William H. Rehnquist: We'll hear argument next in Number 02-299, Entergy Louisiana versus Louisiana Public Service Commission. Mr. Carpenter.
David W. Carpenter: Mr. Chief Justice, and may it please the Court: In multistate power systems, each retail rake... ratemaking body has incentives to impose cost allocations that benefit its residents, and the only way to assure that the power pool recovers a hundred percent of its generating costs is for a neutral body to referee disputes among the States and to fix the allocations. This case arises in the energy system where five subsidiaries provide retail service in four different States, where FERC has found that Entergy's cost allocations generally can't affect its net revenues and where FERC has thus approved a tariff that gives Entergy authority to calculate the inter-company equalization payments that allocate costs with a FERC complaint as the sole remedy if the rates and allocations are believed to be unlawful. Though we--
William H. Rehnquist: What is... what is the source of the rule that this is the sole remedy?
David W. Carpenter: --It's the sole remedy under the tariff itself, Your Honor.
William H. Rehnquist: The... so the tariff itself provides that.
David W. Carpenter: Yes. Under the tariff itself, the only right that is reserved to the... this is section 4.12, joint appendix 11a. The only right that is reserved to the operating companies is to seek amend... if there's a dispute over the rates, is to seek amendments in the tariff or changes in the rate from the regulatory body that has jurisdiction. There's no question here that the LPSC doesn't have jurisdiction to order amendments to the service schedule or changes in the rates. Their claim is only that they can disallow the costs that were incurred.
William H. Rehnquist: Is... is the tariff provision meant to preclude any sort of a judicial remedy?
David W. Carpenter: Yes, it would preclude a judicial remedy. It operates as a... as a... as, obviously, a limitation on the operating companies' remedies and as a forum selection clause in the event of a dispute.
Antonin Scalia: Well, there would be a judicial remedy if they disagreed with the... with... with FERC's determination. They could... they could appeal to the court.
David W. Carpenter: Oh, absolutely, Your Honor. I'm sorry. I--
Antonin Scalia: They just couldn't go straight to the court.
David W. Carpenter: --Yes. No, I'm sorry, Your Honor. I... I meant that they can't go... they couldn't go straight to court, and it means that... for the same reason that a State retail ratemaking body can't disallow the costs because under... under this rate schedule, the rate calculated by the energy system is the filed rate and binds everybody unless and until a complaint is filed with FERC and FERC holds otherwise. And in fact, the Louisiana commission here brought a complaint for the period ending in August of 1997, and FERC denied relief on the ground that although the tariff didn't authorize it, it was just and... nonetheless just and reasonable for Entergy to calculate equalization payments by including certain units that were in extended reserve status because FERC found that those units benefited Louisiana and the entire system.
Stephen G. Breyer: Can I ask? The... the section of the... of the agreement that you... you referred us to, 4.12. It says each company reserves the right to unilaterally seek amendments or changes from any regulatory body having or acquiring jurisdiction thereover. Why didn't they just say from FERC?
David W. Carpenter: Well, at the time this--
Stephen G. Breyer: I mean, if as you say it's only FERC, why didn't they just say from FERC?
David W. Carpenter: --Well, it was... it was fairly prescient because this... this language I think dates from 1953, when there was the Federal Power Commission. So, it--
Stephen G. Breyer: Oh, I see. I see. Yes.
David W. Carpenter: --But the... the key thing here is that it's undisputed that the LPSC can't amend the service agreement.
Stephen G. Breyer: Got you. No. I was just wondering whether--
David W. Carpenter: Yes.
Speaker: --that was so clear to the parties at the time, and you say it is and... and what they... what they were anticipating is a change in the Federal--
David W. Carpenter: Yes.
Stephen G. Breyer: --body that had jurisdiction.
David W. Carpenter: Right.
Stephen G. Breyer: Okay.
David W. Carpenter: But... but in the aftermath of the FERC order that found that these charges were just and reasonable, despite a finding of the tariff violation, the Louisiana commission entered an order that said that FERC's determination bound it only for the precise period that FERC had addressed, and then entered an order that prohibited the petitioner, Entergy Louisiana, ELI, from recovering the same wholesale costs in retail rates for the immediately succeeding period, beginning August 5th, 1977.
David H. Souter: Could... could you explain one thing to me? And that is, why was the period so defined? Is it simply that it was, with respect to that period, that actual figures were introduced before FERC?
David W. Carpenter: That became the period because that was the date of the FERC order.
David H. Souter: The date of the--
David W. Carpenter: Yes.
David H. Souter: --And so, in effect, that... FERC was done with it at that--
David W. Carpenter: Yes. That was the... that was the... the theory--
David H. Souter: --But... but was there--
David W. Carpenter: --of Louisiana Public Service Commission.
David H. Souter: --Was there any question in the terms of the order that the order was intended to operate prospectively until FERC changed it?
David W. Carpenter: Oh, no. No question at all.
Ruth Bader Ginsburg: So the difference is unlike a filed rate, which is a number, here is not a precise number.
David W. Carpenter: That's right. Here the filed rate is a formula that is--
Ruth Bader Ginsburg: And it... and it's going to change constantly.
David W. Carpenter: --That's right. It can change... it can change I believe monthly, or the... the rate calculated under the formula can change monthly. And... and FERC approves formula rates, you know, in circumstances where it believes that it will better promote the overall goals of... of the act, and it imposes terms and conditions that will assure that the overall goals of the act are promoted. And here a critical term and condition was that the determinations of the amount of the payments is centralized at FERC and the only remedy, if there's a disagreement, is to go to FERC and file a complaint. As I point out, that's clear from the terms of the tariff, and that's what FERC said in each of the orders in which it authorized the formula rates.
Ruth Bader Ginsburg: But it... from the point of view of the public service commission, they have to approve the local rates periodically, and how does the timing of the thing work? If the public service commission has to go to FERC and then there's a proceeding, and by that time the year is over.
David W. Carpenter: Yes. But the... if FERC were to agree with the public service commission that we violated the tariff, that the result was unjust and unreasonable and a refund was appropriate, all the interests would be protected because the... they would order a refund at the wholesale level with interest that the Louisiana Public Service Commission could flow through to retail rate papers... rate payers.
Antonin Scalia: Well, wait, wait. How would... how would the Louisiana Public Service Commission have standing to come to FERC? I mean, to come back to the agreement, it says each company... the companies who are parties to the agreement... reserves the right to unilaterally seek amendments or changes.
David W. Carpenter: Yes. Well, they have standing under the act itself. Section 305 I believe it is.
Antonin Scalia: So this provision doesn't govern what they can seek then.
David W. Carpenter: No. But... but they... but... but what it does mean is that they cannot premise a... a prudence disallowance on the ground that... that ELI could have refused to pay the costs or... or required that the equalization payments be calculated on a different basis.
Antonin Scalia: Well, sure, they can. They could say the company was at fault for not going to FERC.
David W. Carpenter: Yes. But... but... sure, they could say that. It was imprudent not to go to FERC. But they can't speculate about what FERC would do in the event a complaint was filed. That's clear from the Arkansas Louisiana Gas case of this Court. So while it's theoretically possible they could say that it was imprudent not to go to FERC, no remedy could be predicated on that finding of imprudence because they can't speculate about what FERC would do if a complaint were filed.
Antonin Scalia: But can they go to FERC as an intervenor? I--
David W. Carpenter: Yes.
Antonin Scalia: --I take it that was their status.
David W. Carpenter: Absolutely, absolutely.
Antonin Scalia: So they could go in and say, look, they should have complained--
David W. Carpenter: Yes.
Speaker: --and therefore you should do what you would have done if they had complained.
David W. Carpenter: Absolutely. They can do that. And the point I was trying to make to Justice Ginsburg is it... when that procedure is followed, all legitimate interests are protected because if FERC agrees and orders a refund, it will be... it can then be flowed through by the Louisiana Commission to the retail ratepayers. Conversely, under their procedure in which they can disallow costs pending a FERC determination on the precise... on the precise issue, you have exactly the... the interference with commerce that the Federal Power Act was designed to prevent. You've got duplicative litigation of this issue. Here in... could be in five different retail ratemaking bodies. And the effect can be a trapping of costs that we never get back because if FERC... you know, they... they trap the costs pending the FERC order. FERC then says... reviews it and says what we did was fine, just and reasonable. Then obviously FERC doesn't do anything at the wholesale level. In the meantime, our costs have been trapped at the retail level, and we can't get the money back under the general rule barring retroactive ratemaking unless an exception were somehow made to that rule.
Anthony M. Kennedy: Well, what is the function and province of the State commission's prudence review? What... what can they do that's proper? And I assume they can do a number of things that increase costs and therefore change rates, or am I wrong about that?
David W. Carpenter: Well, what they... what they can do is they can regulate the... the prudence of... of decisions that the... the utility had to make. So in circumstances where a FERC tariff provides a choice to the... to the retail utility, which was the situation in the Pike County case, then... then the... the State commission can find that it was imprudent to exercise the choice in one fashion or another. But the point here is there was no choice. The equalization payment bound the... bound ELI unless and until it was found to be unlawful by... by FERC. So this is a situation where under the filed rate doctrine and under this Court's decisions in MP&L and Nantahala, the... the State commission was required to treat the resulting expense as a retail... as a just and reasonable expense and pass it through to retail ratepayers unless and until FERC ordered otherwise. There's obviously a range of other issues that aren't... aren't governed by FERC rate schedules at all, as to which State utility commissions can examine the reasonableness of the decisions of the... of the retail body. But they can't say that... that following your duties under a FERC tariff is unjust and unreasonable. That's a question for FERC.
Anthony M. Kennedy: In... in the course of that regular examination that they... that they do, can they find certain actions that require refunds to the... to the consumers?
David W. Carpenter: Oh, absolutely, Your Honor. Absolutely, Your Honor. They can disallow... they disallow charitable expenses. They disallow expenses all the time. There's a citation--
Anthony M. Kennedy: But never if it's in violation of a tariff or a FERC policy?
David W. Carpenter: --Right. They cannot, consistent with the Federal Power Act, say that it was imprudent to do... to... to do what the FERC tariff required the utility to do. That's the clear teaching of MP&L and Nantahala and... and other decisions.
William H. Rehnquist: Would the State commission have authority to argue that the formula was incorrectly applied?
David W. Carpenter: In the context of the retail ratemaking proceeding?
William H. Rehnquist: Yes.
David W. Carpenter: No, Your Honor. That's an issue exclusively for FERC because, as I pointed out before, if the rate is believed to be too high, under the tariff, the... the only remedy the operating company would have would be to go to FERC and... and complain, and the operating company has... has no... no right to refuse to make a payment on the ground that there's an allegation that the equalization formula was improperly implied. But as I... as I just said, the filed rate doctrine clearly, you know, prohibited the order here, and even if it didn't apply, this is an issue that... the issue of the... the reasonableness of rates and the practices affecting rates is an issue that the Federal Power Act clearly allocates to FERC. So even if the tariff here didn't, you know, clearly preclude ELI from doing what the LPSC found a prudent company would have done, the... the filed... the Federal Power Act preempted the... the State from addressing the issue. And the facts of this case sort of illustrate why States shouldn't get involved in... in this because the decision that was made here sort of exemplifies the parochialism that the Commerce Clause and the Federal Power Act was designed to prevent. It was acknowledged by the Louisiana Public Service Commission that the... the units in question, the out-of-state units in question, benefited Louisiana and the entire system, increased the efficiency of the entire system. But it said that was irrelevant. In fact, it said that was evidence of imprudence because the effect was to increase the costs that ELI incurred and thus to increase retail rates, and that's a... the kind of parochialism that the Commerce Clause prevents and the Federal Power Act was designed to draw a bright line that would eliminate any need to even adjudicate questions whether the conduct violates the Federal--
John Paul Stevens: Well, what's left of public service commissions then, if... if you're right, so far as policing imprudent acquisitions and that sort of thing for a multi... multistate company?
David W. Carpenter: --Well, they... they can't regulate issues involving, you know, the exchanges of power within power pools, but there are a range of other issues that, as I said in response to Justice Kennedy's question, that the States can... can decide.
John Paul Stevens: Such as.
David W. Carpenter: Well, the... you know, whether... whether expenses not dictated by a FERC... FERC rate schedule are just and reasonable. There's a whole range of other expenses that--
John Paul Stevens: The cost of... the cost of power is just one of the... one of the--
David W. Carpenter: --Yes, just one of the expenses that a retail utility would incur. And... and so there's a range of issues that they can decide. What they can't do, though, is... is decide that it was imprudent to incur a cost that a FERC rate schedule required the utility to incur, and that's the issue here.
David H. Souter: --Am I... am I correct in assuming, as I have throughout the... reading the briefs here, that the... the costs that a given operating company incurs within its power pool is essentially the same issue as the wholesale rate that a... that a totally independent company might pay when it... when it bought wholesale off the... the grid? Is... is that a... it seems to me in... in each case, the operating company is buying power at wholesale, whether it does it within its group or whether it does it on an open market, and that's what in each case FERC is regulating. Is... is that fair?
David W. Carpenter: Well... well, FERC regulates the transactions within power pools--
David H. Souter: And when one of those transactions is the... is the... in effect, the acquisition of power by a local operating company, that transaction is economically, I guess, the equivalent of buying wholesale by an independent company that is not part of a power pool.
David W. Carpenter: --Yes, but FERC's jurisdiction depends on the fact that... jurisdiction depends on the existence of wholesale sales which... which exist in the context of a power pool because each retail utility is simultaneously, you know, providing power to the pool at the set rate. So it's--
David H. Souter: Oh, no, I understand that. And... and... but FERC also has general authority over wholesale interstate sales.
David W. Carpenter: --Absolutely, Your Honor. Absolutely, Your Honor.
David H. Souter: So that... so that in relation to what a... the reason I'm getting at it is, in relation to what a State utilities commission can do, the State utilities commission, I take it, is in the same position vis-a-vis ELI that it would be if ELI were a totally independent company buying wholesale off the grid. Is that correct?
David W. Carpenter: That's right. If it were... if it were subject to the identical rate schedule. If there are no further questions, I'd like to save the balance of my time for rebuttal.
William H. Rehnquist: Very well, Mr. Carpenter. Mr. Schlick, we'll hear from you.
Austin C. Schlick: Mr. Chief Justice, and may it please the Court: Under Nantahala and Mississippi Power & Light, the regulation of wholesale rates for electric energy in interstate commerce is exclusively within the jurisdiction of the Federal Energy Regulatory Commission. Federal jurisdiction is necessary to ensure that multistate utilities, like Entergy and other utilities, are able to carry out their FERC-regulated transactions, to plan and carry out those transactions without the interference of potentially conflicting State regulation. The facts of this case highlight the need for exclusive Federal regulation. The dispute in this case involves the correct allocation of costs incurred for the common benefit of five utilities in four different States. The Louisiana commission believed that the costs allocated to Entergy Louisiana were too high, but the consequence of the Louisiana commission's rate decision would be to reallocate those costs to ratepayers in Texas, Arkansas, and Mississippi or else to render them trapped and entirely unrecoverable.
John Paul Stevens: Well, does that... is that a death sentence, so to speak, if you find that the costs are trapped and unrecoverable? May not that ever happen to a utility legitimately?
Austin C. Schlick: That's correct, Your Honor. Under this Court's decision in Nantahala, a charge that is federally approved or that is within FERC's exclusive jurisdiction to approve may not be trapped and disallowed by the... by the State regulatory--
John Paul Stevens: You're... you're not talking about costs... trapped costs generally. You're just talking about this particular kind of trapped costs.
Austin C. Schlick: --That's right. I'm... I'm talking about costs that contribute to the wholesale rate that... that is within FERC's jurisdiction.
David H. Souter: So the... the problem is that... not that the costs would be trapped, but that FERC has said it's not trapped. That's... that's the point. I mean, lots of utilities lose money because costs are trapped.
Austin C. Schlick: That is... I... I think that... that--
David H. Souter: So the real point is here FERC has said they can do it. That's... that's the only point that you're making, isn't it?
Austin C. Schlick: --There are two points. There... there is the general prohibition on trapping, but also in this case we have a FERC-approved rate schedule that determines how the allocation should be carried out. There's a question whether or not Entergy complied with that rate schedule, but the resolution of that question involves what the wholesale rate is or should be, and that's a question within FERC's jurisdiction.
David H. Souter: And that's a FERC question, period.
Austin C. Schlick: That's right. Only FERC can decide that question. Unlike the cases on which respondent relies, this case does not involve a State contract action about a matter that is within the State's concurrent jurisdiction. In the first place, there is no contract dispute between the parties in this case, the Entergy operating companies and the holding company. Rather, this case arose in the same context as Nantahala and Mississippi Power & Light, a retail rate setting. And the dispute involves the correct division among the operating companies in multiple States of costs of operating the system. Just like Mississippi Power & Light, that's a cost... that's a... a question that only the FERC can determine. It's worth mentioning that--
William H. Rehnquist: Could... could this be characterized as a question of a reasonable interpretation of the tariff, or you couldn't characterize the issue that way?
Austin C. Schlick: --There... there is a... an interpretation, an underlying question of interpretation, of the tariff, but beyond that, there's the question of whether the resulting charge was just and reasonable. And that's the important reasonableness question. That's the question that only FERC can decide. Here the Louisiana commission assumed both that there was a procedural violation of the system agreement in... in the documentation of the operating committee's decision--
Antonin Scalia: But--
Austin C. Schlick: --and that the resulting charge was unjust and unreasonable.
Antonin Scalia: --But what Louisiana is saying, they... they're conceding that FERC has the authority, the exclusive authority, to prescribe what the division would be. However, they're saying if, in fact, there's a violation of that division, the States ought to be able to adjudicate the violation. They're still giving FERC all of... all of its power. They're saying FERC decides what the division will be, but the State agency can determine that the division has not been carried out the way FERC prescribed. What is there in the act that... that says that FERC is the exclusive adjudicator of whether its directives have been complied with?
Austin C. Schlick: In the context of what the wholesale charge is or should be, the provision of the act is section 824d and... and 824e. The underlying principle was established by this Court's decision in Attleboro, which is that States are entirely disabled from regulating wholesale rates. That was implemented through the Federal Power Act in 1935. It was confirmed in this Court's decision--
Antonin Scalia: They're not regulating the wholesale rates is what... is the argument that will be made by the State. They're... they're leaving it to FERC to regulate it, but they're adjudicating whether the rates prescribed by... by FERC have, in fact, been the rates charged.
Austin C. Schlick: --Justice Scalia, in fact, they were regulating the wholesale charge. The necessary determination of the Louisiana commission's order was that the costs pass through under the Federal rate schedule to Entergy Louisiana. The specific costs allocated on the rate schedule were too high. It was imprudent in the Louisiana commission's judgment for Entergy Louisiana--
Antonin Scalia: I thought the Court said in Mississippi Power & Light that once FERC sets a wholesale rate, a State may not conclude in setting retail rates that the FERC-approved wholesale rates are unreasonable.
Austin C. Schlick: --That... That's correct. The--
Antonin Scalia: So I guess that's the law, isn't it?
Austin C. Schlick: --the only additional step that need be taken in this... in this case is to determine whether the fact that there is a dispute as to whether or not the FERC rate schedule was violated somehow puts the case within the State's jurisdiction. That was the question that only FERC can answer.
Stephen G. Breyer: But how is that different from the State determining that a retail rate is unreasonable?
Austin C. Schlick: We believe it's precisely the same.
Stephen G. Breyer: So then there is nothing extra.
Austin C. Schlick: Our... our answer to that question is there is no difference.
Stephen G. Breyer: So I have to see what the other side would say.
Austin C. Schlick: That's correct, Justice Breyer.
David H. Souter: I... I take it you agree with Mr. Carpenter that the State can be heard on this issue as an intervenor who may raise the issue before FERC. Is that correct?
Austin C. Schlick: Not just as an intervenor. Under section 825e of the act, the State could actually bring a complaint--
David H. Souter: I see.
Austin C. Schlick: --to FERC. It could bring the issue directly to FERC. And--
David H. Souter: In any case, it can get to FERC if it has a gripe.
Austin C. Schlick: --The order 415 proceeding in 1997... that was resolved in 1997... shows exactly how this should happen. The--
David H. Souter: No, but the answer to my question is yes, isn't it?
Austin C. Schlick: --Oh, yes, absolutely.
David H. Souter: That's all I'm... that's all I'm--
Antonin Scalia: --Well, it seems to me it's quite a different question. Question one is whether the allocation was unreasonable, and the State here is saying we're... we're not questioning the reasonableness of the allocation. That's up to FERC. But we don't think that we were charged that allocation that... that was given to us. And that's... that's not challenging FERC's decision of what the allocation should be. It's challenging the factual question of whether the allocation was carried out the way FERC prescribed.
Austin C. Schlick: Justice Scalia, the order 415 proceeding shows precisely the problem with that. In that case, FERC said that there was a violation of the system agreement, analogous to the one that's being claimed here. But it also said that the resulting charge was just and reasonable. In fact, ratepayers benefited overall from what was done by Entergy.
Antonin Scalia: Must be a section of the FERC rules or regs or tariffs which says the company may... must... or must pass over to the company that has the higher number of generators a charge equal to the amount, da, da, da, that this particular thing we have before it gives the allocation for.
Austin C. Schlick: Well, the... the rate schedule has been approved--
Antonin Scalia: Yes.
Austin C. Schlick: --by FERC and--
Antonin Scalia: All right--
Austin C. Schlick: --there's a requirement--
Antonin Scalia: --it says that in the rate schedule.
Austin C. Schlick: --and there's a requirement to the comply with rate schedule.
Antonin Scalia: So the rate schedule of FERC says charge a rate--
Austin C. Schlick: That's right.
Antonin Scalia: --based on this allocation.
Austin C. Schlick: That's right.
Antonin Scalia: All right. I'll ask the other side. I don't see any room for the question that was just raised.
Austin C. Schlick: If the Court has no further questions.
Antonin Scalia: I... I do. I mean, what... what happens if the... the State says, they haven't charged it according to that allocation? Then Mississippi--
Speaker: --Well, let counsel answer. [Laughter]
Austin C. Schlick: Justice Scalia, what... what happens is then the question becomes was the resulting charge just and reasonable. In order 415, FERC determined the resulting charge after a violation of the rate schedule was just and reasonable. In fact, ratepayers in Louisiana benefited from what Entergy did, notwithstanding that it wasn't in compliance with the terms of the rate schedule at that time.
William H. Rehnquist: Thank you, Mr. Schlick. Mr. Fontham, we'll hear from you.
Michael R. Fontham: Thank you. Mr. Chief Justice, and may it please the Court: The issue in this case is the following. The FERC approved a contract amendment that established conditions, procedures before a utility could bill an affiliate for units in mothballs. The utility failed to follow the procedures, failed to consider the conditions, and failed to record the decision in its minutes, as it was required to do, and then said to the LPSC--
William H. Rehnquist: We're... we're within about 15 feet of you, Mr. Fontham. You don't have to speak up.
Speaker: [Laughter]
Michael R. Fontham: --Thank you, Your Honor. And then said to the LPSC, you must take the charges anyway.
Antonin Scalia: Yes, I think that's right under the law, isn't it?
Michael R. Fontham: No, it's not, Your Honor.
Antonin Scalia: Because?
Michael R. Fontham: Because the issue in this case is a drastic departure from what this Court held in MP&L or in Nantahala. In that--
Antonin Scalia: Because? Okay, that's exactly--
Michael R. Fontham: --In those cases--
Antonin Scalia: --Yes. To get the question very precise, that is the question. In MP&L, it said once FERC sets a rate, which means, I take it, that they have the terms that we've just described in the tariffs, a State may not conclude in setting retail rates that the FERC-approved rates are unreasonable.
Michael R. Fontham: --That's correct.
Antonin Scalia: All right. Now, what's the difference between that and what you just said?
Michael R. Fontham: The... the difference is that the FERC set the rate. The utility couldn't bill for the units because it hadn't gone through the procedure under the FERC rate. The utility billed anyway. It says if the rate said 5, the utility sends a bill for 10. 10 shows up in the retail rate case. The question is, can the State agency, looking at the FERC tariff and looking at what the utility billed, make the decision, instead of the utility making the decision, in the State proceeding that it's wrong.
David H. Souter: That's the question--
Antonin Scalia: --Maybe... maybe it can if FERC has not previously adjudicated that very question.
Michael R. Fontham: And it hasn't.
Antonin Scalia: I mean, here what... what they're contending is that FERC not only prescribed the formula, but that in order 415, it adjudicated that the formula had been properly applied or, if improperly applied, close enough for Government work is what they said. And once they decided that, their contention is, it's not up to the State to second-guess them.
Michael R. Fontham: Well, Your Honor, I don't... that may be what they're saying, but that's not what happened in the case. The... in the case the FERC did refuse to order refunds. It held that the utility had invalidly exercised its, quote/unquote, discretion to violate a clear and ambiguous tariff for 10 years. Then it said, we're going to have a new tariff. We're going to curb the utilities' discretion. We're going to require the utility to have a procedure. We were saying it is too... it was too vague, but no, no. The utilities said, our discretion will be curbed. The FERC said, their discretion will be curbed. The Court of Appeals for the D.C. Circuit said their discretion will be curbed.
David H. Souter: Didn't FERC... didn't FERC also say that the rates that had resulted during the period prior to the amendment were just and reasonable rates?
Michael R. Fontham: The FERC said that looking retroactively, in effect, retroactively--
David H. Souter: Absolutely. They're looking retroactively.
Michael R. Fontham: --Yes, sir.
David H. Souter: And having done so, and having set the rate, how then is a State utilities commission, in effect, able to go behind that determination?
Michael R. Fontham: Because the costs that were incurred and are at issue here... actually, I lost that issue before the LPSC. The LPSC, as to all the charges up until August 1997, said since the FERC retroactively effectively changed the filed rate... I don't know how they can do that, but they did... they retroactively approved a new filed rate. You... we can't touch that. Then the LPSC said, okay, now we've got a new contract amendment that operates prospectively. And what does it require? Take a look at what it requires. This was in... litigated issue. And the LPSC says, well, they didn't follow the conditions again.
Antonin Scalia: But wait. Can you please go back and explain to me my question?
Michael R. Fontham: Yes, Your Honor.
Antonin Scalia: To use your example--
Michael R. Fontham: Yes, sir.
Antonin Scalia: --we have, I mean, it sounds to me that what you're saying is a revolution in rate conditions or setting in the United States. I've always understood it to be, because of the sentence of MPL that I read to you, that if FERC says we have a piece of paper here that either directly or through a formula makes clear that $5 of your cost, your total cost for the consumer, is correct way to determine an interstate part of it, then when the local commission looks at the $10 rate to the consumer, it can do what it wants, but it has to take that $5 as a given.
Michael R. Fontham: We did that.
Antonin Scalia: Now, if the commission thinks that the $5 that the company put on its line as part of the interstate payment did not comply with every condition, did not satisfy the law because it was unjust and unreasonable, their remedy is to go to FERC and to say, FERC, they didn't comply with your conditions. They let... got an unreasonable rate. That the commission's remedy... the local commission... is not to readjudicate that itself. And the... the legal authority for what I've just said I've always thought was the sentence I read to you out of MP&L. Now, where am I wrong in that?
Michael R. Fontham: You are wrong, Your Honor, in this. MP&L says that the State commission has to take the 5. If the tariff says 5, it has to take the 5.
Speaker: That's what I said.
Michael R. Fontham: We're dealing with the extra 5 here. We're dealing with the overcharge, the overbilling, the violation of the contract.
Antonin Scalia: The extra 5. Now, I thought what we were dealing with here was a formula set out by what I used to call the FPC, which... which formula said that the 5 is made up of many things. One of those things is a charge that the Louisiana company is to pay to a company in a different State to reflect the fact that that company in the different State has generators in reserve capacity that serve everybody, and among those generators are generators that were put in mothballs provided that they noted in the minutes of the joint company, et cetera that this is a mothballed generator available for reserve capacity if necessary. All right, and if I understand it correctly and I've said it correctly, then the cost at issue here is part of the 5, not part of the other 5.
Michael R. Fontham: I'll give you that, Your Honor. The... but the... but the problem and the difference is that... there was a little more in the tariff condition. It said you have to have a plan to return the unit to service.
Antonin Scalia: Yes.
Michael R. Fontham: Did they have that? No. It said--
Antonin Scalia: No, but now we're repeating because I... I just said that if you think that the minutes were not filled, if you think one of the other conditions that was put forth in that particular tariff, which I guess is... what is... page 57 or something of the... of... but if you think one of those was not fulfilled, then your remedy is to go to the FPC... the FERC rather.
Michael R. Fontham: --And then... and that poses the question beautifully because we're in a State ratemaking proceeding and now we know the question. Does the State get to interpret the tariff and decide what it means and what it says, or does the utility? Because the FERC is not here to tell us. So the question is, what goes into rates today? The utility's decision based on a violation of the tariff which was litigated through the Louisiana courts? They got to eat the cake, but now they're back because they didn't like the taste of the cake, to put it--
Ruth Bader Ginsburg: Mr. Fontham, I'm a little confused on who is the they because my understanding was that the Louisiana company, ELI, had no say in this, that it was the Entergy, the... the holding company... the... for all of these five companies, that gave the instructions. And it wasn't as though ELI could say, well, we think you allocated too much to us. You're making us pay too much. The... each unit is bound by what Entergy says. So the they seems to me to be Entergy, but the Louisiana Public Service Commission has only ELI before it.
Michael R. Fontham: --That's true, Your Honor.
Ruth Bader Ginsburg: So how can it say that ELI was at fault for something that ELI is locked into by virtue of being part of this multistate--
Michael R. Fontham: What... what the commission says is that ELI is at fault in the sense of any utility, going back to... to Justice Souter's reference to two independent companies in a wholesale power transaction. Now, we all know you can go to court to enforce a wholesale tariff, and that's where most people go. In the case of a parent-subsidiary relationship, well, obviously the parent gets to tell the subsidiary what to do. That's true in everything. It's true of many cost allocations that we see. We see hundreds of millions of dollars of cost allocations coming into Louisiana based on Entergy's decisions under innumerable types of allocation schemes, including the Federal tariff. And ELI has an obligation, even though it's owned by a parent, to make sure the parent follows the terms of the tariff, just as the wholesale buyer of power--
Antonin Scalia: --I'm beginning to understand your argument. Is this what it is? That you'd... imagine we have a Federal FERC rule, and it says you can include in your... in your charge to the wholesale company the charge of sending a salesman to the foreign State to tell him about your product. All right? And now we have... now we have... you go before the State commission and the company says, and it costs me $117 to send Mr. Smith to do that. And you want to say, I, of course, am forbidden from arguing to you, the State commission, that they violated the tariff. But I can tell you that this salesman, named Murphy, actually spent most of his time in a chicken restaurant, and therefore, what he did for that 117 fell outside the tariff. It didn't violate the tariff. It fell outside the tariff. And similarly, you want to say here that the cost of the generator in mothballs did not violate the tariff to include it, but rather fell outside the tariff because they never had the minutes, et cetera. Is that what you're arguing?
Michael R. Fontham: --I'm arguing both, Your Honor, because--
Antonin Scalia: Well, what's both? If you say--
Michael R. Fontham: --Well--
Antonin Scalia: --If you say you're arguing it violated the tariff, you have an additional problem which is that the Louisiana Public Service Commission itself said that the staff wants us to say this violated the FERC tariff, but we have no power to do that.
Michael R. Fontham: --No. That... that was as to the refunds. That was as to the period going up to 1996.
Antonin Scalia: No.
Michael R. Fontham: But... but, Your Honor, let me... let me take this and put it in... in context here. When a State commission decides issues of intrastate ratemaking, it decides all kinds of questions of Federal law. It has to decide what the Internal Revenue Code requires. It has to decide what the consolidated tax return provides for. It has to decide SEC allocations that are filed with the SEC. So along comes a situation that's completely within its expertise. What does a FERC tariff require? And it makes so many decisions involving millions and millions of dollars in which it... it decides as... as any other State court. You apply Federal law, you apply State law. It's the whole body of law that you're dealing with.
Anthony M. Kennedy: Except that FERC specifically addressed this question.
Michael R. Fontham: No, Your Honor. The FERC did not address this question. This is tariff 2. Tariff 1 the FERC did address and it said the utility violated the tariff. Now we're on tariff 2, and tariff 2 was designed, according to the FERC, to curb the utility's discretion. And... and that tariff 2, designed to curb the utility's discretion, the utility then immediately proceeded to ignore. And even in their reply brief, they say, we did nothing more than we ever did before. That's on the first page of their reply brief.
David H. Souter: But isn't the way to look at the problem this way? FERC says you may charge a certain tariff. We're not coming up with the actual number now--
Michael R. Fontham: No.
David H. Souter: --because it depends on facts that will vary over time. You may... we... we are approving a tariff. You supply the number and you must supply the number according to certain conditions. And what the Louisiana commission is now saying is, the number that you supplied was a number that violates those conditions.
Michael R. Fontham: Right. That's true.
David H. Souter: The fact remains that on the face of it, FERC has said, if you come up with the number, that's the tariff. So if you are going to challenge that number, aren't you, in effect, challenging a FERC determination? And to do that, don't you have to go back to FERC and say, they didn't follow your conditions, and therefore you, FERC, should tell them that that number is, in fact, wrong and they can't charge it?
Michael R. Fontham: Your Honor--
David H. Souter: What's wrong with that analysis?
Michael R. Fontham: --I... I don't think that's correct. I do think that your predicate is correct. They... they... the FERC gave them a tariff. That's the tariff. The utility's decision doesn't become the tariff. It's like any contract case. If I have a contract with you, and I can charge you 5, and I send you a bill for 10, that doesn't... my 10 doesn't become the tariff.
David H. Souter: Right, except that in this case... and... and maybe this is where I'm going wrong. Tell me if I am. In this case, I thought FERC did not say the number is 5.
Michael R. Fontham: Yes. It said... what it said was... is, you go through this process, step 1, step 2, step 3--
David H. Souter: Right.
Michael R. Fontham: --step 4. The utility did none of that.
David H. Souter: No, but... but at the end... but what FERC is saying is, if... if you go through that process, the number you get at the end of the process is what our tariff guarantees you to charge.
Michael R. Fontham: Yes, that's true.
Speaker: And in this case, you're saying... so that... so that the... FERC is not saying what the number is in advance. It's setting the process in advance.
Michael R. Fontham: Right.
Speaker: And what you're saying is, sure, they came up with the number, ostensibly what FERC told them they could do, but they didn't go through the right process to get it, and therefore the number is no good. But in order to say the number is no good, you're still challenging something which, at least on its face, has been authorized by FERC. And therefore, why isn't the appropriate action for you to take, to go back to FERC and say, the number they're claiming under your authority is the wrong number, tell them it's the wrong number?
Michael R. Fontham: Okay. I'll... I'll answer the last question first. The reason the appropriate action for the LPSC to take is not to go to FERC is because the LPSC has the authority as part of its State ratemaking authority, as part of State law to make--
Speaker: Yes, but that's the question here. That's the question here.
Michael R. Fontham: --That's the question.
Speaker: Do they have it or is it preempted?
Michael R. Fontham: Well, it wasn't preempted--
Speaker: And one question as to whether it's preempted, I would think, would be can they go back to the Federal ratemaker and... and, in fact, get the relief that they want. That's something we ought to consider.
Michael R. Fontham: --And, Your Honor, the... our position is... and I believe it's correct... that there's nothing in the Federal Power Act that preempts the State from doing this, that the only FERC jurisdiction to decide enforcement issues didn't even... they created it in 1980 approximately. They were told in 16 U.S.C. 825m that if they found a violation of a tariff, they had to go to United States District Court. And there's nothing in the Federal Power Act. In fact, the Senate had a provision in the Federal Power Act that the FERC can award remedies for violations of its orders. It was pulled out.
Speaker: In other words, they-- --Okay. You're talking about the condition today, and what you're saying today is, whenever FERC sets a tariff that leaves the bottom line number to be filled in later, a State utility commission in a ratemaking proceeding may challenge that bottom line number in its own bailiwick.
Michael R. Fontham: No, Your Honor. We're saying that if there's a tariff--
Speaker: I thought that's what you were doing.
Michael R. Fontham: --and it sets forth objective requirements, and it... and the utility doesn't follow those objective requirements, then they're not entitled to bill for the units. That's all we're saying. We're not... this is not--
Speaker: All that you're saying is that Justice Souter was wrong to limit it to places where the Federal tariff is open. It's just as applicable to instances where the Federal tariff is specific. And you're saying that Congress in the Federal Power Act set up an act where you have a single central Federal body to provide tariffs for, let's say, the billions and billions of kilowatt hours made every year, but that each State... 50 or 51 different local service commissions are going to adjudicate whether or not those millions of words are, in fact, violated and what we will have is 51 separate decisionmaking bodies to determine when a FERC tariff has been violated. Now, I grant you Congress did not say in the act, and we don't mean to do that. But it would be an awfully surprising thing for them to want to do.
Michael R. Fontham: --They did say we don't want to do that. It's in... it's in the introduction.
Speaker: Well, if they said they don't want to do it, then why are you arguing to the contrary?
Michael R. Fontham: I'm saying that they... well, maybe I misunderstood what they don't want to do, Your Honor.
Speaker: I mean, don't want to do that is... means that they don't want 51 bodies--
Michael R. Fontham: Okay, they didn't--
Speaker: --adjudicating the correctness of the application of rules for wholesale rates that are contained of thousands or millions of words filed before the Federal Power Commission.
Michael R. Fontham: --They... they--
Speaker: I've always thought that the Federal Power Act did not want to have 51 adjudicative bodies, but rather wanted to have one centralized body that States were free to use.
Michael R. Fontham: --Not... not at all.
Speaker: No, okay.
Michael R. Fontham: What the Federal Power Act says is there's one central body to make the rate, to establish the reasonable and just terms of the rate. All the courts in the United States can decide whether a tariff is violated, including the State courts, and that's the way it always has been. In fact, the FERC wouldn't hear the cases until 1979. If there was a case of a tariff violation pending in State court, you had the potential, this potential of possible loss of uniformity, which never really happened. As a matter of fact, this is a high-profile case. Where are the conflicting decisions? And the reason is we have an objective tariff. They violated the objective tariff. Nobody can really dispute that. It was litigated in the lower courts.
Speaker: Mr. Fontham... Mr. Fontham, there are five States in this and there could be more in a regional organization.
Michael R. Fontham: Yes, Your Honor.
Ruth Bader Ginsburg: If each State's public service commission can do what the Louisiana commission has done, you could have chaos.
Michael R. Fontham: No.
Ruth Bader Ginsburg: One will say, my utility was underpaid. Another one will say, ours was overpaid. And each one could do exactly what the Louisiana commission has done. It... it seems to me that that just cries out for having the one decisionmaker, FERC.
Michael R. Fontham: Well, Your... Your Honor, I... I will respectfully disagree that this as big a problem as... as you are suggesting. And I'll... I'll tell you that literally billions of dollars of costs are split up by Entergy among its companies, only a very small sliver under the Federal Power Act. Now, they split up these costs from Energy Operations, which is a nuclear company; Energy Services, which is a service company, by allocating them into the jurisdictions. Anytime there would be a conflicting decision, you could have... supposedly you could have chaos. What really happens is the utility tries to shove as much costs as it possibly can into the jurisdictions which are reviewing the rates frequently.
Anthony M. Kennedy: But... but your answer to Justice Ginsburg and your earlier answer to Justice Breyer, with reference to whether there is a preemptive effect in the, what we might call, the enforcement--
Michael R. Fontham: Right.
Anthony M. Kennedy: --or interpretation phase of the... of the tariff, it seems to me is contrary to what we said in Mississippi Power. We... we actually were quoting Nantahala. There we said the Mississippi Supreme Court erred in adopting the view that the preemptive effect of FERC jurisdiction turns on whether a particular matter was actually determined in FERC proceedings.
John Paul Stevens: We have long rejected this sort of case-by-case analysis of the impact of State regulation upon the national interest.
Michael R. Fontham: Yes, Your Honor, and... and bear in mind what Justice Stevens was addressing there. The issue of prudence... and the Court were addressing, but the issue of prudence is an issue is that comes up in making the rate. The FERC in the Federal Power Act is... is authorized to establish just and reasonable rates. If you're going to raise prudence, you raise it in the proceeding where the just and reasonable rate gets established. We admit they have that. Then you have the next question. If they start violating their contract, is that something that the States can't look at? And there's nothing in the Federal Power Act that suggests that States--
John Paul Stevens: Well, but it was violating the contract in... in a context where FERC had... had looked at that... that specific violation, and it... and it announced the remedy.
Michael R. Fontham: --No. The prior violation. This is the second tariff, Your Honor. This is a new tariff that sets conditions which were supposedly designed to curb their discretion. But going back to MP&L, this Court's decision affirmed the decision of the Mississippi Public Service Commission. It reversed the Mississippi Supreme Court. It affirmed the Mississippi Public Service Commission. In... in that decision of the Mississippi Public Service Commission, 327 million will be incurred under the FERC tariff. They... they had to actually estimate what would be incurred. Now, if you hand the utility the right to tell the State public service commission that, oh, it will be 500 million, do they have to pass it through? If this Court is going to give the sword of preemption to utilities, and basically, there's a test, you know. We've got concurrent jurisdiction. The test for concurrent jurisdiction or exclusive jurisdiction is unmistakable intent of Congress. Congress had it in there, pulled it out of the... in the Senate report. The FERC can... can hear violations. It was in the Senate version of the bill in 1935. If you look on page 6 of our brief, you'll find that the Senate pulled it out. The FERC had no... no... jurisdiction to hear tariff violation cases. It could go to court. That's 16 U.S.C., section 825m. In about 1980, the FERC said, well, you know what? We're going to infer the power to do that. And for the first time ever, because up until then, the FERC had been refusing to hear cases that were pending in State court, wouldn't even exercise primary jurisdiction. Now, obviously, if you have exclusive jurisdiction, there's no need for a primary jurisdiction doctrine. They wouldn't even exercise primary jurisdiction. They left it to the State courts, all the State courts. Now, if you leave it to the State courts, what is... how can you possibly say a State ratemaking agency, which decides issues of Federal law, contracts, all the time, has to interpret allocations, has to decide if they're right... how could the Federal Power Act have taken away their power when the Federal Power Act was passed--
Stephen G. Breyer: Well, I want to be sure I get a response to this, though, because you said before... and this very interesting argument might be cut short if the paragraph that I read to you is applied to the 19... post-1965 costs, which I... aren't they the costs that were at issue when... when the staff was talking about disallowing costs?
Michael R. Fontham: --The post-1997--
Stephen G. Breyer: No. The post... the... there's the post-'65 or... what--
Michael R. Fontham: --August... it's August 5th, 1997.
Stephen G. Breyer: --But... yes.
Michael R. Fontham: You have... you have costs incurred in '96, which interestingly enough, were incurred in violation of a FERC tariff as determined by the FERC.
Stephen G. Breyer: Yes, yes, that's right. I understand that.
Michael R. Fontham: As determined by the FERC.
Stephen G. Breyer: But they are... but it's... it's the '97 costs we're talking about here.
Michael R. Fontham: Going forward. That's correct.
Stephen G. Breyer: And... and when they're talking about this, it seemed as if they're talking about post-August 5th, 1997 costs on page 64a, 65a.
Michael R. Fontham: Right. That's when the new tariff--
Stephen G. Breyer: Are you sure they're not?
Michael R. Fontham: --That's when the new tariff became effective.
Stephen G. Breyer: Yes. But you know what I'm thinking of on page 64a and 65a of your appendix.
Michael R. Fontham: I don't, but I'll be happy to look.
Stephen G. Breyer: I'm a little puzzled by your reference to the new tariff. I thought the-- --It's... it's... they have a... B, is this committee precluded from determining whether the operating committee's decision was in compliance with the amended section 10.02 of the system agreement?
Michael R. Fontham: It's the amendment. Yes. The amendment took effect August 5th, 19--
Antonin Scalia: Yes, and they're talking about the post-August 5th, aren't they?
Michael R. Fontham: --That's correct.
Antonin Scalia: All right. Then they say, LPSC staff argues that the MS-1 overpayment should be disallowed because the decision violated the FERC tariff. As ELI argues, this commission is preempted from determining whether the terms of a FERC tariff have been met, for the issue of violation or compliance with a FERC tariff is peculiarly within FERC's purview. Any allegation of a violation of a FERC tariff should, therefore, be brought before FERC. I read that and thought they seem not to have decided this on the basis that you've been arguing it.
Michael R. Fontham: Your Honor, I believe they did decide it on the basis that I've been arguing, but I'll concede that that language is sitting in there. It's wrong. And--
Antonin Scalia: You mean it's wrong as a matter of law? It's wrong at describing what they thought?
Michael R. Fontham: --It's wrong. I think it relates to the refunds, but it's wrong as a matter of this Court's law, the fact that there was a primary jurisdiction doctrine, the fact that the States have always had the power to decide this, the fact that the FERC had to infer jurisdiction to decide tariff violations in the... in around 1979 or 1980. The FERC has never had exclusive jurisdiction to decide if a contract has been violated. The Arkla against Hall case. That case is a case that came through the... this... the Louisiana courts. This Court held there's a difference between establishing the just and reasonable rate and enforcing the contract. And if you go back to the... the Pan American case decided by this Court, this Court held that with regard to contract enforcement issues, which somebody was arguing need to be decided by the FERC, there was a State proceeding pending.
Ruth Bader Ginsburg: Why is this a contract enforcement proceeding? I don't follow.
Michael R. Fontham: Because, Your Honor, the... it's a contract. This is one of the sections of the contract. This is the section that... it's an amendment to the contract that was approved by the FERC. It's a contract between the parties--
Ruth Bader Ginsburg: A contract between whom?
Michael R. Fontham: --Pardon?
Ruth Bader Ginsburg: Who is the... who are the parties to this contract?
Michael R. Fontham: The parties to the contract are the five operating companies, plus--
Ruth Bader Ginsburg: But you agreed with me earlier that the operating companies have to follow the instructions of Entergy.
Michael R. Fontham: --Only by virtue of the fact that Entergy... not under the contract, not because the contract says so. They don't have to take an illegal charge. But as a matter of practice, I admit that the big boss of Entergy can tell the operating companies what to do, and they're not going to lose their jobs over it. So they'll take the charge if it's an overcharge. You're darned right. But not because the contract says so, Your Honor. Not at all.
David H. Souter: Is this contract the contract that has been accepted by and approved by FERC and, in effect, incorporated into the tariff?
Michael R. Fontham: Yes, Your Honor.
David H. Souter: So that we're not talking about a freestanding contract.
Michael R. Fontham: We're--
David H. Souter: We're talking, in effect, about a term which the tariff incorporates by its reference to the contract.
Michael R. Fontham: --We are... we are really... the contract itself--
David H. Souter: Well, isn't--
Michael R. Fontham: --more or less becomes the tariff, Your Honor.
David H. Souter: --Right. That's--
Michael R. Fontham: There is no separate tariff. It's just a contract. It becomes a rate schedule filed with the FERC. But in Pan American, this Court said, you know, in... in its nature... by its nature, a contract like that is a State court contract. And the... and the Court made the statement by the fact that everybody knows there's a scheme of Federal regulation doesn't change that. And the State courts... and I think it implicitly means this--
William H. Rehnquist: --Thank you, Mr. Fontham.
Michael R. Fontham: --Yes, Your Honor.
William H. Rehnquist: Mr. Carpenter, you have 4 minutes remaining.
David W. Carpenter: Unless the Court has any further questions, I have nothing else I need to add.
William H. Rehnquist: Thank you, Mr. Carpenter. The case is submitted.
Speaker: The honorable court is now adjourned until tomorrow at ten [= 10] o'clock.