On Monday, April 28, 2003, at 11:00 a.m., the United States Supreme Court will hear oral arguments in the case Entergy Louisiana, Inc. v. Louisiana Public Serv. Comm'n, Docket No. 02-299. Although the case arises out of the unique regulatory scheme in Louisiana, the Court's resolution of the case has the potential to affect the entire U.S. energy industry. The Supreme Court will be deciding whether state public utility commissions or the Federal Energy Regulatory Commission ("FERC") will have the last word on which participant in the energy market will ultimately bear the costs of power purchases.

The specific issue is whether a state public utility commission may determine that costs incurred by an electric utility under a FERC-approved rate schedule were "imprudent," and therefore, may not be passed along to ratepayers.

Settled case law under the Federal Power Act, including widely-cited U.S. Supreme Court precedent, provides that the FERC has exclusive authority to determine the reasonableness of wholesale rates. This means that when an electric utility purchases power from a wholesale provider, only FERC can decide if the price charged is fair. Once the FERC decides that a wholesale price is fair, case law also currently provides that the utility may pass along those costs to ratepayers.

While the FERC regulates wholesale energy rates, state public utility commissions regulate retail rates. Because state public utility commissions set retail rates, utilities must forward all of their cost information to the state commissions, and the commissions then decide whether those costs will be reflected in the retail rates paid by ratepayers.

In the case to be argued on Monday, an electric utility, Entergy Louisiana, Inc. ("ELI") bought wholesale power from its parent company, Entergy Corporation, under a FERC-approved rate schedule. The rate schedule allowed Entergy Corporation to decide how to share costs among its various generating and transmission facilities in four states. FERC approved this cost-sharing plan and made it a part of the FERC-approved rate schedule. FERC found that allowing Entergy Corporation to balance costs resulted in a system-wide savings to the generators, as well as an overall benefit to utilities and ratepayers. However, FERC also found that under the rate schedule certain utilities (including ELI), and thus certain ratepayers, were paying more than their correct share based on Entergy Corporation's cost sharing decisions.

When the state public utility commission (here, Louisiana Public Service Commission or "LPSC") set ELI's retail rates, the LPSC decided not to allow ELI to pass along certain costs ELI had incurred under the FERC-approved schedule. The LPSC found that it was "imprudent" for ELI to knowingly pay more than its share for power. The LPSC decided that, because Entergy Corporation could have made different choices under the FERC-approved schedule that would not have forced ELI to pay more than its share, ELI should have fought its parent corporation's decision to continue forcing ELI to pay more than its share under the FERC-approved plan.

ELI appealed the LPSC's decision to the Louisiana Supreme Court, which upheld LPSC's decision. The Louisiana Supreme Court held that the LPSC decision "did not challenge[] ELI's decision to participate in the [FERC-approved] Agreement. Rather, the LPSC has merely examined the prudence of ELI's failure to . . . minimize its payments [by challenging Entergy Corporation's decisions]." ELI then petitioned the United States Supreme Court for review, which the Court has granted.

The LPSC is advocating that the Supreme Court recognize an exception to case law that currently provides utilities may pass along to ratepayers costs incurred under a FERC-approved rate schedule. This exception would distinguish between mandatory costs under a FERC-approved rate schedule and costs which an energy wholesaler had discretion not to charge the utility under the FERC-approved rate schedule.

If the LPSC wins this case, ELI and its stockholders will bear the excess costs of the wholesale power they purchased from Entergy Corporation. If ELI wins, Louisiana ratepayers will bear this cost. More broadly, the Supreme Court decision may have implications on the interplay between federal and state regulatory authorities over energy matters, particularly in states such as California, where the federal-state conflicts have become so enflamed.