Opinion ID: 1740878
Heading Depth: 2
Heading Rank: 1

Heading: prudency

Text: Miss. Code Ann. § 77-3-39 (1972) authorizes the MPSC to establish just and reasonable rates which lead to a fair rate of return for the utility. As we have often held, A fair rate is one which, under prudent and economical management, is just and reasonable to both the public and the utility. Miss. Public Service Commission v. Miss. Power Co., 429 So.2d 883 (Miss. 1983), (citing Southern Bell Tel. & Tel. Co. v. Mississippi Public Service Comm'n, 237 Miss. 157, 241, 113 So.2d 622, 656 (1959) [emphasis added]). What appears to have taken place here is the evasion by sister MSU companies of any review of the prudency of their operation or the fairness of their many in house dealings. The C.O.N. to construct Grand Gulf was granted under a specific set of circumstances: the first unit was to be operational in 1980, the two units were to cost $1.227 billion, and Mississippi ratepayers were not to pay for any more of its capacity than they needed. Unit 1 began operation in July, 1985; the cost of Unit 1, alone, was over $3.5 billion; and the MSU-controlled operating companies agreed, among themselves that Mississippians should pay for 1/3 of its cost  much of Grand Gulf was even paid for in advance of receiving one kilowatt of power from the plant. Now MP & L presents us with this rate increase as a fait accompli, and demands that we affirm it, because the FERC has determined that a 33% allocation of Grand Gulf to MP & L does not discriminate among the various sister operating companies. We do not interpret the law to require that we approve the blind pass-through of a $326 million rate increase to Mississippians without a prudency review; to do so would be a gross abdication of the responsibility of state regulators. Predictably, MP & L relies heavily on the decision of the United States Supreme Court in Nantahala Power & Light Co. v. Thornburg, ___ U.S. ___, 106 S.Ct. 2349, 90 L.Ed.2d 943 (1986). In that case, the FERC had allocated a certain amount of low cost TVA-supplied hydroelectric power to Nantahala Power & Light Company. The FERC allocation slightly adjusted an agreement between Nantahala and Tapoco, Inc., both wholly owned subsidiaries of Alcoa. Nantahala's retail customers were all North Carolina residents, and the North Carolina Utilities Commission (NCUC) rejected this allocation in its setting of rates for Nantahala. The NCUC set rates as if Nantahala were receiving more of the low cost power than it was allocated. Although the FERC allocation was ultimately approved by the United States Court of Appeals for the Fourth Circuit, the North Carolina Supreme Court affirmed the utility commission's action. The United States Supreme Court reversed. The Supreme Court's opinion reiterated the exclusive jurisdiction of the FERC to set interstate wholesale rates. Since the allocation of low cost power directly affected Nantahala's rates, the Court held that The fact that NCUC is setting retail rates does not give it license to ignore the limitations that FERC has placed upon Nanatahala's [sic] available sources of low-cost power. ___ U.S. at ___, 106 S.Ct. at 2358, 90 L.Ed.2d at 956. We are aware of the effect that wholesale rates have on retail rates, and we do not challenge the FERC's jurisdiction over interstate wholesale rates. We do not, however, construe Nantahala as forcing the MPSC to set rates based on the construction and operation of a plant (nuclear or otherwise) that generates power that is not needed at a price that is not prudent. If MP & L had built Grand Gulf on its own, and then come to the MPSC asking for a rate increase based on its cost, no one would seriously argue that the commission would have the authority, indeed, the duty, to inquire into the prudency of its cost. MP & L, however, asks us to take the position that, because Grand Gulf is owned by an out-of-state corporation, the Supremacy clause of the United States Constitution precludes any such review of Grand Gulf, and forces its unneeded power down the throats of Mississippi ratepayers. We do not believe the preemption doctrine was ever intended to accomplish such an inequitable and unjust result. Important factual distinctions exist between this case and Nantahala. In Nantahala, no question was raised about the prudency or necessity of acquiring low-cost hydroelectric power. The Supreme Court recognized this, stating: Without deciding this issue, we may assume that a particular quantity of power procured by a utility from a particular source could be deemed unreasonably excessive if lower-cost power is available elsewhere, even though the higher-cost power actually purchased is obtained at a FERC-approved, and therefore reasonable, price. ___ U.S. at ___, 106 S.Ct. at 2360, 90 L.Ed.2d at 958. In this case, there is no doubt that Mississippians do not need the power provided by Grand Gulf, and that lower cost power is available elsewhere (in fact, by plants owned by MP & L). The record indicates that MP & L still serves 61% of its electrical generating needs from oil and gas units, and, with the purchase of coal-generated energy from ISES2, the company is at 85% over peak demand. Furthermore, MP & L admitted at oral argument that it is selling the less expensive energy off the system and retaining the electricity allocated to it from Grand Gulf. The Grand Gulf electricity is estimated to have a busbar, or total generation, cost of 15¢ per kilowatt hour, compared to an average busbar cost of 4¢ for non-Grand Gulf power. Donald Lutken, the Chief Executive Officer of MP & L, testified that the company has the highest average kilowatt hour cost of the MSU system. In light of these facts, clearly the allocation of 33% of Grand Gulf power is unreasonably excessive. Since Mississippi cannot use 33% of Grand Gulf's power, the 1982 System Agreement providing for the allocation of 33% of its cost would seem to be imprudent. The 1982 System Agreement is not the only action between MSU subsidiaries that gives us pause. The Power Purchase Advance Payment Agreement is another example of less-than-arm's-length transactions between these sister companies. We can see no benefit accruing to MP & L by entering into the agreement to pay over $74 million to MSEI in advance of receiving any power from Grand Gulf. On the contrary, this agreement could only benefit MSU and MSEI by providing funds for construction work in progress at Grand Gulf, in circumvention of our long established doctrine preventing the use of funds to finance construction work in progress from being allowed in the rate base as a basis for increase for rates. Mississippi Public Service Commission v. Coast Waterworks, Inc., 437 So.2d 448 (Miss. 1983); State, ex rel., Allain v. Mississippi Public Service Commission, 435 So.2d 608 (Miss. 1983); Mississippi Public Service Commission v. Mississippi Power Company, 429 So.2d 883 (Miss. 1983). This agreement becomes especially suspect in light of the fact that it was entered among companies whose officers are controlled by MSU, the holder of all of their voting stock. In sum, we believe that the relationship of MP & L to MSU, MSEI, and the other operating companies has brought about a situation in which Mississippi ratepayers are being intolerably burdened with highcost nuclear energy that they neither want nor need nor can afford. In holding that a prudency review is not precluded by federal law, we adopt the following language from Appeal of Sinclair Machine Products, Inc., 126 N.H. 822, 498 A.2d 696 (1985): The approach of this modern trend, which we here adopt and approve as being consistent with preemption doctrine applicable to State regulation of retail electric rates, is to examine whose matters actually determined, whether expressly or impliedly, by the FERC. As to those matters not resolved by the FERC, State regulation is not preempted provided that State regulation would not contradict or undermine FERC determinations and federal interests, or impose inconsistent obligations on the utility companies involved. Id. 498 A.2d at 704. Several aspects of prudency have never been addressed with respect to Grand Gulf, either by state or federal authorities. Specifically, we have yet to see MP & L, MSEI or MSU justify putting Grand Gulf on line at its exorbitant cost to ratepayers. At no point in the regulatory hearings related to Grand Gulf have we found evidence from MSU or its subsidiaries of alternatives to putting Grand Gulf on line. The FERC allocations presuppose an operational Grand Gulf, delivering at, or near, full capacity. That agency was never presented with the question of whether the completion of Grand Gulf, or its continued operation, was prudent. Mississippi Industries v. Federal Energy Regulatory Commission, 808 F.2d 1525 (D.C. Cir.1987) stated the issues reviewed by the FERC: The principal issue in ER82-616 was whether the UPSA's proposed allocation of Grand Gulf investment costs was reasonable, and, if not, how such costs should be allocated... . The principal issue in the System Agreement proceeding was whether FERC should approve that Agreement as filed or whether it should equalize all of part of the production costs on the system. Id., at pp. 1536-38. Surely, it became obvious to MSU management, at least by the early 1980's, that both the cost and demand projections related to Grand Gulf were terribly incorrect. No regulatory review was made at that point, however, and management proceeded doggedly along. The Court of Appeals recognized this folly in its synopsis of the facts of this case: The Grand Gulf project was initiated by MSU to meet the then projected demand for electricity by the system as a whole. 26 FERC at 65,101-12. By the late 1970's however, it became clear that projected demand would fall well short of previous expectations. Nonetheless, MSU continued to build Grand 1 on the assumption that the overall cost per kilowatt hour would be less than that of alternative energy sources. 26 FERC at 65,102.23 23 This assumption is now questionable. Through the 1990's Grand Gulf will not produce energy that is cheaper than energy produced from alternative sources. Indeed, ALJ Liebman estimated that by 1993 ratepayers will pay $3 billion more for Grand Gulf energy than they would for energy from comparable sources. As of 1984 MSU was still predicting that Grand Gulf power would become economical at some future date and that at some (even later) point the project will represent a net benefit to consumers. 26 FERC at 65,103. As ALJ Liebman noted, however, the decline in the price of oil makes these projections appear rather dubious. Id. Mississippi Industries, at 1535. However, the court made no finding with regard to prudency because the issue was not presented. Now that Grand Gulf is complete, at over three times its projected cost, and clearly unnecessary for the purpose of generating electricity for Mississippians, MP & L thinks that it can evade a prudency review of Grand Gulf because the plant is owned by an interstate wholesaler, which, incidentally, is wholly owned and controlled by MSU, as is MP & L. We disagree. In remanding this case to the MPSC for a review of the prudency of the Grand Gulf investment, we rely on the expertise of this agency in making a determination of whether MSU and its subsidiaries made reasonable decisions in light of local conditions. We believe that this is a matter best left to this state agency to resolve, and that this issue has not been preempted by federal jurisdiction over interstate wholesale ratemaking. We, thus, agree with the following language of the Court of Appeals for the Fifth Circuit, applying the abstention doctrine of Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943): Given the facts before us and the structure of the Federal Power Act, which leaves jurisdiction over retail rates to the states, we conclude that the district court did not abuse its discretion in finding Burford abstention appropriate here. As with the regulatory scheme at issue in Burford, the regulation and adjustment of local utility rates is of paramount local concern and a matter which demands local administrative expertise. The regulatory scheme is complex. In addition, the Louisiana state courts are fully able to address NOPSI's complaints about Council actions: appeals from Council orders are to be filed with the Civil District Court for the Parish of Orleans. Significantly, NOPSI has not denied that adequate state court remedies exist. That the state courts often capably address claims such as that raised by NOPSI is apparent from the number of state court cases upon which NOPSI relies to prove its preemption claim substantial. Nor would federal abstention foreclose the United States Supreme Court from entertaining NOPSI's preemption claim should it wind its way up through the state courts, as is demonstrated by the path of the recent Nantahala case. New Orleans Public Service v. City of New Orleans, 798 F.2d 858, 862 (5th Cir.1986). See also Kentucky West Virginia Gas Co. v. Pennsylvania Public Utility Commission, 791 F.2d 1111 (3rd Cir.1986); Middle South Energy, Inc. v. Arkansas Public Service Commission, 772 F.2d 404 (8th Cir.1985). We thus hold that the state regulatory body, in this case, the Mississippi Public Service Commission, must review the prudency of an investment such as Grand Gulf before it can enact rates based on its cost. Such a review must determine whether MP & L, MSEI and MSU acted reasonably when they constructed Grand Gulf 1, in light of the change in demand for electric power in this state and the sudden escalation of costs.