case, was over three years in the making.

Every single interested jurisdiction, including the State of Mississippi, through its attorney general and its public service commission, participated in that hearing.

And each one of them presented its own separate formula that served its own separate state interests as to how those costs ought to be allocated.

John Paul Stevens:

Mr. Lee, can I interrupt you?

Rex E. Lee:

Yes.

John Paul Stevens:

It seems to me that the question of prudence breaks down into two or three different issues as to whether the percentage of the total power goes to the state is prudent, whether the wholesale rate is prudent, and there is also a third point that I wanted to focus on.

And that is the initial investment.

Did I understand you correctly to say that that is something that is controlled by the state, by means of issuing a certificate of public convenience and necessity for the original construction?

Rex E. Lee:

Well, at the time that the original investment, that the original certificate is issued, then the state can take whatever factors into account it wants to in deciding whether or not to–

John Paul Stevens:

And in this particular case, the plant is in Mississippi?

Rex E. Lee:

–That is correct.

John Paul Stevens:

And they did get a certificate from the Mississippi Commission?

Rex E. Lee:

That is correct.

John Paul Stevens:

So do you contend that that decided the portion of the prudence issue that relates to whether or not there shall be a plant of this kind at all?

Rex E. Lee:

Well, it determines whether or not there would be an authorization for the building of the plant.

Now, they could still come back.

In fact, it would still be open to them today to go before FERC and say that it was not prudent to continue the plant or that it was not… well, it has already been determined that the allocation is prudent to give Mississippi 33 percent.

But chaos would be the result if that is not the case, because FERC has carefully considered the different positions that have been advanced by each of the different states and has determined what is a just and reasonable allocation.

John Paul Stevens:

Mr. Lee, you are proceeding along the line that the state has, you mentioned earlier that the state would be parochial and seek to defend its own interests.

But surely a state is allowed to do that.

If someone comes in and says I want to build a power plant that is going to serve the consumers of this state, it is also going to serve the consumers of the other state, and they really need it more than our consumers do, but we’re being nice guys and we want to serve both.

Surely the state can say well, that’s very nice but we have our consumers in mind.

Can’t a state be parochial like that?

Rex E. Lee:

That was exactly the issue that was before this Court two terms ago in Nantahala when North Carolina wanted to do just exactly that.

And to say that even though this has been determined to be a reasonable wholesale rate, we are going to re-examine the prudence of the case at the state level.

Antonin Scalia:

I don’t understand that.

Like Justice Stevens, I see a lot of different prudence issues here.

One issue is whether it is prudent to build this plant for the four states.

The answer to that is not necessarily the same as the answer of whether it was prudent for Mississippi to throw in its lot with the other states.

That could be quite different.

Antonin Scalia:

It could make sense for the four states but make no sense at all for Mississippi to go along with it.

Mississippi consumers could be milked by the consumers of the other three states.

Now, can you tell me how the State of Mississippi can protect its consumers against that?

How can the State of Mississippi say we don’t want to go into this regional thing in the first place?

Where is that prudence issue determined?

Rex E. Lee:

If the State of Mississippi says that it doesn’t want to go into it in the first place, it can of course turn down the plant.

That means that it may be built in another state or it may not.

It can also make the same prudence arguments that it made during the course of a three-year long proceeding before the FERC and make its argument there.

Antonin Scalia:

What if the plant is being built in another state?

It can’t protect itself by denying approval for the building of the plant, can it?

Rex E. Lee:

That is correct.

But what it can do is to protect its interests by arguing before the only entity that has authority over the wholesale rates that come out of that plant.

Antonin Scalia:

But FERC’s interest is in the whole four-state region.

It’s not in Mississippi alone.

Who protects Mississippi’s narrow, selfish interest?

It makes sense for the four states, and FERC is going to say it makes a lot of sense.

Mississippi says it does, but it doesn’t make sense for our people.

Rex E. Lee:

Well, there is no more reason to assume that that issue can be decided any better by a court than it can by an administrative agency.

Certainly that is the only administrative agency that has the authority over all of the jurisdictions and not just one.

I’d like to save the rest of my time for rebuttal.

William H. Rehnquist:

Thank you, Mr. Lee.

We will hear now from you, Mr. Cohen.

Louis R. Cohen:

Mr. Chief Justice, and may it please the Court:

Let me begin with Justice O’Connor’s question.

The State of Mississippi had the power to decide whether or not to license a plant located within Mississippi.

And there are various things on which it could condition that license.

But the one thing that it could not, and by the say, the State of Mississippi did not attempt to impose as a condition on that license, is that the power that is produced by that plant be sold at wholesale in interstate commerce on terms other than the terms filed with FERC.

All of the power that is produced by Grand Gulf I is sold at wholesale in interstate commerce, and the terms for that sale can be determined only by FERC.

The question whether the wholesaler, MSE, should be permitted to charge the full price, its full costs for producing that power, or should be denied some of that return on the ground that the investment was, in whole or in part, imprudent, that question is a question that can only be decided by FERC because–

William H. Rehnquist:

Mr. Cohen, I thought Mr. Lee, in response to Justice O’Connor’s question, said it could be reasonably argued either way whether FERC had decided this question or not.

Louis R. Cohen:

–I think that FERC has decided it only in the sense that the issue was not raised and some parts of the issue have probably been decided by the failure of the state which participated in the FERC proceeding to raise the issue.

There may be other parts that remain open.

William H. Rehnquist:

You say then that FERC may have quote, “decided” close quote, as you would use that term, it, simply by doing nothing when nothing was presented to it on the question?

Louis R. Cohen:

We are talking about a potential challenge to a wholesale rate charged by a wholesaler for transactions in interstate commerce.

I think that the question whether and to what extent FERC has decided prudence issues relating to that rate ought to be left for FERC itself to decide if the State of Mississippi or others now want to go back to FERC and argue that the whole thing was imprudent or they put solid gold doorknobs on it and that was an imprudent investment… if somebody wants to go back to FERC and argue–

William H. Rehnquist:

Is that presently open, in FERC’s view?

Louis R. Cohen:

–The question that I am explicitly declining to answer is the extent to which such challenges are precluded.

Certainly some challenges are open.

Indeed, FERC is engaged in a continuous audit of the operation of this plant.

And the state can, under Section 206, go to FERC, argue that the charges for the power that is produced by this plant to the local utility are unjust and unreasonable because expenses were not prudently incurred, and FERC decides that.

The present point is only that FERC’s jurisdiction to decide the prudence of facilities, all of whose power is sold In wholesale and interstate commerce, must be exclusive.

Sandra Day O’Connor:

Mr. Cohen, explain to me how the Federal Power Act should be interpreted in this fashion to permit in effect an end run around the omission in the Power Act of authority in FERC to decide in the first instance whether a generating plant should be built.

Louis R. Cohen:

I don’t think it is an end run.

Sandra Day O’Connor:

Well, why isn’t it?

Because FERC can’t decide in the first instance whether a nuclear generating plant should be built.

That goes to the states.

Louis R. Cohen:

But it can… no, it cannot insist that the plant be built if the state wants to say no.

But it can decide that a utility system that has built a plant will not be allowed to charge the full costs of building that plant if they were not prudently incurred and the power is being sold at wholesale in interstate commerce.

Antonin Scalia:

What about my prudence question?

Does FERC decide my prudence question, too?

That is, whether it was prudent for Mississippi to throw in with the other three states?

Louis R. Cohen:

Yes.

Antonin Scalia:

Who decides that?

Louis R. Cohen:

And FERC explicitly decided at least part of that question.

The State of Mississippi tried here and they tried before FERC to analogize this to the kind of case at which FERC has merely set a price, at which a wholesaler can sell, but hasn’t obliged the retailer to buy.

But FERC here set the terms, including the obligation of MP&L to buy one third of the power.

And in doing that, it explicitly rejected Mississippi’s argument that MP&L itself has excess capacity and that Grand Gulf should be paid for by the short companies in the system.

And that, it seems to me, is close to the heart of the issue.

This is a system that has been physically interconnected–

Antonin Scalia:

But that could be based on the fact that MP&L threw itself in with the deal a number of years ago.

Louis R. Cohen:

–Yes.

Antonin Scalia:

And FERC is just saying a deal is a deal.

You committed to take an equitable portion of it.

This is an equitable portion.

But has FERC addressed the point of whether it was wise in the first place for you to commit yourself to take an equitable portion of this plant?

Louis R. Cohen:

Talking about a decision in 19551 to create this system, a decision which I believe Mississippi would have had to approve the participation of its utility in.

But its utility joined in a petition to the SEC to form a holding company system and that system was approved by the SEC.

In 1951 it filed a first system agreement.

The plants that are run by all four of the utilities on the system have been physically interconnected ever since.

All of the sources of electrical capacity and power available to MP&L have been subject, with the result of systemwide planning, and have been subject to systemwide contracts, setting forth the terms on which their capacity and their energy are available to the four utilities ever since 1951.

FERC had all of the present versions of those arrangements before it for review in this proceeding.

FERC had express power under Section 206 to determine, as it did, that the agreements were unjust and to set just and reasonable terms.

Mississippi did what it should.

It argued to FERC that Grand Gulf should be treated as added to the existing sources of power in such a way that each company would first get credit for its older, cheaper sources of power, and the companies that are then short, the companies that say we don’t need this power because we’ve got plenty, should pay for Grand Gulf.

FERC explicitly concluded that that would be unjust and instead that the way that the system operated, the fact that the nuclear capacity supplies the baseload and was invested in on that basis, made it appropriate for the four companies first to share the nuclear capacity in proportions specified by FERC and that the companies that are then long after they have bought their share of the nuclear power, should sell the older, cheaper power to the other companies in the system.

As I’ve said, all of the parties to this case, the Mississippi parties participated in those proceedings before FERC, they also participated in the review by the D.C. Circuit in which that Court squarely upheld the power of FERC to impose a third of the costs of Grand Gulf I on Mississippi… or 33 percent… on Mississippi Power and Light.

We think that the Mississippi Supreme Court’s decision is trying to subject MP&L to a state prudence review of costs that FERC has properly ordered it to bear, and that under Nantahala, the Mississippi Public Service Commission was required to do just what it did, which is to accept that FERC-imposed cost as reasonable and to give it effect in setting retail rates.

If there are no further questions, thank you, Mr. Chief Justice.

William H. Rehnquist:

Thank you, Mr. Cohen.

We will hear now from you, Mr. Maxey.

John L. Maxey, II:

Mr. Chief Justice, and may it please the Court:

The Appellant invites the Court to take action the result of which will be the transfer of a substantial amount of the electric utility retail rate-making from the states to the Federal Government.

The State of Mississippi and the Mississippi Legal Services Coalition submit that such a result would be contrary to this Court’s prior decisions, to the enactment of legislation by Congress… the Federal Power Act… and to important policies of this Nation.

The Appellant has raised the significant issues on a record that is far from complete.

If Mississippi is permitted to complete its regulatory responsibilities, we submit that there will be no cause for this Court to take the extreme step urged by the Appellant.

After describing several essential facts which the Appellant failed to describe, we would like to summarize that part which Mississippi plays in the dual regulatory system contemplated by this Court and the legislation.

MP&L wears three hats in these proceedings.

It is the purchaser of wholesale power.

It is the seller of retail power.

And it is the construction manager of Grand Gulf.

John L. Maxey, II:

Let me address the latter first.

In the early 1970s, the operating companies of the Middle South Utilities System decided to make a large investment in Grand Gulf, a huge nuclear generating facility.

They did this to produce electricity for their customers, but to also produce a large return on their investment for their stockholders.

Antonin Scalia:

Could Mississippi have stopped that?

Is it your position that Mississippi would have authority to stop its utility from participating in a multi-state energy operation such as that?

Would the Commerce Clause prevent it, or anything else prevent it?

John L. Maxey, II:

No, sir.

They could have stopped it in the manner that it was presented to Mississippi at the time, Your Honor.

It was presented as a certificate for a license to construct the unit.

And I think Mississippi clearly had the power to reject that application for a license.

Antonin Scalia:

But didn’t?

John L. Maxey, II:

But it did not.

No, sir.

Sandra Day O’Connor:

Well, what if it rejected it but a neighboring state granted it, so the facility was purchased, and in fact, it’s an integrated system?

John L. Maxey, II:

Your Honor, the question raises the conflict between the FERC jurisdiction to rule on these kind of multi-state agreements with the state’s rights to protect itself through prudence inquiries when those rates come to Mississippi as retail rates.

Sandra Day O’Connor:

I suppose some systemwide review makes sense, though, doesn’t it?

John L. Maxey, II:

Well, I think it does, at a wholesale level, Your Honor.

Sandra Day O’Connor:

And that’s what FERC does.

John L. Maxey, II:

FERC did so in this case.

Sandra Day O’Connor:

Right.

John L. Maxey, II:

Or claims to have done so.

Sandra Day O’Connor:

Right.

John L. Maxey, II:

But it did not do anything with regard to the prudency of the retail rats which are those paid by the ultimate consumer.

What Mississippi seeks to do at this point is to be able to carry out its responsibilities under the dual regulatory system and investigate the prudency of the rates that are flowing to it from this system.

Sandra Day O’Connor:

Well, the effect might be to veto what FERC has done, in effect.

John L. Maxey, II:

Mississippi cannot veto what FERC has done.

That is conceded.

Sandra Day O’Connor:

But the practical result of what you are urging might be just that.

John L. Maxey, II:

Your Honor, we would disagree in that the practical result would be to establish whether Mississippi Power & Light was prudent in its undertakings as a retail seller of power to the ultimate consumer.

Sandra Day O’Connor:

Well, FERC has required that Mississippi Power & Light pay for one third of the nuclear power that is generated.

John L. Maxey, II:

That is correct.

Sandra Day O’Connor:

So they are going to have to do that no matter what.

John L. Maxey, II:

That is correct.

Sandra Day O’Connor:

And you say Mississippi can now make a determination that they can pay for it but none of that cost can be recouped?

John L. Maxey, II:

That is correct.

Our position is that the shareholders, I mean the rate payers should not be required to pay for the imprudence of the management of a company in its undertakings to sell retail power to the ultimate consumer.

This is based on the fact that when MP&L decided to construct this unit, it made representations to the Mississippi Public Service Commission in order to get its license, and it did so, in acknowledging the jurisdiction of Mississippi to grant or reject that license.

It said, for example, that the cost of this two-unit plant was going to be $1.4 billion when completed, and the first unit would be completed in 1979 and the second in 1981.

It also represented that the specific methodology that would be used to allocate both the costs and the electricity to the customers was that which was going to be put in place before the FERC.

It also made representations that the retail rate payers at that time in Mississippi really had no need for the electricity to be produced by Grand Gulf but it would be valuable in the future and it would accrue to the benefit of the rate payers of Mississippi to support the construction of this plant, but they wouldn’t have to pay for it until they needed it and they wouldn’t have to take the power until they needed it.

MP&L continued to serve as construction manager, supervising all phases of the design and construction of the facility.

We now know that the cost of that facility skyrocketed to some 400 percent of the original estimations so that the completion of Unit I alone was some $3.6 billion.

The demand for electricity began to decline during this period shortly after construction began, and the cost escalated, so that MP&L and its sister subsidiaries came together and arrived at a different methodology.

The plan was adopted by the MSU companies in 1908, but it wasn’t presented to the Mississippi Public Service Commission until 1981 and then it was revealed only through cross examination of one of the company officials who was there testifying about the acquisition of substantial capacity other than Grand Gulf, a coal-fired plant in Arkansas called Independence.

William H. Rehnquist:

What action, if any, did the Mississippi Corporation Commission take in 1981 when it found out about this?

John L. Maxey, II:

It took no action then.

In 1983, it reviewed that situation and found that the representations had been made and entered an order making a finding that the changes had taken place without any permission being given by the Mississippi Public Service Commission.

But it did not take any action at that time.

The President of MP&L represented to the Commission in 1981 that irrespective of the changes that had been made by the operating companies with regard to this agreement and the allocation of the cost and electricity from Grand Gulf, that the Public Service Commission of Mississippi still had the authority, it had the ultimate authority, when MP&L decided to put these rates into the retail rate structure.

Of course, we’ve heard how the ultimate ’82 agreement and the allocation agreement were submitted to the FERC for approval and after being modified Mississippi ended up with 33 percent instead of the 31.63 percent that MP&L had agreed to do in this agreement subsequent to the certification of the unit.

MP&L then, of course, came to the Mississippi Public Commission to obtain the rates at retail to pay them for the 33 percent allocation of Grand Gulf.

Prudence of MP&L’s actions with regard to its acquisition of such a large percentage of Grand Gulf was acknowledged as an issue in the case.

But the MPSC unilaterally carved that out and it was not addressed by the Public Service Commission.

Matters of excess capacity, Grand Gulf, and an acquisition of some coal-generated capacity from Independence were carved out of the proceedings considering the Grand Gulf rates.

The MPSC issued its decision then, which allowed the entire 33 percent, or 100 percent of the FERC allocation, to go into effect as retail rates through a tiered phase-in plan.

When that was appealed to the Mississippi Supreme Court, the issue of prudence and whether or not the state had fulfilled its regulatory responsibilities under state law, was the principal issue before the Mississippi Supreme Court, and of course, it reversed and said you just comply with state law in order to be able to adopt rates and pass them on to the customer to be paid.

And what the Mississippi Supreme Court did is, it sent it back to the Public Service Commission to carry forward its duties and responsibilities.

Now, we talk about prudence, and we chase the term around, and it is a bit elusive.

But in this context, we would submit that a fair definition would be what was the quality of the managerial judgment exercised by MP&L as the company with the exclusive right to provide adequate electrical service to its retail customers at a price both fair and reasonable to those customers and to give it the opportunity to earn a reasonable rate of return.

Prudence takes on several characterizations.

John L. Maxey, II:

It can be the prudence of construction, which has been referred to earlier in the arguments.

Whether MP&L, for example, looked at the cost overruns.

Did it examine the projections of costs during construction?

MP&L was in a peculiarly advantageous position to be able to find that, since it was the construction manager.

William H. Rehnquist:

Did the State of Mississippi attempt to litigate these kind of questions before the FERC?

John L. Maxey, II:

No, Your Honor.

And I can’t tell you the entire reason, but the issue of prudence appeared very early in the proceedings before the FERC, and the question was are the Administrative Judges, or is the Administrative Law Judge that is going to hear this case going to determine the matter of prudence?

And he said, and it is cited in several of the briefs, no, we’re not going to consider prudence.

That’s not the office or province of the FERC.

And the FERC, or anyone, would really have to strain and torture a reading of that record to come up with any finding that the FERC conducted anything that might resemble a prudence–

John Paul Stevens:

May I interrupt you, Mr. Maxey?

John L. Maxey, II:

–Yes, sir.

John Paul Stevens:

Supposing that it appeared during the FERC proceedings that they had spent $100 million on gold doorknobs, to use your opponent’s example, and that was, although the whole project might be perfectly wise and prudent, that particular expenditure was imprudent and should not be incorporated into the rate base either for wholesale rates or retail rates.

Could Mississippi have argued in that proceeding that you should disallow $100 million of cost of gold doorknobs?

John L. Maxey, II:

Yes, sir.

I understand your question to be at the FERC?

John Paul Stevens:

Yes.

Before the FERC.

John L. Maxey, II:

Yes, sir.

John Paul Stevens:

So you could have at least argued some kinds of prudence issues?

John L. Maxey, II:

Yes, sir.

John Paul Stevens:

But you tell me you didn’t.

You didn’t raise any questions of prudence at all?

John L. Maxey, II:

No, sir.

They were not raised at that time.

They were preserved in the retail setting to Mississippi, to the appropriate time, which would be at the time–

John Paul Stevens:

Then why wouldn’t Mississippi have an interest even at the wholesale level in saying look, half this plant is totally wasted money.

You should back out half of the capital costs and not build it into the rate base?

You certainly had an interest in doing that at both the wholesale and retail levels in that proceeding.

John L. Maxey, II:

–That just wasn’t done.

John Paul Stevens:

It just wasn’t done.

But it certainly could have been done, I would think.

John L. Maxey, II:

Well, it could have been done.

I can’t argue that the wholesale, that FERC should be very sensitive to the prudency at the wholesale level.

John Paul Stevens:

But if a litigant raises the issue and says look, this is just a lot of water in this plant that we should take out of the capital costs, certainly the Commission would review that, I would think.

John L. Maxey, II:

I would think so, too, Your Honor.

The question I would have with that is the posture that FERC has before, that has these companies before it, which, all of which are concerned with the allocation of the FERC of that plant, because some may need it and some may not need it.

FERC sort of rises above those internecine disputes and decides what it thinks is fair as between those companies.

John Paul Stevens:

In rising above it it has to consider the arguments made by for example the Mississippi Commission which might say well, look at all this waste here and there you could make your arguments on this point.

At least that is one forum.

John L. Maxey, II:

Yes, sir.

Absolutely.1 We would concur in that.

And my answer stands as it just was not done in this case.

Sandra Day O’Connor:

Mr. Maxey, and I guess you also clearly litigated before FERC how much, what quantity of power should be allocated to each state out of this plant?

John L. Maxey, II:

Yes, Ma’am, absolutely.

Sandra Day O’Connor:

Clearly, the quantity issue was litigated.

John L. Maxey, II:

Yes.

Sandra Day O’Connor:

Along with price and costs.

John L. Maxey, II:

The principal issue was what allocation was coming to each state.

That was one of the debates.

Yes, it was, Your Honor.

Sandra Day O’Connor:

So the question is whether the state now has to take the quantity that FERC said it would have to take, and that was litigated?

John L. Maxey, II:

Well, it was litigated in the sense that each state was trying to get an allocation that was most suitable to them at the time or at least I think each state was trying to get the least amount it could take so as to avoid the high cost that would ultimately be passed on if all of it were passed on.

Sandra Day O’Connor:

Now, if it were lower cost power being distributed, and that had been litigated before FERC, and this was the lowest cost power that was available, I guess you agree that Nantahala would preclude you from now saying the state can order a different quantity to be sold to it?

John L. Maxey, II:

We don’t read Nantahala with the same reading that the other side does.

Sandra Day O’Connor:

Did you understand my question?

John L. Maxey, II:

Yes.

I think I did.

Sandra Day O’Connor:

Suppose that this power that we’re talking about turned out to be the lowest cost power rather than the highest and FERC had litigated the quantity and price question as it did here.

Now, you don’t argue that Mississippi could base its retail rates on a different allocation of low-cost power, do you?

John L. Maxey, II:

Oh, yes.

Sandra Day O’Connor:

Oh, you do?

You don’t think Nantahala spoke to that?

John L. Maxey, II:

Nantahala says, had before it a different set of facts.

The facts were, as the Opinion reflected, that there was only one source of power flowing to Nantahala and the ratio went from lower cost power, more than the entitlement, then it raised the cost in the other state, and if that were modified as it were by the North Carolina Utilities Commission, and they took more of the lower cost entitlement power from that one source, then it raised the cost in Tennessee.

So there was a seesaw effect.

We contend here that there is present both before this Court in the record and before the Public Service Commission below, the availability of other sources of lower cost power.

Mississippi Power & Light has a history of off-system purchases, which are referred to in the briefs.

And those are sources of perhaps lower cost power.

The point that we would make, Your Honor, is that that is a determination that has yet to be made.

It is to be made by the Mississippi Public Service Commission sitting before the evidence which it has assembled and raising the questions of whether there was the availability of lower cost power that could be used in the Pike County sense to reduce the ultimate rates to the retail consumer.

Whether or not Mississippi Power & Light exercised prudence in reducing the risk to its rate payers while it watched these construction costs escalate, it watched the price of oil, which had been projected to rise to astronomical levels, stay under $20.

What did it do during this period of time when Three-Mile Island came down, or occurred, and then the resulting additional regulatory oversight occurred which increased the cost?

What did MP&L do during this period of time to reduce the risk to the rate payers of Mississippi when it realized that the cost of capital had increased due to inflation?

Those are matters of prudence which relate to the rate payers of Mississippi which the Mississippi Public Service Commission deserved the opportunity under our dual regulatory system to continue and make findings.

And we would suggest to the Court that that would present a substantially more reliable record than you have before you now.

The Nantahala case had been to the North Carolina Supreme Court twice.

It had been remanded back to the North Carolina Public Service Commission.

When it came before this Court, it had been thoroughly reviewed at the administrative level and again at the Supreme Court of North Carolina.

And I’m not suggesting that what we’re attempting to do is perpetuate litigation.

But I am submitting that the finality of the order before you is subject to substantial question in view of the additional–

John Paul Stevens:

Mr. Maxey, could I ask you another question?

Is it your position, does Mississippi take the position that the whole project is imprudent and that all the capital costs should be absorbed by the shareholders?

John L. Maxey, II:

–No, sir.

Mississippi takes the position that it really doesn’t know what it is going to find in the way of prudence when it conducts the prudency inquiry.

John Paul Stevens:

Theoretically, then, I suppose you could find that failure to make a proper readjustment, after Three-Mile Island and so forth and so on, that there is a certain portion of the costs that is imprudent and therefore that the rate base for retail purposes would be different than the rate base for wholesale purposes.

Is that what it boils down to?

John L. Maxey, II:

Yes, sir.

John Paul Stevens:

I see.

So you chip away at the rate base rather than totally reject the whole thing?

John L. Maxey, II:

Well, there are a number of ways, yes, sir, that that could be accomplished.

And we have seen it happen in one of the subsidiary companies already, that explored the various kinds of managerial judgments that were made during these periods of time and made the attempt to avoid bringing any conflict of its jurisdiction with that of the FERC, in an effort to, rather than saying the all or none kind of argument, saying we have to live together in a dual regulatory system and we recognize that the FERC has issued its allocation and we’re not going to take from the company the ability to meet that payment that it is obligated to make to Middle South Energy or SERE, that it is now called.

But what we are going to do is we are going to try to reduce the ultimate impact on the rate payers as a result of the imprudence that the company conducted itself during that period of time.

That is the nature of the exploration that would be made by the Public Service Commission in Mississippi.

Antonin Scalia:

Is it fair to say, Mr. Maxey, that all of the arguments that Mississippi wishes to present now with reference to prudence could have been made before FERC even though FERC is being asked to draw a different conclusion than the Mississippi Regulatory Commission would be?

John L. Maxey, II:

Your Honor, I don’t think that there is any rule of law that would have kept Mississippi from making these presentations to the FERC.

There is an election of forum that would have, that gave Mississippi the chance to say, we understand that if you address these problems at the FERC level they will be at the wholesale level.

But we want to have a determination of the prudency at the retail rate level and we will do that in Mississippi, which is preserved to the states by the Federal Power Act.

So our position would be that of course you could present anything that the Administrative Law Judge would authorize you or permit you to introduce at that point, but that it was not done and it was not done because FERC did not have jurisdiction over the prudence at the retail level.

It had only at the wholesale level.

Antonin Scalia:

Would you be bound by FERC’s determination if you had raised those issues at the FERC level seeking to effect wholesale prices?

Would you acknowledge that you could not then take a second bite and raise the same issues at the retail level?

John L. Maxey, II:

Your Honor, I suspect that the opposing side would raise some defense like collateral estoppel if you had attempted to take both bites at the apple.

Antonin Scalia:

I’m sure they would.

I’m asking you whether it would be successful.

John L. Maxey, II:

I don’t know the answer to that, Your Honor.

John Paul Stevens:

Your answer has to be no, because you are saying that you have a right to present those arguments to the State Commission regardless of what the Federal body does.

That seems to me the essence of your position.

You have to answer that no.

John L. Maxey, II:

Well, it is the position that the roles are dual and that they sometimes overlap or appear to overlap, but the same evidence presented with regard to the prudency at the wholesale level–

John Paul Stevens:

You are arguing it could be prudent at the wholesale level but you can still say, Mississippi is still free to say it is imprudent at the retail level.

John L. Maxey, II:

–Yes, sir.

John Paul Stevens:

I understand your position.

John L. Maxey, II:

That’s absolutely–

John Paul Stevens:

So there would not be a res adjudicata bar if your view is correct?

John L. Maxey, II:

–No, sir, we would argue that it would not.

We would suspect that the other side would argue that it would, however, in response to the question.

But we think that there is absolutely a division between the wholesale and retail rate making that is set up by Congress, the Federal Power Act, and while the two may appear to overlap, that the two have very different functions and very different goals.

There might be evidence, of course, that would apply to both, but nonetheless, in the final analysis, the division would be clear.

Antonin Scalia:

Do you know of any case, Mr. Maxey, in which FERC has denied an element of wholesale rates on the basis that the investment was imprudent?

Antonin Scalia:

Has FERC ever done that to your knowledge?

John L. Maxey, II:

Not to my knowledge.

William H. Rehnquist:

Have they ever said in any of their opinions that they had the authority to do it?

Or are you just not that familiar with their opinions?

John L. Maxey, II:

I think I’m familiar with decisions where the FERC says it has the authority to consider prudence, yes, sir.

In fact, an example of sort of the dual regulatory system was where, in a case that was cited in one of the briefs, I believe it’s the Union Electric case, that where the state had conducted a prudence inquiry at the state level about the retail rates, and then carried its findings to the FERC and said we found imprudence here, and we would like to have, like to be able to have you recognize the imprudence at the FERC level.

The FERC said we have the right to conduct a prudency inquiry and we may take into consideration what the state has found but we’re not bound by it, I think, thereby recognizing the dual regulatory system that is contemplated by the Federal Power Act, and FERC is trying to walk the line to do.

MP&L claims that there will be unlawful shifting of prices between the… or costs, rather… between the operating companies, if MP&L grants, if the MPSC grants less than the full pass-through of the 33 percent to MP&L.

That is certainly not borne out by the record.

The other three operating companies, AP&L, LP&L and NOPSI, have all taken less as retail rates than the total amount that has been allocated to them by the FERC.

Their shareholders have, in varying measures, absorbed some of the allocations that are granted to them by the FERC.

And testimony which is referred to in the briefs indicates that that has not resulted in a shifting of costs back to MP&L.

In other words, an absorption by LP&L of its partial allocation has not resulted in costs shifting back to Mississippi.

We would take issue with that.

We consider that the Federal Power Act was adopted to provide the regulation of interstate wholesale sales of electricity and expressly created the dual regulatory system which this Court, in a similar fashion recognized, in the recent case of Federal Communications Commission v. Louisiana Public Service Commission.

To those that argue that this interferes with the efficiency of broad regulation, which we heard this morning, this Court has admonished that the courts should not assume a role which our system has assigned to Congress.

Now, MP&L seeks to move these lines drawn by the Court and adopted as law by Congress under the guise of furthering the national policy of economy and efficiency in the delivery of electric service.

But that in fact is wrong.

That would defeat the efficiency that now exists in the electric utility rate making.

For example, the states would be less than interested in granting a license to a large nuclear power plant or any kind of power generating plant today if it knew tomorrow that it is not going to be able to protect its citizens and constituents which it has elected or appointed to serve, because the FERC might well come along and later change that and then send those rates right back to them as retail rate payers that they would not be able to regulate or even investigate under the Appellant’s theory.

This is not an isolated case which compels this Court’s decision.

In fact, we’ve counted some 22 states that would be directly affected because they have utilities that are involved in a multi-state pooling arrangement or an integrated system.

This is a case which will have an impact on all investor-owned utilities which engage in any such interstate pooling or joint ventures.

The Appellant raises these questions of widespread and harmful potential on a record that is far from complete.

This Court should have the benefit of thorough development in these issues.

This case should be returned to Mississippi where that can take place.

Thank you.

William H. Rehnquist:

Thank you, Mr. Maxey.

Mr. Lee, you have two minutes remaining.

Rex E. Lee:

First, I would like to just clarify that every single one of these prudence issues could be raised before FERC, and also, that FERC can and does reject increases in the wholesale rate base on the basis that the costs are imprudently acquired.

Rex E. Lee:

Footnote 15 of our reply brief discusses the cases in which that happens.

FERC did not consider these issues, or said they did not consider them… we think they did… but in any event, the ALJ said that he wasn’t going to consider anything that was not raised.

The crucial point is that these matters can and must be raised before FERC if they are to be raised at all, and the reason lies right at the heart of why the Federal Power Act was enacted.

It was enacted in order to preclude violations of the Commerce Clause that would otherwise occur.

It is very apparent that the alternatives to the use of Grand Gulf Power to which the Mississippi Attorney General refers is the use of otherwise, of the other sources within the Middle South System, oil and gas, which are cheaper, which are located right within Mississippi and which, if Grand Gulf has not used, will then be sent out of state to other parts of the Middle South system.

That is the NEPCO case, and NEPCO squarely declares that this would be a violation of the Commerce Clause.

And that is why we have a Federal Power Act, because we are one Nation and we need one entity that can prevent these violations of the Commerce Clause that would otherwise occur.

The fact of the matter is that FERC has made a determination that it is just and reasonable for Mississippi to bear 33 percent of the costs of Grand Gulf.

And what we have here is nothing less than an attempt to have the states test the prudence of the costs that FERC has ordered that Mississippi bear.

Thank you.

William H. Rehnquist:

Thank you, Mr. Lee.

The case is submitted.