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, a long line of cases also provides that the utility may pass along those wholesale costs to its 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 a variety of types of cost information to state commissions, which then decide whether those costs may be included in computing the retail rates paid by ratepayers as part of a prudence or reasonableness review process.
This case arose when a state public utilities commission decided not to allow a utility to pass on to retail ratepayers discretionary costs the utility incurred under a FERC-approved rate schedule. The state-regulated 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 because it 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, would be paying more than their appropriate share based on Entergy Corporation's cost sharing decisions.
When the state public utility commission (here, the 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 resisted Entergy 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 affirmed the 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. The Court's decision on Monday squarely rejected the Louisiana Supreme Court's reasoning, and made clear that utilities may recover via retail rates all costs, whether mandatory or discretionary, incurred under a FERC-approved rate schedule.
The LPSC had advocated that the Supreme Court recognize an exception to the filed rate doctrine, which requires that state utility commissions give binding effect to all interstate wholesale power rates filed with or fixed by FERC. The filed rate doctrine, as well as settled case law, also provide that utilities may pass along to ratepayers costs incurred under a FERC-approved rate schedule. The exception the LPSC sought would have distinguished between mandatory and discretionary costs under FERC-approved rate schedules. Such an exception would have permitted state commissions to disallow utilities from recovering discretionary costs incurred under FERC-approved rate schedules if the commission found the costs were "imprudent."
In Monday's decision, the Supreme Court declined to make such an exception, stating "We see no reason to create an exception to the filed rate doctrine for tariffs of this type that would substantially limit FERC's flexibility in approving cost allocation arrangements." The Court also ruled that a state commission may not "second-guess" the FERC about "how and by whom" decisions regarding cost allocation under FERC-approved rate schedule should be made.
The Court also rejected the notion that FERC's exclusive jurisdiction was not implicated because FERC had not specifically approved the cost allocation at issue. The Court noted its prior holdings that "the view that the preemptive effect of FERC jurisdiction turns on whether a particular matter was actually determined in the FERC proceedings has long been rejected." Thus, the LPSC's second-guessing of the cost allocation issues was preempted.
This case not only determined that public utility commissions may not second-guess FERC-approved rates, but also reinforces the continued vitality of the filed rate doctrine and the preemptive effect of FERC's exclusive jurisdiction over wholesale electricity markets.