Entergy Louisiana, Inc. v. Louisiana Public Service Commission: Preemptive Effect of Federal Energy Regulatory Commission Orders

Entergy Louisiana, Inc. v. Louisiana Public Service Commission: Preemptive Effect of Federal Energy Regulatory Commission Orders

Order Code RS21559
July 1, 2003
CRS Report for Congress
Received through the CRS Web
Entergy Louisiana, Inc. v. Louisiana Public
Service Commission: Preemptive Effect of
Federal Energy Regulatory Commission
Orders
Michael V. Seitzinger
Legislative Attorney
American Law Division
Summary
In Entergy Louisiana, Inc. v. Louisiana Public Service Commission the United
States Supreme Court faced the issue of whether a Federal Energy Regulatory
Commission (FERC) tariff delegating discretion to the regulated entity to determine
precise cost allocation pre-empted a FERC order that had judged those costs imprudent.
Reversing the Louisiana Supreme Court, the United States Supreme Court held that the
FERC order pre-empted any attempt at modification and that, therefore, the costs
determined as imprudent could not be allowed. The case continues the line of Supreme
Court cases holding that, when FERC approves a “just and reasonable” rate, a state
agency may not reconsider the rate.
The Federal Energy Regulatory Commission (FERC) is charged by statute with
regulating the sale of electricity at wholesale in interstate commerce.1 FERC is further
charged with making certain that wholesale rates are “just and reasonable.”2 The United
States Supreme Court in previous cases3 held that under the filed-rate doctrine4 cost
allocations between affiliated energy companies which had been approved by FERC could
not be reevaluated by state ratemaking agencies. In Entergy Louisiana, Inc. v. Louisiana
Public Service Commission, decided June 2, 2003 (No. 02-299), the Court faced the issue
1 16 U.S.C. § 824(b).
2 16 U.S.C. § 824d(a).
3 Mississippi Power & Light Co. v. Mississippi ex rel. Moore, 487 U.S. 354 (1988); Nantahala
Power & Light Co. v. Thornburg, 476 U.S. 953 (1986).
4 The filed rate doctrine states that “interstate power rates filed with FERC or fixed by FERC
must be given binding effect by state utility commissions determining intrastate rates.”
Nantahala Power & Light, at 962. The filed rate doctrine applies to state regulators because of
the doctrine of federal preemption as set forth in the Constitution’s Supremacy Clause. Arkansas
Louisiana Gas Co. v. Hall, 453 U.S. 571, 581-582 (1981).
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of whether a FERC tariff delegating discretion to the regulated entity to determine precise
cost allocation pre-empted a FERC order that had judged those costs imprudent. The case
continues the line of Supreme Court cases holding that, when FERC approves a “just and
reasonable” rate, a state may not reconsider the rate.
Entergy Louisiana, Inc. (ELI), is one of five public utilities owned by Entergy
Corporation. ELI operates in Louisiana and shares capacity with other Entergy utilities
operating in Arkansas, Mississippi, and Texas. This arrangement allows a company to
access additional capacity when needed, but the costs associated with keeping excess
capacity available must be allocated. The cost allocation is an important component of
the setting of retail rates by state regulators.
Entergy allocates costs through a system agreement approved by FERC under section
205 of the Federal Power Act.5 The formula for the agreement contains an automatic
adjustment clause, necessary because of the possible monthly change in the cost
allocation, and this clause is exempted from the Federal Power Act’s usual requirements
for rate changes.
The cost allocation determination was based not simply upon the power used from
generating facilities; rather, certain generating units shut down because of overcapacity,
but which could be brought back up if necessary, were also figured into the cost
allocation. An operating committee was given the discretion to determine the status of
these “mothballed” units. Because of this allocation, ELI often found that its cost
equalization payments were increased.
In December 1993 FERC initiated a proceeding to determine for formula purposes
whether the “mothballed” generating units should be treated as available. FERC found
that, although the units should not have been classified as available for purposes of the
formula, a refund was not warranted because the cost allocations had not been “unjust,
unreasonable, or unduly discriminatory.” FERC also approved an amendment to the
system agreement to allow a “mothballed” unit to be treated as available if the operating
committee determined that at a future date it intended to return the unit to service.
ELI filed with the Louisiana Public Service Commission (LPSC) in May 1997 its
annual rate. A contested issue in the filing was whether the cost of “mothballed”
generating units should be included or excluded from its revenue requirement.6 The
LPSC confined its review to payments made after August 5, 1997, the date on which
FERC’s order allowing inclusion of the “mothballed” units as just and reasonable had
been issued. Despite concluding that it was preempted from determining whether the
filing was just and reasonable because of FERC’s authority over the matter, the LPSC
held that it was not preempted from disallowing as imprudent these costs after August 5,
1997.
5 16 U.S.C. § 824d.
6 Allowed revenue would typically permit an operating company to recover its costs and a
reasonable rate of return.

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ELI’s petition for review in state district court was denied. ELI then appealed to the
Supreme Court of Louisiana, which upheld the LPSC’s decision.7 The Supreme Court
of Louisiana held that the LPSC’s order was not barred by preemption because the LPSC
was neither attempting to regulate interstate wholesale rates nor challenging FERC’s
declining to order refunds. The Louisiana Supreme Court also stated that FERC had not
ruled on whether continuing after August 5, 1997, to include the cost of the “mothballed”
units was prudent. The United States Supreme Court granted ELI’s petition for writ of
certiorari to determine whether the LPSC’s order was preempted. The United States
Supreme Court reversed the Louisiana Supreme Court.
In Nantahala & Light and Mississippi Power & Light the Court applied the filed rate
doctrine in holding that FERC-mandated cost allocations could not be modified by state
regulators. The Court stated in Nantahala:
Nantahala must under NCUC’s order calculate its retail rates as if it
received more entitlement power than it does under FERC’s order,
and as if it needed to procure less of the more expensive purchased
power than under FERC’s order. A portion of the costs incurred by
Nantahala in procuring its power is therefore “trapped.”8
Applying these earlier decisions to the facts in Entergy Louisiana, the Court held that the
LPSC’s order impermissibly “trapped” costs allocated in a FERC tariff. The Court went
on to state that, because Congress had specifically allowed the use of automatic
adjustment clauses in the Federal Power Act, the Louisiana Supreme Court’s conclusion
that leaving the classification of the “mothballed” generating units to the discretion of an
operating committee could substantially limit FERC’s flexibility in approving cost
allocation arrangements.
As for the Louisiana Supreme Court’s upholding the LPSC’s order based upon its
belief that FERC had not specifically approved the cost allocation after August 5, 1997,
when it issued its order, the Court stated that the Louisiana Supreme Court had revived
the same erroneous reasoning used by the Mississippi Supreme Court in Mississippi
Power & Light. In that case the Court stated:
The Mississippi Supreme Court erred in adopting the view that
the pre-emptive effect of FERC jurisdiction turned on whether a
particular
matter
was
actually
determined
in
the
FERC
proceedings.... We have long rejected this sort of “‘case-by-case
analysis of the impact of state regulation upon the national interest’”
in power regulation cases. Nantahala, 476 U.S., at 966 (quoting
FPC v. Southern California Edison Co., 376 U.S. 205, 215-216
(1964)). Congress has drawn a bright line between state and federal
authority in the setting of wholesale rates and in the regulation of
agreements that affect wholesale rates. States may not regulate in
areas where FERC has properly exercised its jurisdiction to
7 815 So. 2d 27 (La. 2002).
8 476 U.S., at 971.

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determine just and reasonable wholesale rates or to insure that
agreements affecting wholesale rates are reasonable.9
Finally, the Court addressed the argument by respondents that the inclusion of the
“mothballed” generating units in the rate calculations violated the amended system
agreement and that, therefore, the LPSC’s order cannot be pre-empted. The Court is
uncertain as to why respondents advanced this argument, since the LPSC’s prior holding
stated that it did not have jurisdiction to determine whether the system agreement was
violated and since the Louisiana Supreme Court accepted that position. Therefore, the
Court stated that it had no reason to address the question.
9 Mississippi Power & Light, at 374.