Justia Federal District Court Opinions

Separate opinion by Circuit Judge BORK, concurring in part and dissenting in part.

PER CURIAM:

We consider eighteen consolidated petitions for review of two orders of the Federal Energy Regulatory Commission (FERC or the Commission).¹ In the orders under review the Commission held that the four operating companies of the Middle South Utilities (MSU) system must share the costs of MSU's investment in nuclear energy in proportion to their relative demand for energy generated by the system as a whole. The Commission implemented this scheme by reallocating responsibility for investment costs associated with the catastrophically uneconomical Grand Gulf I nuclear plant. The parties attack both the Commission's jurisdiction and the rationality of its decision. Although the Commission's allocation of nuclear investment costs is subject to reasonable dispute, we do not think such criticisms warrant reversal of FERC's orders. We therefore affirm.

The controversy facing the court today stems from the pattern of power generation investment cost sharing practiced by Middle South Utilities and its operating companies. In order to address fully the proper allocation of the costs of nuclear power generation among those companies, we review MSU's structure, the history of its involvement in nuclear power generation, and the record of the proceedings below.

1. Corporate structure. Middle South Utilities, Inc. is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA). 15 U.S.C. Sec. 79 et seq. (1982). It owns outright four utility operating companies: Louisiana Power & Light Co. (LP & L), New Orleans Public Service, Inc. (NOPSI), Arkansas Power & Light Co. (AP & L), and Mississippi Power & Light Co. (MP & L). See Middle South Energy, Inc., 26 FERC p 63,044, 65,098 (1984). The operating companies sell electricity, both wholesale and retail, in the states of Louisiana, Arkansas, Missouri, and Mississippi.²

Although each operating company has a separate board of directors, the sole stockholder, MSU, selects each director. In addition, the various companies do have common or overlapping officers and directors. The Chairman and Chief Executive Officer (CEO) of MSU is a member of the board of each operating company and the CEOs of the operating companies are members of the board of MSU. Other MSU board members are also board members of individual operating companies. Middle South Services, Inc., 30 FERC p 63,030, 65,142 (Docket No. ER82-463-000) (ALJ Head).

Transactions among the various operating companies are governed by a System Agreement. Over its history, MSU has filed three successive System Agreements--in 1951, 1973, and 1982. The Commission scrutinizes the System Agreement and modifies it when necessary. See, e.g., Middle South Services, Inc., 16 FERC p 61,101 (1981) (modifying the 1973 System Agreement), aff'd, Louisiana Public Service Commission v. FERC, 688 F.2d 357 (5th Cir.1982), cert. denied, 460 U.S. 1082, 103 S.Ct. 1770, 76 L.Ed.2d 343 (1983). Section 3.01 of the Agreement states the system's general goal of operating as a coherent unit:

The purpose of this Agreement is to provide the contractual basis for the continued planning, construction, and operation of the electric generation * * * facilities of the Companies in such a manner as to achieve economies consistent with the highest practicable reliability of service * * *. This agreement also provides a basis for equalizing among the Companies any imbalance of cost associated with the construction, ownership and operation of such facilities as are used for the mutual benefit of all the Companies.

483-R. 7117, VII Joint Appendix (JA) 1569.³ In light of this language, Administrative Law Judge (ALJ) Head found that the MSU system has sought to coordinate the addition of operating capacity by each individual operating company while achieving the greatest economies of scale.⁴ As he observed:

The System Agreements * * * clearly permit and encourage, for efficiency, reliability, and other economies of scale, that the individual companies from time to time build larger facilities than are necessary to meet their own native load, to benefit all the generating companies by having lower costs and greater reliability. * * *

30 FERC at 65,142.

All three System Agreements have assigned the task of coordinating the planning of new generating capacity to a systemwide Operating Committee.⁵ The CEO of each operating company designates one member of the committee, as does MSU. The members representing the operating companies control 80% of the votes on the committee, apportioned according to each individual company's share of the system's investment in generating capacity. The representative of MSU votes the remaining 20%. Under Section 5.04 of the System Agreement, the Operating Committee can now take action on the basis of a bare majority. 483-R. 7129, VII JA 1581.

2. Investment cost sharing. As ALJ Liebman noted, the MSU system planning approach to new generating capacity inevitably results in certain operating companies having less generating capacity than do others for varying periods of time. See 26 FERC at 65,098 (Docket No. ER82-616-000. If a company does not have enough capacity to meet the needs of its consumers, the deficient operating company can always draw on the excess capacity of the other companies on the system.⁶ This system also benefits those companies that have built more capacity than necessary to meet current demand. Such companies generally find willing buyers of their surplus among the other companies on the system.⁷

Under the system planning approach, it is inevitable that an operating company will, from time to time, provide a proportionate share of the system's investment in generating capacity that is more or less than its proportionate demand for the system's energy. If a company's share of the system's generating capacity is greater than its share of the energy actually generated and distributed by the system as a whole, the company is deemed to be "long." If the company's share of the system's generating capacity is less than its percentage of the system's energy, the company is deemed "short." 26 FERC at 65,099.⁸

Since 1951 the MSU system has sought to iron out the inequities that would otherwise result where some companies were long while other companies were short through a system of "equalization payments." Prior to 1973 each "short" company made a payment to the "long" companies based on a fixed dollar amount per kilowatt of capacity that the company was short.⁹ In 1973 the System Agreement was amended to provide for capacity equalization payments calculated under the "participation unit" formula, a formula that based payments on the ownership costs of the latest unit constructed by the "long" company.¹⁰ See id.; see also 30 FERC at 65,122-23.

Importantly, this new system did not call for equalization payments based on the relative number of dollars each company had invested in generating capacity. Instead, the relative number of kilowatts of generating capacity owned by each company formed the basis for the payments. Because kilowatts can vary in cost, the system potentially perpetuated the operating companies' relatively unequal investment in generating capacity.

For over twenty-five years, however, the system largely avoided this potential inequity. Notwithstanding its limitations, the equalization payment approach managed to produce the effect of roughly equalizing the cost of investing in new capacity from the 1950's through the 1970's. During the years in which the 1951 System Agreement was in force the cost of creating such capacity was relatively uniform and relatively constant. See 616-R. 1332-33, I JA 14041; 30 FERC at 65,168.¹¹ As a consequence, the System Agreement's allocation of equalization payments based on a constant dollar per kilowatt of short capacity served to equalize investment costs. Although in the 1970's the cost of new units began to exceed that of older facilities by a substantial margin, the 1973 System Agreement balanced this development by basing equalization payments on the costs of the newest (and more expensive) units of the "long" companies. 26 FERC at 65,100.¹²

3. The shift to nuclear energy and its consequences. In the 1950's and 1960's the MSU system tended to add new generating units in the southern part of the system to take advantage of cheap oil and gas reserves in Louisiana. See 26 FERC at 65,100; 30 FERC at 65,143. In the late 1960's, however, the system began a program of adding coal and nuclear generating capacity, 30 FERC at 65,144, that eventually resulted in the collapse of the investment equalization program.

AP & L was the first operating company to make such an investment in nuclear power. AP & L had historically been both a short company and one with insufficient capacity to meet the requirements of its customers. 30 FERC at 65,143. Moreover, AP & L had been losing its long-term gas contracts while Louisiana and Mississippi continued to have an adequate supply of gas and oil. 26 FERC at 65,101. In December 1974 AP & L brought on line MSU's first nuclear plant, Arkansas Nuclear One (ANO) Unit 1.

Although ANO 1's capacity was substantially more expensive than that of non-nuclear generating units built at the time,¹³ 26 FERC at 65,100-01, the lower fuel costs of a nuclear unit made the total generation costs of ANO 1 comparable to those of other plants brought on line in the 1970's.¹⁴ Thus it is fair to say that the basic system of roughly equalizing the costs and benefits derived from the system's investment in new capacity remained intact.¹⁵

The picture changed radically with the development of two new nuclear units--the Waterford 3 unit (assigned to LP & L) and Grand Gulf 1 (initially assigned to MP & L). Grand Gulf was initially projected to cost $1.2 billion for two generating units.¹⁶ Regulatory delays, additional construction requirements, and severe inflation ran up Grand Gulf costs to in excess of $3 billion for one unit.¹⁷ Similar cost over-runs marred the construction of Waterford 3. See Middle South Energy, Inc. and Middle South Services, Inc., 31 FERC p 61,305, 61,654 (1985). These units produce the most expensive energy on the MSU system. Measured in dollars per kilowatt of generating capacity, the new units were five times costlier than the ANO units installed by AP & L.¹⁸ Most important, although these two plants have been estimated to represent over 70% of the production costs of the MSU system, they apparently will produce only 13% of the electricity used on the system. 30 FERC at 65,121.

Under these conditions, continued application of a capacity equalization scheme that only sought to equalize kilowatts could no longer come close to equalizing investment dollars. Any operating company saddled with responsibility for Waterford 3 and/or Grand Gulf would likely find itself paying far more per kilowatt of capacity than would an operating company that was free of such a burden. 26 FERC at 65,100.

It is true that MSU filed a new System Agreement in 1982 altering its previous equalization scheme. Unlike the 1973 Agreement, which had pegged equalization payments to the cost of the long company's most recent generating addition, the 1982 Agreement provided for equalization payments based on the long company's "intermediate" (i.e., oil and gas) units. 483-R. 7137-50, VII JA 1589-96. This change reduced the burden on any company that might be both short and have substantial responsibility for the new nuclear plants.¹⁹ But, as discussed below, this change did not eliminate the major inequities that nuclear power introduced to the MSU system.²⁰

4. The Grand Gulf plant. 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 65,101-02. By the late 1970's, however, it became clear that projected demand would fall well short of previous expectations.²¹ Nonetheless, MSU continued to build Grand Gulf 1²² 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

Initially the plant had been assigned to MP & L.²⁴ It soon became apparent, however, that MP & L did not have the resources to finance the construction of the plant. As a consequence, MSU made a system decision to form Middle South Energy (MSE) in 1974 as a vehicle for financing Grand Gulf. MSE acquired full title to Grand Gulf. In June of 1974 all four Middle South operating companies entered into an "Availability Agreement" under which each operating company put its credit behind Grand Gulf.

Notwithstanding this initial agreement, at the time MSE was first formed no clear plan existed to allocate responsibility for Grand Gulf's capacity to each of the companies. Over the years various allocation plans were put forward, ultimately resulting in the Unit Power Sales Agreement (UPSA) at issue in this case.

At first it was contemplated that MSE would become a party to the System Agreement. Under this plan all of Grand Gulf would be a "participation unit" and responsibility for the plant's capacity would shift among the operating companies to the degree they were short. 616-R. 4122-23, II JA 505.

In 1979 MSU officials, having come to the conclusion that a fixed allocation of capacity was preferable to a scheme of shifting responsibilities, recommended a plan that would have allocated a share of Grand Gulf capacity to all of the operating companies.²⁵ But by early 1980 the MSU officers were moving toward a scheme absolving AP & L of all responsibility for Grand Gulf. In July of 1980 the CEOs of the MSU operating companies signed a Memorandum of Understanding, freeing AP & L of all responsibility for Grand Gulf. Although this Memorandum was never submitted to the Coordinating Committee, and therefore never became final, its basic terms were set forth in a "Reallocation Agreement" executed in July 1981. 616-R. 3275, I JA 268. Under the Reallocation Agreement AP & L assigned its entitlement to purchase Grand Gulf power to the other companies.26 In addition, NOPSI, LP & L, and MP & L agreed to indemnify AP & L for any obligation it might incur to MSE's creditors. The Reallocation Agreement thus relieved AP & L of any responsibility for Grand Gulf capacity costs and provided the basis for the Unit Power Sales Agreement. 26 FERC at 65,103.

The Unit Power Sales Agreement was executed on June 10, 1982. Although all of the operating companies are signatories to the UPSA, it only provides for sale of Grand Gulf capacity and energy by MSE to three of the operating companies: LP & L, MP & L, and NOPSI, but not to AP & L. 26 FERC at 65,095.²⁷B. The Proceedings Below

In April 1982 MSU filed with the Commission the 1982 System Agreement, which set the general rules governing transactions between the operating companies, including capacity equalization payments and the rates governing the exchange of energy between the operating companies. FERC set the proceeding for hearing before ALJ Head. In June 1982 MSU filed the Unit Power Sales Agreement with the Commission, governing the sales of Grand Gulf capacity and energy by MSE to the four operating companies. This proceeding was set for hearing before ALJ Liebman.²⁸ ALJ Liebman issued his opinion on February 3, 1984, Middle South Energy, Inc., 26 FERC p 63,044 (1984), and ALJ Head issued his opinion a year later, on February 4, 1985. Middle South Services, Inc., 30 FERC p 63,030 (1985). Both decisions touched on the allocation of Grand Gulf Power, and FERC reviewed both decisions in an opinion issued June 13, 1985. Middle South Energy, Inc. and Middle South Services, Inc., 31 FERC p 61,305 (1985). It revisited the issue following petitions for rehearing in an opinion issued September 28, 1985. Middle South Energy, Inc. and Middle South Services, Inc., 32 FERC p 61,425 (1985).

1. ALJ Liebman's decision in the UPSA case (ER82-616). The principal issue²⁹ 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. As a threshold matter, however, ALJ Liebman rejected a series of arguments suggesting that FERC did not have jurisdiction or statutory authority to amend this aspect of the UPSA.30

Having found jurisdiction, ALJ Liebman found that the UPSA was "unduly discriminatory" under Section 206(a) of the Federal Power Act, 16 U.S.C. Sec. 824e(a) (1982),31 because it failed to allocate any portion of Grand Gulf's capacity costs to AP & L. He based this decision on his view of the MSU system as a highly integrated operation that made critical decisions--such as the decision to move into nuclear power--as a unit. Under that view ALJ Liebman thought it only fair that AP & L pay its share of the company's decision to build nuclear capacity. Having rejected the UPSA's allocation of Grand Gulf costs, ALJ Liebman was faced with three alternatives:

(1) Making Grand Gulf a participation unit, with floating responsibility among the short(er) companies.³²

(2) Allocating responsibility for Grand Gulf capacity proportionate to each operating company's relative share of system demand, as fixed in 1982.³³

(3) Allocating responsibility for Grand Gulf such that each operating company bore a share of the cost of all the nuclear units on the MSU system proportionate to that company's relative share of system demand, as fixed in 1982.³⁴

26 FERC at 65,109.

ALJ Liebman chose the last proposal. As the Commission noted, this approach did not merely allocate the cost of Grand Gulf. By including the total system investment in nuclear power in his formula, ALJ Liebman effectively reallocated the costs of all nuclear capacity on the MSU system. 31 FERC at 61,633.

ALJ Liebman justified his exclusive focus on nuclear capacity costs--rather than on equalizing the costs of all capacity investment or, even more sweeping, equalizing all generating costs--by claiming that the differences among non-nuclear base load³⁵ generation costs were minor compared to the cost differences among the nuclear generating facilities. 26 FERC at 65,110. He suggested that even under his proposal AP & L would still have the lowest total generation costs on the system. Id. at 65,119. He justified his decision to reallocate costs of Grand Gulf primarily by reference to the fact that the UPSA perpetuated discrimination caused by the timing of nuclear units by forcing the Louisiana and Mississippi ratepayers to pay about four times more for nuclear capacity than the Arkansas ratepayers would pay for their nuclear kilowatts. Id. at 65,107.

2. ALJ Head's decision in the System Agreement case (ER82-483). The principal issue in the System Agreement proceeding was whether FERC should approve that Agreement as filed or whether it should equalize³⁶ all or part of the production costs on the system. 30 FERC at 65,120. ALJ Head also considered a series of arguments militating against FERC jurisdiction over the reallocation of Grand Gulf costs and rejected them.³⁷

Having found that FERC had the authority to reallocate production costs, ALJ Head faced the following alternatives:

(1) Adoption of the System Agreement as filed. This would entail allocating none of the Grand Gulf costs to AP & L and only equalizing the costs of capacity between "long" and "short" companies, with equalization payments pegged to the cost of the long companies' oil and gas investment costs.³⁸

(2) Equalization of production costs. The basic concept,³⁹ presented by the Louisiana Public Service Commission, was to allocate responsibility for a share of all production costs on the MSU system proportionate to each company's share of the system's total load.⁴⁰

(3) Making Grand Gulf a participation unit. This proposal would allocate responsibility for Grand Gulf capacity to each operating company to the degree that the company in question was "short." Under this scheme responsibility for Grand Gulf capacity would shift over time.⁴¹

ALJ Head rejected all of these proposals. He rejected the concept of making Grand Gulf 1 a participation unit primarily because it would allow long companies (e.g., MP & L) to avoid completely the high front-end costs associated with that plant. 30 FERC at 65,166-67. He rejected the equalization proposals on the ground that overall cost equalization would be inconsistent with the general "pattern of autonomy * * * particularly as to * * * specific plant site locations, fuel and financing" that he found characterized the operating companies in the MSU system. Id. at 65,168.

ALJ Head found support for his finding of a "pattern of autonomy" in two circumstances. First, he stressed that the historic practice in the MSU system was to equalize only excess capacity. Id. at 65,167. Second, he insisted that "generation additions in almost every instance (except for Grand Gulf) were made primarily to satisfy individual company needs." Id. at 65,168.⁴²

ALJ Head, however, found that Grand Gulf constituted an "anomaly" in the MSU system:Grand Gulf from its inception was planned, presented to the licensing authorities and constructed as a system plant not only to serve the needs of MP & L but to serve the needs of all the operating companies on the system.

30 FERC at 65,170.⁴³

He therefore deemed it appropriate to reject the System Agreement as filed and to allocate the costs of the Grand Gulf investment among all of the operating companies. Unlike ALJ Liebman, however, he held that this allocation should fluctuate from year to year to track each company's relative demand for the system's energy. 30 FERC at 65,172.

3. FERC's initial decision.⁴⁴ In Order No. 234 the Commission summarily affirmed both ALJs on the threshold issue of its own jurisdiction to amend the Sales Agreement and the System Agreement. 31 FERC at 61,643-46.⁴⁵ On the merits, the Commission affirmed both ALJs' findings that MSU constituted an "integrated electric system." 31 FERC at 61,645. The Commission, however, specifically rejected ALJ Head's finding that the MSU system displayed a "pattern of autonomy" with regard to the planning and construction of generating units. Id.

The Commission conceded that MSU's system of overlapping officers and directors and the representation of the operating companies on the System Operating Committee gave the operating companies substantial influence in the development of the system's plans. Id. at 61,646. FERC further observed that the individual companies used their influence to seek the addition of generating units that met their particular needs, and that Section 4.01 of the System Agreement made each operating company responsible for financing the ownership or purchase of the generating capacity necessary to service its customers. Id. at 61,649. The Commission nonetheless concluded that "major critical decisions, including decisions to build new generating units, are made by the Operating Committee for the benefit of the system as a whole." Id. at 61,646. See also id. at 61,650.

The Commission buttressed its conclusion with the following evidentiary support: (1) Section 4.01 of the 1982 System Agreement provides that the Operating Committee shall "determine" the system generation addition plans;⁴⁶ (2) at least five witnesses testified that new units were added to address the needs of the system as a whole, id. at 61,646-48; and (3) the Operating Committee minutes over a twenty-year period revealed that the Committee had the responsibility and the authority to make the "critical decisions" concerning the addition of generating capacity. Id. at 61,648-49.

The Commission's review of the Operating Committee minutes revealed that the Operating Committee did not merely rubber-stamp the requests of the individual operating companies concerning the addition of generating capacity. Id. at 61,649. The Commission found that the Operating Committee consistently based its generation plans on the needs of the system as a whole. Id. at 61,649-50. It found that the Operating Committee had authority over the general timing, location, and size of plant additions, while the individual operating companies retained authority to fill in the details of such fundamental decisions. Id. Thus FERC stated that there was no evidence in the record that an operating company had ever built a new plant without a recommendation from the Operating Committee or that one had ever refused to carry out such a recommendation. Id. at 61,651.⁴⁷

In light of this finding, FERC rejected ALJ Head's contention that Grand Gulf was an "anomaly." Instead it agreed with ALJ Liebman that Grand Gulf, like every other generating station, was built to serve the needs of the system as a whole and to attain the system-wide goal of diversifying MSU's fuel mix. Id. at 61,653. MSE was deemed a mere financing shell that the Commission hypothesized would have been made available to any other operating company that suffered the financial difficulties encountered by MP & L. Id. at 61,654.

The Commission viewed the decision to move into nuclear power as a system-wide decision calculated to meet system-wide needs. It found that MSU's nuclear project had run afoul of unforeseen economic difficulties that had disrupted the system's historic rough equalization of generation costs. FERC therefore adopted ALJ Liebman's scheme⁴⁸ of allocating Grand Gulf costs so that each operating company would contribute proportionately to the system's investment in nuclear capacity. Id. at 61,655.⁴⁹

4. FERC's opinion on rehearing. In Opinion No. 234-A FERC clarified its position on the various jurisdictional arguments it had addressed in its initial decision. 32 FERC at 61,943-52. The Commission also addressed--and rejected--the argument raised by various Arkansas parties that FERC lacked jurisdiction as there was no interstate sale of power. The Commission suggested that, whatever the merits of such an argument where a "monolithic" system is concerned, there was no question but that the transfer of power among the MSU operating companies constitutes a "sale for resale." Id. at 61,957.

Indeed, a major portion of the Commission's opinion on rehearing was dedicated to clarifying the Commission's essential finding concerning the "integrated" character of the MSU system. The Commission rejected any attempt to mischaracterize its decision as based on a view that MSU is a "monolith." Id. at 61,952. FERC simply insisted that, whatever the powers of the individual operating companies, the MSU Operating Committee makes the "major critical decisions on the System, primarily for the System as a whole." Id. at 61,953 (emphasis in original).⁵⁰ The Commission emphasized that its opinion hinged on "a variety of factors including the manner in which decisions are made by the commonly owned affiliates, and for whose primary benefit those decisions are made." Id. at 61,956.

Turning to the merits, the Commission addressed three challenges to the rationality of its allocation of Grand Gulf costs. It disputed the contention of the Arkansas parties that the allocation violated the spirit and practice of the MSU system, the System Agreement, and the intent of the parties to that Agreement. FERC responded that the clear intent of the System Agreement was to correct major cost imbalances while moving toward a mixed fuel base including nuclear and coal-fired facilities. The Commission insisted that it need not measure the rationality of its allocation from the vantage point of the parties at the time the UPSA was first negotiated. Id. at 61,957-59.

The Commission also addressed the argument of MP & L that the Commission's order had only exacerbated the discrimination it would have suffered under the original UPSA scheme. MP & L noted that under the UPSA it would have been responsible for 31.63% of Grand Gulf, but under the Commission's scheme it would be responsible for a full 33%. 31 FERC at 61,959. Under the new scheme Mississippi would receive only 9.5% of the system's nuclear capacity while paying for 15% of the system's nuclear investment. 32 FERC at 61,964 n. 26.

The Commission responded by asserting that the mere fact that FERC's order increased MP & L's burden did not make it more discriminatory. It is completely rational, argued the Commission, that a smaller burden can be discriminatory and, with a change in the relative standing of the parties, a larger burden can be fair. The original allocation was discriminatory, in the Commission's view, because AP & L had failed to share the burden of Grand Gulf. Although the Commission's order would increase MP & L's allocation somewhat, it would spread the overall burden of Grand Gulf more equitably by making AP & L carry a portion of the burden.

The Commission suggested that its refusal to reallocate the capacity of all nuclear units (as well as their costs) was justified by the MSU system's historic aversion to equalizing all costs per kilowatt. Id. at 61,959. It stressed the same point in responding to the arguments of various Louisiana parties that it should have adopted full cost equalization. Id. at 61,961. Thus the Commission depicted its opinion as an attempt to balance

the need to provide an equitable sharing of the investment costs of units that have (or could have) become unforeseeably high due to the unique problems associated with nuclear construction, and the need to recognize the efforts of individual companies on the System and allow them to retain the benefits of units they own to the fullest extent possible.

Id.

Dissatisfied with this rationale, petitioners sought review in this court.

The petitioners from Arkansas, Missouri and Mississippi raise certain threshold challenges to the Commission's decision. They contend that FERC lacks jurisdiction to modify the allocation of the capacity costs of Grand Gulf embodied in the Unit Power Sales Agreement ("UPSA"). We disagree, and hold that the Federal Power Act ("FPA" or "the Act")⁵¹ provides FERC with authority to issue the orders in question. Initially, we will set forth the affirmative basis of FERC's jurisdiction; thereafter, we will address (and reject) each individual counterargument raised by petitioners.

Section 201 of the Act contains the Commission's basic jurisdictional grant.⁵² It provides that "[t]he provisions of this subchapter shall apply to the transmission of electric energy in interstate commerce and to the sale of electric energy at wholesale in interstate commerce" and that "[t]he Commission shall have jurisdiction over all facilities for such transmission or sale...." This section also defines "public utility" as "any person who owns or operates facilities subject to the jurisdiction of the Commission under this subchapter."⁵³ The facts here reveal that MSE sells Grand Gulf's energy to the affiliated operating companies of the MSU system at wholesale in interstate commerce. Thus, under section 201 of the Act, MSE is a "public utility" and FERC retains jurisdiction over its sales and facilities.

Sections 205 and 206 of the Act set forth the Commission's remedial authority. Section 205(a) establishes a threshold requirement that all "rates and charges" made by a public utility, and "all rules and regulations affecting or pertaining to such rates and charges," must be "just and reasonable," or they will be deemed "unlawful."⁵⁴ Most significantly for our purposes, section 206 provides that when the Commission, after a hearing, determines that

any rate, charge, or classification, demanded, observed, charged, or collected by any public utility for any transmission or sale subject to the jurisdiction of the Commission, or that any rule, regulation, practice, or contract affecting such rate, charge, or classification is unjust, unreasonable, unduly discriminatory or preferential, the Commission shall determine the just and reasonable rate, charge, classification, rule, regulation, practice, or contract to be thereafter observed and in force, and shall fix the same by order.⁵⁵

The combined force of these provisions leads inexorably to the conclusion that, under the circumstances presented in the instant case, FERC had jurisdiction to modify the Grand Gulf allocation set forth in the UPSA.

The distribution of Grand Gulf costs and capacity in the UPSA inevitably affects each operating company's generation costs and, by extension, their wholesale rates. When, as here, generation capacity has been built and planned on a profoundly integrated basis, the Commission properly may examine its allocation as a cost component affecting wholesale rates. For this purpose, the UPSA cannot be examined in isolation. As the Commission stated, the UPSA is "an agreement which 'supplements or supersedes' the coordination arrangements among the MSU utilities, and ... is a contract 'affecting' rates under the 1982 System Agreement."⁵⁶

The UPSA serves to distribute the Grand Gulf capacity available to MSE--and its cost--among the MSU operating companies. When the Commission acted to modify the UPSA and reallocate the capacity of Grand Gulf, it altered the relative amount of system capacity ultimately paid for by each affiliate. Concurrently, the 1982 System Agreement (Service Schedule MSS-1) established the terms of reserve capacity cost-sharing among the same group. Any change in the allocation of the capacity costs of Grand Gulf in the UPSA will change the relative "longness" or "shortness" of each company under the System Agreement, thus altering the equalization payments made and received for capacity under Service Schedule MSS-1. In the instant case, the cost burden of system generating capacity has been shifted among the affiliates, by virtue of Commission action and system agreement, in order to insure an equitable distribution.⁵⁷ This equitable distribution is mandated by the FPA because of the historical integration of the MSU system.

Capacity costs are a large component of wholesale rates. Thus, the capacity costs of the system carried by each affiliate will significantly affect the wholesale price it pays for energy on the MSU system. In the Commission's view, the UPSA's allocation of Grand Gulf, combined with the provisions of the 1982 System Agreement, created serious inequities in the division of costs of power resources among the operating companies in light of the integrated planning for generating capability on a system basis. Unreasonable disparities in the shares borne by affiliates of the total costs of the system's generating capacity plainly "affect" the wholesale rates at which the operating companies exchange energy, and therefore require remedial action by the Commission pursuant to section 206.

A case involving the Northern States Power ("NSP") Companies, State of Minnesota v. FERC,⁵⁸ provides a helpful illustration of how agreements among affiliates can "affect" rates. The NSP Companies develop and operate both generation and transmission facilities on an integrated basis through participation in a Coordinating Agreement which, inter alia, establishes procedures for sharing costs on the system. In 1982, the Companies filed an amendment to that Agreement with FERC proposing a methodology for determining the rate of return on investment as a component of the fixed costs shared under that Agreement. The Minnesota Public Utilities Commission ("MPUC") intervened and contended that FERC lacked jurisdiction to review the amendment because the Coordinating Agreement does not establish a wholesale rate. Specifically, MPUC argued that FERC "exceeded its authority under the Federal Power Act and intruded upon retail ratemaking functions by accepting a filing that sets a rate of return on capital as part of a cost allocation agreement between affiliated power companies."⁵⁹

The Eighth Circuit observed that "MPUC's challenge to the Commission's jurisdiction rests on its contention that the Coordinating Agreement serves simply as a mechanism for allocating costs among the NSP Companies and does not establish a wholesale rate for the resale of electricity."⁶⁰ However, the court agreed with the Commission that the Coordinating Agreement "contain[ed] numerous provisions authorizing the NSP Companies to exchange electric power among themselves in return for payment," i.e., interstate wholesale transactions. Thus, the Eighth Circuit held that the Coordinating Agreement established a wholesale rate and that, "[b]ecause a change in the rate of return on investment affects the wholesale rate under the Coordinating Agreement, the Commission possessed jurisdiction to review and approve the proposed amendment."⁶¹

We are in total accord with the Eighth Circuit's view of FERC's jurisdiction as enunciated in State of Minnesota. In the instant case, the petitioners concede that wholesale rates are established in the disputed contracts governing the MSU system; but petitioners nonetheless contend that the Commission does not have jurisdiction here because other portions of these same agreements allocate generation costs among the MSU companies and these particular provisions do not themselves establish a wholesale rate. However, the petitioners ignore the critical point here that, while these provisions do not fix wholesale rates, their terms do directly and significantly affect the wholesale rates at which the operating companies exchange energy, due to the highly integrated nature of the MSU system. We conclude that, because the allocation of Grand Gulf capacity and costs, like the rate of return on capital in State of Minnesota, significantly affects the wholesale rates at which the operating companies exchange energy due to the combined effect of the UPSA and the 1982 System Agreement, that allocation is plainly within Commission jurisdiction.⁶²

The Supreme Court quite recently confirmed the propriety of this analysis in Nantahala Power & Light Co. v. Thornburg.⁶³ In that case, FERC examined an agreement between two affiliated power companies, which allocated certain low-cost entitlement power between them. FERC found that the agreement was unfair to one of the companies, Nantahala, and increased the percentage of low-cost entitlement power that it should receive. Although FERC did not specifically "reform" the agreement, Nantahala was required to file revised rates, reflecting its increased entitlement to low-cost power. The North Carolina Utilities Commission ("NCUC") not only rejected the actual apportionment agreed to by the companies, but also "employed an allocation of entitlement power that nowhere [took] into account FERC's allocation of that same power."⁶⁴

The Supreme Court held that the NCUC orders were inconsistent with preemptive federal law. The Court observed that

[a]lthough the [companies' agreements] do not purport explicitly to set a sales price for power, FERC's decision on how Nantahala may treat these agreements in determining its wholesale rates obviously does affect Nantahala's costs directly, and thus Nantahala's wholesale rates.⁶⁵

FERC's allocation of Grand Gulf's costs and capacity, like the setting of entitlement percentages in Nantahala Power & Light, does not set a sales price, but does directly affect costs and, consequently, wholesale rates. We cannot disregard the Supreme Court's clear and timely message that FERC's jurisdiction under such circumstances is unquestionable.

Having determined that all MSU generating capacity, including Grand Gulf, had been built and planned on an integrated basis by the MSU system to meet its collective needs and that the allocation of Grand Gulf would affect wholesale rates within the system, the Commission decided that the affiliated operating companies' arrangement for sharing of capacity costs--as set forth in the UPSA and the 1982 System Agreement--was unjust, unreasonable and unduly discriminatory. Under these circumstances, sections 205 and 206 of the FPA plainly provide FERC with authority to modify the Grand Gulf allocation agreed to by the operating companies.

The petitioners advance various theories to support their contention that FERC lacks jurisdiction to impose the remedy selected in this case. They maintain that: (1) FERC has unlawfully exercised jurisdiction over a generating facility; (2) FERC has unlawfully compelled a purchase of power and generating capacity; (3) FERC has impermissibly intruded on areas subject to state jurisdiction; (4) FERC has contravened the purposes of the Public Utility Holding Company Act ("PUHCA") and infringed upon the authority of the Securities and Exchange Commission ("SEC"); and (5) FERC has violated the Mobile-Sierra doctrine. As set forth below, none of these attempts to displace FERC's jurisdiction succeed.

The Arkansas-Missouri petitioners contend that, in allocating the cost and capacity of Grand Gulf, the Commission has asserted jurisdiction over a generating facility in contravention of section 201(b) of the FPA. They maintain that the equalization of nuclear investment by reallocating generation costs falls outside of FERC's rate making jurisdiction and instead falls solely within state authority over generation.

In pertinent part, the statute states:

The Commission shall have jurisdiction over all facilities for such transmission or sale of electric energy, but shall not have jurisdiction, except as specifically provided in this subchapter and subchapter III of this chapter, over facilities used for the generation of electric energy....⁶⁶

In the same section, the statute provides for

Federal regulation of matters relating to generation to the extent provided in this subchapter and subchapter III....⁶⁷

The Conference Report on the FPA instructs that the italicized phrases were "added to remove any doubt as to the Commission's jurisdiction over facilities used for the generation ... of electric energy to the extent provided in other sections ..."⁶⁸ The Commission concluded that, in the course of exercising its undisputed jurisdiction over interstate sales of electric energy at wholesale, it lawfully could reallocate the costs of Grand Gulf across the integrated system. Hence, the Commission reasoned that although allocating cost does, to some extent, result in the "regulation of matters relating to generation," such regulation is valid under the FPA when it is the byproduct of a legitimate exercise of FERC's power to regulate wholesale rates.

We agree that FERC has not exercised jurisdiction over generating facilities in any way that violates the FPA. Instead, the Commission is acting pursuant to its exclusive rate authority over wholesale transactions and its remedial authority as set forth in sections 205 and 206.

The Arkansas-Missouri petitioners concede that FERC has jurisdiction to modify the rates and rate-related terms of the UPSA, but deny that this authority encompasses the reallocation of generating capacity. Citing the congressional concern that states maintain control of generating facilities,⁶⁹ they assert that the statutory prohibition of federal regulation of such facilities in section 201(b) becomes meaningless if FERC is permitted to allocate the costs of a plant.

This analysis is flawed. As FERC correctly reasoned:

We cannot interpret the "but" clause of Section 201(b)(1) as nullifying the authority granted to us in the first sentence of Section 201(b)(1), in situations where generation facilities are used for interstate wholesale sales. To interpret the statute otherwise would be inconsistent with the declaration in Section 201(a) that Federal regulation of the sale of energy at wholesale in interstate commerce is necessary in the public interest.⁷⁰

Nor could such an interpretation be reconciled with the Commission's statutory authority to revise contracts affecting rates which are unjust, unreasonable or unduly discriminatory.⁷¹

The petitioners' general assertion that FERC has improperly infringed upon a state realm by reallocating the costs of Grand Gulf will be dealt with separately infra; for the present purpose, it suffices to note that FERC has not regulated a facility, but rather the wholesale rates of interstate sales within the MSU system. It is well-accepted that FERC must allow the recovery of the cost of generating facilities in setting wholesale rates. Here, FERC has simply exercised its undisputed authority over the wholesale rates of electric generating facilities in interstate commerce, which includes, under the facts presented, the authority to reallocate the costs of Grand Gulf across the system. As the statute quite plainly states, FERC's control here is exclusive. The jurisdictional line drawn by Congress is bright, and FERC stands on the correct side of that line.

The cases cited by the Arkansas-Missouri petitioners are inapposite. In Connecticut Light & Power Co. v. FPC,⁷² the Supreme Court construed the "local distribution" exception to the Commission's jurisdiction, rather than the "generating facilities" exception, in the context of determining whether to permit regulation of an electric utility located and serving customers exclusively in the state of Connecticut. In its decision, the Court cited the language of section 201(a) of the FPA, "but shall not have jurisdiction ... over facilities used in local distribution." The lower court had decided that this exemption did not preclude Commission regulation if the Act otherwise provided for the facilities' regulation, i.e., if they carried energy in interstate commerce. The Supreme Court rejected this interpretation of the "but" clause and held that, in order to be subject to FERC jurisdiction, a company must own facilities used in the transmission of interstate power and not be a local distribution facility. From this, the petitioners reason that Grand Gulf must be used for interstate wholesale sales and not be a generating facility to be subject to FERC jurisdiction.

This interpretation must fail. Initially, we note that the distribution facility at issue in Connecticut Light & Power sold energy exclusively within Connecticut; MSE's sales are, without exception, at wholesale and in interstate commerce. Second, the holding in Connecticut Light & Power addresses only the "local distribution" exception to the FPA, not the "generating facilities" exception at issue here. Furthermore, the Court's limited discussion of the "generating facilities" exception refutes petitioners' contention. In this discussion, the Court accepts the proposition that FERC may lawfully assert jurisdiction over matters pertaining to generation where it is found that generation facilities are used as facilities for interstate wholesale sales.⁷³ In the instant case, the MSE generating facilities are utilized solely for interstate wholesale sales, thus satisfying the Court's test.⁷⁴

2. Compelled Purchases of Power and Capacity

The Arkansas-Missouri petitioners also argue that FERC has exceeded its jurisdiction by forcing independent companies--AP & L, for example--to purchase power from Grand Gulf in quantities beyond that agreed to in the UPSA. The Commission found that, as a factual matter, there would be no "forced purchase" due to the integrated nature of the Grand Gulf project and the MSU system and AP & L's individual longstanding, in-depth commitment to Grand Gulf. We agree with the Commission that "the issue here is not whether a company should be forced to purchase or sell power, but rather is the appropriate allocation of costs among integrated companies owned by the same parent."⁷⁵ The Commission has made detailed findings on the highly integrated nature of the MSU system and on the coordinated planning of the Grand Gulf project. The depth of the operating companies' historical involvement in both the system and the project allows the Commission to step in and reallocate costs under section 206(a) of the FPA so that each of the operating companies is treated fairly.

A consistent line of judicial precedent supports FERC's authority to approve and/or modify the terms of the pooling and coordination agreements of closely integrated power systems when it deems those arrangements unlawful as filed. Over thirty years ago, in Pennsylvania Water & Power Co. v. FPC,⁷⁶ the Supreme Court considered the Commission's authority to order continued integrated operations by two utilities. For more than 20 years, the companies had been interconnected and had bought and sold power in a coordinated fashion. The FPC ordered a significant reduction in the rates charged by one utility to the other, and the selling utility refused to comply. As a result, the Commission itself prescribed rate schedules to comply with its rate order, requiring the utility to "continue to buy, sell, and transmit power in the same coordinated manner" as in the past, though at the decreased rates. The utility objected, but the Supreme Court sustained the order, observing that the integration of utilities is a "practice" within the meaning of section 206 and that the Commission could order its continuation and determine contract terms suitable to achieve that end:

The Act gives the Commission ample statutory power to order Penn Water and Consolidated to continue their long-existing operational "practice" of integrating their power output.... In ordering such "practice" continued, the Commission was furthering the expressly declared policy of [section 206 of] the Act.⁷⁷

This case provides a solid foundation for the Commission's authority to order a purchase or sale of power when, as here, such an order is consistent with the historical integration of a power pool or network.

This conclusion is further confirmed by the decision of this circuit in Central Iowa Power Cooperative v. FERC.⁷⁸ In that case, FERC approved a voluntary pooling agreement among some 31 electric systems. The petitioners therein complained that the agreement failed to provide services offered by pooling arrangements established among other electric systems. Because of the voluntary nature of pooling arrangements under section 202(a) of the FPA, the court held that FERC could not order an expansion of pool services merely upon a showing "that a particular pool does not offer the same range of services as another pool."⁷⁹ The court, however, went on to determine that FERC did have "specific responsibility in this proceeding to decide whether a particular voluntary pool agreement was unjust, unreasonable, or unduly discriminatory,"⁸⁰ and, in the event of such a finding, that FERC had authority to order expanded services:

The Commission had authority ... under section 206 of the Act ... to order changes in the limited scope of the Agreement, including the addition of pool services, if, in the absence of such modifications, the Agreement presented "any rule, regulation, practice or contract [that was] unjust, unreasonable, unduly discriminatory or preferential."⁸¹

Having found that the agency may exercise authority under section 206 to modify an unlawful voluntary power pool arrangement negotiated by nonaffiliates, a fortiori we must conclude that FERC may intervene to reform an unlawful agreement made by affiliates in a fully integrated, commonly owned system.

The cases relied upon by the Arkansas-Missouri petitioners are easily distinguishable. In Southern Co. Services, Inc.,⁸² Southern Company filed a contract with the Commission to increase sales to Florida Power & Light ("FP & L"). Seminole Electric Cooperative intervened in the proceeding and argued that FP & L should be required to purchase energy from it. Seminole was a stranger to the UPSA at issue in Southern, was not affiliated with either Southern or FP & L, and did not contend Southern's rates were unjust or unreasonable under the FPA. Given the entirely inapposite factual setting of Southern, FERC's refusal to reject the Southern-FP & L contract or to order FP & L to purchase power from Seminole is irrelevant to the present case.

The Arkansas-Missouri petitioners also maintain that Otter Tail Power Co. v. FPC,⁸³ establishes that compulsory purchases of power may be characterized as a compelled expansion of generating facilities, forbidden by section 202(b) of the Act. In that case, FERC ordered a utility to interconnect with a municipality and to assume the costs of the municipality's generating plant in exchange for energy from the plant. The court determined that this transaction forced the utility to assume beneficial ownership of the plant, i.e., to enlarge its facilities. In the present case, FERC has ordered the operating companies to pay a certain percentage of the capacity costs of Grand Gulf--an entity constructed for system benefit and already within the beneficial ownership of the parent holding company, MSU. The Commission decision does not add any capacity to the MSU system. Nor does it modify the percentage of generating capability for which each company will ultimately bear responsibility under the 1982 System Agreement; it simply alters the composition of each individual company's share.

In relying on Otter Tail Power, the parties once again seek to ignore AP & L's role as an affiliated company in an historically integrated system and Grand Gulf's status as a system project. In the factual context of the instant case, the reallocation of capacity costs among the parties cannot be described as a compelled purchase of either power or additional generating facilities.

The Arkansas-Missouri petitioners and the Mississippi Public Service Commission ("MPSC") separately contend that FERC's orders unlawfully interfere with the jurisdiction of the state regulatory authorities. We will treat the arguments individually.

a. The Arkansas-Missouri Argument

Section 201(a) of the FPA provides that FERC's regulation of interstate wholesale sales of electricity extends "only to those matters which are not subject to regulation by the States." The petitioners assert that the FERC orders interfere with local authority over matters intended to be within the province of state regulators. They reason that FERC's cost allocation has such an extensive impact on the rate base in the state jurisdictions that it, in effect, removes regulation of retail rates and capacity construction from the hands of the state commissions. These assertions are unfounded. FERC has exercised its jurisdiction in order to regulate the sale of electricity at wholesale in interstate commerce in the context of exchanges within a multi-state power pool, an area exclusively subject to FERC control. The fact that FERC's assertion of jurisdiction has some impact on state regulation does not make it unlawful.

As the Supreme Court made clear in Public Utilities Comm'n of Rhode Island v. Attleboro Steam & Electric Co.,⁸⁴ the states are constitutionally prohibited from exercising jurisdiction over wholesale rates for electricity transmitted and sold in interstate commerce. In the absence of federal action, this holding created a regulatory gap, and Congress enacted Title II of the FPA to fill that gap and provide for federal authority over interstate wholesale rates:

Congress meant to draw a bright line easily ascertained, between state and federal jurisdiction, making unnecessary ... case-by-case analysis. This was done in the Power Act by making FPC jurisdiction plenary and extending it to all wholesale sales in interstate commerce except those which Congress has made explicitly subject to regulation by the States.⁸⁵

This holding was confirmed in Pacific Gas & Electric Co. v. State Energy Resources Conservation & Development Comm'n,⁸⁶ in which the Supreme Court observed that states have retained "their traditional responsibility in the field of regulating electrical utilities for determining questions of need, reliability, cost, and other related state concerns" "[w]ith the exception of the broad authority of the ... Federal Energy Regulatory Commission over the need for and pricing of electrical power transmitted in interstate commerce...."⁸⁷

As explained above, there is no clash between state and federal jurisdiction in the instant case. FERC's allocation of Grand Gulf was simply an exercise of its authority to regulate wholesale rates in interstate commerce--an area within its exclusive jurisdiction.

The Arkansas-Missouri petitioners contend that the FERC orders deprive state commissions of their control over retail rates. The Supreme Court has recently confirmed that

[o]nce FERC sets ... a rate, a State may not conclude in setting retail rates that the FERC-approved wholesale rates are unreasonable. A state must rather give effect to Congress's desire to give FERC plenary authority over interstate wholesale rates, and to ensure that the States do not interfere with this authority.⁸⁸

Thus, once FERC permits a utility to charge a rate reflecting investment in a particular plant, a state commission may be obliged to reflect such an investment in the retail rate base. Under these circumstances, the petitioners argue, state regulatory authorities confronted with a FERC cost allocation will virtually lose control over retail rates.

In Nantahala Power & Light, the Supreme Court made clear that, in setting wholesale rates, the NCUC was required to give binding effect to the interstate wholesale rate that had been fixed by FERC. The Court further determined that the realm of preemption was "not limited to 'rates' per se " and stated:

Here FERC's decision directly affects Nantahala's wholesale rates by determining the amount of low-cost power that it may obtain, and FERC required Nantahala's wholesale rate to be filed in accordance with that allocation. FERC's allocation of entitlement power is therefore presumptively entitled to more than the negligible weight given it by NCUC.⁸⁹

Similarly, in the present case, the Commission's allocation of Grand Gulf's costs and capacity affects wholesale rates and, therefore, the state commissions may not "interfere" with FERC's "plenary authority."

Moreover, the petitioners' argument would apply to the costs embodied in any wholesale rate approved by FERC and, therefore, proves too much. In any wholesale rate proceeding, the state commissions may protect their interests, as here, by intervening and presenting evidence before the Commission, a neutral body. The main point here is that FERC plainly had authority to approve or reject the cost allocation pursuant to its jurisdiction over wholesale interstate rates despite its inevitable impact on retail rates.⁹⁰

Moreover, when, as here, affiliated operating companies in an integrated regional system enter into agreements for wholesale power sales in interstate commerce which allocate costs, FERC jurisdiction has additional merits. As ALJ Head observed, "the Commission is perhaps in the best position to reach the most equitable result and to act in the public interest, rather than to be controlled by the necessarily parochial concerns of the States."⁹¹ The basis of this conclusion has been discussed by FERC in another context:

If State Commission A orders a change to be made in a wholesale rate filing, presumably because it would benefit the ratepayers in State A, then State Commission B might well retaliate by ordering a counter rate filing that would benefit the ratepayers in State B.... It was to protect against such competing local state interests that a Federal Commission was given jurisdiction to protect the national interest in transmission and sales for resale in interstate commerce.⁹²

This same reasoning applies with equal force to a cost allocation among affiliates who exchange power at wholesale in interstate commerce.⁹³

b. The Mississippi Argument

The MPSC argues that the Commission's orders unlawfully disregard the considerations upon which that state agency relied in certificating construction of Grand Gulf in Mississippi. We find the Commission's analysis and rejection of this argument entirely correct.

MPSC asserts that the utilization of any allocation procedure other than that accepted by it in the Grand Gulf certification proceedings would impermissibly usurp its certification authority. As the Commission found, this assertion is incorrect for several reasons. First, as has been detailed above, state regulatory authorities, including the MPSC, do not have authority, as a threshold matter, to approve any allocation of Grand Gulf's cost or capacity among the system operating companies. Such decisions were subject to review and approval by the Commission.

Moreover, the MPSC argument, which it quite properly characterizes as one of equitable estoppel, is untenable under the circumstances. As FERC correctly observed, the Commission itself made no representations to the MPSC; its hands could not be tied by the doctrine, particularly here where its application would lead to "an inequitable result."⁹⁴

Finally, it is noteworthy that the MPSC "did not specifically approve any particular allocation or allocation methodology for Grand Gulf or establish any particular allocation or allocation methodology as a condition of the certificate."⁹⁵ This factual prerequisite to the application of the doctrine of equitable estoppel, too, is absent.

For all of these reasons, the MPSC's arguments were properly rejected by FERC.

The Arkansas-Missouri petitioners contend that FERC has impermissibly infringed upon the authority of the SEC to regulate the MSU system as a registered holding company under the PUHCA.⁹⁶ They further maintain that, by statutory mandate, any conflict between the SEC's authority under the PUHCA and FERC's authority under the FPA must be resolved in favor of the former.⁹⁷ We find no inconsistency in the actions taken by FERC and the jurisdiction of the SEC.

The SEC has correctly explained the division of responsibility between itself and FERC:

The jurisdiction of this Commission [the SEC] with respect to the availability agreement existed under Section 12(b) of the Act as to the indemnity obligations of the four operating companies to MSE and as to the indemnity that three of the companies gave to APL. The contracts for the sale of electric energy among the subsidiaries of MSE [sic] are subject to the exclusive jurisdiction of FERC. Generally a contract for sale of goods and services to an associate company is governed by Section 13(b) of the Act, but Section 2(a)(20), which defines "Sales contract," expressly excludes sale of "electric energy or natural or manufactured gas."⁹⁸

The SEC thus explicitly acknowledged FERC's control over wholesale rates and sales among the operating companies and its statutory authority over the rates and rate-related terms of the UPSA.⁹⁹ Moreover, when the SEC approved the Reallocation Agreement among the system operating companies,¹⁰⁰ it recognized that a rate schedule for the sale of energy would be filed with FERC--a schedule plainly subject to modification pursuant to FERC's authority under the FPA. The SEC itself perceives no conflict between its jurisdiction and that of FERC. Similarly, having determined that the allocation of Grand Gulf is well within FERC's authority over wholesale rates for electric energy in interstate commerce, we, too, have little trouble concluding that there is no conflict with SEC jurisdiction.

Nor do we find merit in the claim that FERC's action is at odds with the goals of the PUHCA. We agree that an important aim of the PUHCA was the elimination of control of some holding companies so that local utilities might be regulated by local authorities. However, the PUHCA itself permits holding companies to own subsidiary utilities when its purposes are best served by focusing on regional rather than state interests, so long as the effectiveness of regulation is not impeded.¹⁰¹ The PUHCA permits the continued existence of a holding company if its operations are limited "to a single integrated public-utility system,"¹⁰² which is defined as follows:

a system consisting of one or more units of generating plants and/or transmission lines and/or distributing facilities, whose utility assets, whether owned by one or more electric utility companies, are physically interconnected or capable of physical interconnection and which under normal conditions may be economically operated as a single interconnected and coordinated system confined in its operations to a single area or region, in one or more States, not so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation....¹⁰³

The SEC has determined that the MSU system constitutes an "integrated public-utility system."¹⁰⁴ Thus, the regional integration embodied in the structure of the MSU system was clearly contemplated by Congress when it enacted the PUHCA.

Moreover, in the PUHCA itself, Congress recognized "that affiliate power transactions 'are not susceptible of effective control by any State.' "¹⁰⁵ "Transactions, such as this one, between affiliated power companies appear to be precisely the type of transactions that Congress sought to regulate by enactment of the Federal Power Act and the Public Utility Holding Company Act of 1935."¹⁰⁶

The APSC maintains that FERC's orders disregard the Mobile-Sierra doctrine,¹⁰⁷ which requires the Commission to respect certain private contract rights in exercising its regulatory powers. We find that, in the instant case, this doctrine does not bar the exercise of FERC's power under section 206 of the FPA to reform a practice or contract affecting a rate charged by a public utility for wholesale service in interstate commerce.

In the Mobile case, the Mobile Gas Service Corporation ("Mobile"), a natural gas distributor, had entered into a long-term contract with the United Gas Pipe Line Company ("United") to purchase gas for resale to an industrial customer, Ideal Cement Company ("Ideal") Ideal had a reciprocal contract to buy the gas from Mobile. The Mobile-United agreement had been filed with the Commission and was part of United's filed schedule of rates. Subsequently, United, acting without the consent of Mobile, altered the rates specified in its contract with Mobile by filing with the Commission a new rate schedule purporting to increase the rate on gas sold to Mobile for resale to Ideal. Mobile challenged United's action, and the Supreme Court held that the Natural Gas Act does not permit natural gas companies to change their rate contracts by unilateral action.

Thereafter, in Sierra, the Court applied its holding in Mobile to cases arising under the FPA. Thus, neither the filing of a new rate nor a finding that it is reasonable may abrogate a utility's contract with a distributor. "Together, the two cases make it crystal clear that a heavy burden must be met before a customer who has negotiated a fixed-price contract can be deprived against his will of the benefits of his bargain."¹⁰⁸

APSC suggests that, in reforming the UPSA, FERC has snatched from AP & L the favorable result of its contractual escape from responsibility for Grand Gulf in contravention of the Mobile-Sierra holdings. We disagree. Initially, we note that the UPSA itself expressly permits unilateral changes in the contract by MSE: