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

CRS Report for Congress
Received through the CRS W eb
En terg y Louisiana, Inc. v. Louisiana Public
Service Commission: Preemptive Effect of
Federal Energ y Regulatory Commission
Mi chael V. Seitzinger
Legislative Attorney
American Law Division
In Entergy L ouisiana, Inc. v. Louisiana Public Service C ommission t h e United
S t a t e s S u prem e C ourt faced t h e i ssue o f w het h er a Federal Energy R egu l at o ry
Commission (FERC) tariff delegat i n g d iscretion t o t he regulated entity to determine
preci se cost allocation pre-empted a FERC order t hat h ad judged those costs imprudent.
Reversing t he Louisiana S upreme C ourt, the United S tates S upreme C ourt h eld t hat t he
FERC order pre-empted any attemp t a t m odi fication and that, t herefore, t he costs
determined as imprudent coul d not be allowed. The case continues t he line o f S upreme
Court cases holding that, when FERC approves a “just and reasonable ” r a t e , a s t ate
agency m ay not reconsi d er t h e rat e.
The Federal Energy Regulatory Comm i s sion (FERC) is charged by s tatute with1
regu l at i n g t he sal e of el ect ri ci t y a t w h o l esal e i n i nt erst at e com m erce. FER C is further
charged wi t h m aki ng cert ai n t h at whol esal e rat es are “j u st and reasonabl e.”2 The United3 4
States Supreme C ourt i n p revious cases held that under t h e f i l e d - rate doctrine cost
allocations between affiliated energy companies which had been approved by FERC could
not be reeval uat ed b y s t at e rat em aki ng agenci es. In Entergy L ouisiana, Inc. v. Louisiana
Public Service C ommission, d ecided J une 2, 2003 (No. 02-299), t he Court faced the i ssue

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 & Ligh t Co. v. T hor nburg, 476 U.S. 953 (1986).
4 The f iled r ate doc t r i n e s t a t e s t hat “interstate power rates f iled with FERC or fixed by FERC
must be gi ve n b i nding effect by state utility co mmi ssions determining i ntrastate r ates.”
Nantahala Power & Light, at 962. T he f iled r ate doctrine applies t o s tate regulators because of
the doctrine of f ederal preemption as s et forth i n t he Constitution’s Supremacy Cl ause. Arkansas
Louisiana Gas Co. v. Hall, 453 U.S. 571, 581-582 (1981).
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of whet her a FERC tariff delegating discretion t o t he regulated entity to determine preci se
cost allocation pre-empted a FERC order t hat h ad judged those costs imprudent. The case
continues t he line o f S upreme C ourt cases hol ding that, when FERC approves a “just and
reasonabl e” rat e, a st at e m ay not reconsi d er t h e rat e.
Entergy Lo u i s i ana, Inc. (ELI), is one of five public utilities owned by Entergy
Corporation. ELI operates i n Louisiana and shares capacity with other Entergy utilities
operating i n Arkansas, Mis s i s s i p p i, and Tex as. This arrangement allows a company to
access additional capacity when needed, but the costs a s s o c i a t ed with keeping ex cess
capacity available m ust b e allocated. The co st allocation i s an important component of
the s etting of ret ai l rat es by stat e regulat ors.
Entergy allocates costs through a system agreement approved b y FERC under s ection
205 of t h e Federal P o wer A ct . 5 The form u l a for t he agreem ent c o n t a i n s an aut o m at i c
adj u st m ent cl ause, n ecessary because of t h e possi bl e m ont hl y change i n t he cost
allocation, and t his clause i s ex empted from the Federal P ower Act’s u sual requirements
The cost allocation d etermination was based not simply upon the power used from
generating facilities; rather, certain generating units shut down b ecause of overcapacity,
but which could b e b rought back up if necessary, were also figured into the cost
allocation. An operating committee was gi ven t he discretion t o det ermine t he stat us of
these “mothballed” units. Because o f t h i s a llocation, ELI o ften found that its cost
equal i z at i o n p aym ent s w ere i ncreased.
In December 1993 FERC initiated a proceeding t o d etermine for formula purposes
whether t he “mothballed” generating units should b e t reated as available. FE RC found
that, although t he units should not have been cl assifi ed as available for purposes of the
form ul a, a refu n d w a s n o t warrant ed because t h e cost al l o cat i ons had not been “unj ust ,
unreasonable, or unduly d iscriminatory. ” FER C a l s o approved an amendment t o t he
syst em agreem ent t o al l o w a “m ot hbal l ed” uni t t o b e t reat ed as avai l abl e i f t he operat i n g
committee det ermined that at a future dat e i t i ntended t o ret urn t he unit t o s ervice.
ELI filed with the Louisiana P ublic Service C ommissio n ( LP S C ) i n M ay 1997 its
annual rate. A contested i ssue i n t he filing was whet her t he cost of “m ot hballed”
generating units should b e i ncluded o r ex cluded from its revenue requirement.6 The
LPSC confined its review to paym ents made afte r August 5 , 1997, the d ate o n which
FER C ’s o rder al l o wi ng i n cl usi o n o f t he “m o t h b al l ed” uni t s as j u st and reasonabl e h ad
been i ssued. D espi t e concl udi ng t h at i t was p reem pt ed f r o m d et erm i n i n g w het h er t h e
filing was just and reasonable b ecause of FERC’s authority over t he matter, the LPSC
held that it was not preem pted from disallowi ng as imprudent these costs after August 5 ,


5 16 U.S.C. § 824d.
6 A l l o w e d r e venue would t ypically permit an operating company to recover its costs and a
reasonable r ate of r eturn.

ELI’s petition for review in stat e district court was denied. ELI then appeal ed to the
S u p r e m e C ourt o f Louisiana, which upheld the LPSC’s decision. 7 TheSupremeCourt
of Loui si ana h el d t hat t he LP S C ’s order was not barred b y p reem pt i o n b ecause t h e LP S C
was n ei t h er at t em p t i n g t o regul at e i nt erst at e w hol esal e rat es nor chal l engi n g FE R C ’s
declining t o o rder refunds. The Louisian a S upreme C ourt also s tated t hat FERC h ad not
ruled o n whether continuing after August 5 , 1997, to include the cost of t he “mothballed”
units was prudent. The United S tates S uprem e C ourt granted ELI’s petition for writ of
certiorari to determine whether the LPSC’s order was preem pted. The United S tates
Supreme C ourt reversed t he Louisiana S upreme C ourt.
In Nantahala & Light and Mississippi Power & Light the C ourt applied t he filed rat e
doctrine i n holding that FERC-mandated cost allocations could not be modified by state
regulators. The Court s tated i n Nantahala:
Nantahala m ust under NCUC’s o rder calculate its retail rates as i f i t
received m ore entitlement power than it does under FERC ’ s o r d e r,
and as i f i t n eeded t o procure l ess o f t he m o re ex pensi v e purchased
power than under FERC’s o rder. A portion o f t he costs i ncurred b y
Nantahala i n p rocuring its power is therefore “trapped.”8
Appl yi ng t h ese earl i er d eci si ons t o t h e fact s i n Entergy L ouisiana , t he Court h eld t hat t he
LPSC’s order impermissibly “trapped” cost s al l o cat ed i n a FER C t ari ff. The C ourt w ent
on t o st at e t hat , because C ongress had s peci fi cal l y al l o we d t h e u s e o f aut om at i c
adjustment clauses i n t he Federal P ower Act, the Louisiana S upreme C ourt’s conclusion
that leaving t he cl assification of t he “m othballed” generating units to the discretion of an
operating committee could substantially limit FERC’s f l e x i bility in approving cost
allocation arrangem ents.
As for t he Louisiana S upreme C ourt’s upholding th e LPSC’s order b ased upon its
belief t hat FERC h ad not specifically approved t he cost allocation after Augu st 5, 1997,
when it issued its order, the C ourt s tated t hat t he Louisiana S upreme C ourt h ad revived
the s ame erroneous reasoning used by the M ississip p i S u preme C ourt i n Mississippi
Power & Light. In that case t he Court s tated:
The M ississippi Supreme C ourt erred i n adopting t he view that
the p re-emptive effect of FE R C j u risdiction t urned o n whether a
particular matter was act ually determined in the FERC
proceedings .... W e have long rejected this so r t of “‘case-by-case
analys is of the impact of state regulation upon the n ational i nterest’”
in power regulation cas es . Nantahala, 476 U.S., at 966 (quoting
FPC v. Southern Californ i a Edison Co., 376 U.S. 205, 215-216
(1964)). Congress has d rawn a b righ t line b etween state and federal
aut hori t y i n t h e s et t i ng of whol esal e rat es and i n t he regu l at i o n o f
agreem ent s t h at affect whol e s a l e rat es. S t at es m ay not regu l at e i n
areas where FERC has properly ex ercised its juri s d iction t o

7 815 So. 2d 27 ( La. 2002).
8 476 U.S., a t 971.

d e t e r mine j ust and reasonable wholesale rates or to insure t h a t
agreem ent s affect i n g w hol esal e rat es are reasonabl e. 9
Fi nally, t he Court addressed t he argu m e n t by respondents t hat t he inclusion o f t he
“m othballed” generating units in the rat e calculations violated the a m e nded s ys tem
agreement and that, t herefore, t he LPSC’s order cannot be pre-empted. The Court i s
uncertain as to why respondents advanced this argu ment, s ince the LPSC’s prior holding
stat ed that it did not have jurisdiction t o det ermine whether the s ys tem agreem ent was
v i o l ated and s ince the Louisiana S upreme C ourt accepted t hat position. Therefore, the
Court s tated t hat i t h ad no r eason to address t he question.

9 Mississippi Powe r & Light , a t 374.