Alliance for Affordable Energy, Inc. v. Council of City of New Orleans

• Decision Date: 04 April 1991
• Docket Number: Nos. 90-CA-0420,90-CA-0421 and 90-CA-0422,s. 90-CA-0420
• Citation: 578 So.2d 949
• Parties: ALLIANCE FOR AFFORDABLE ENERGY, INC., et al., v. The COUNCIL OF the CITY OF NEW ORLEANS. Lambert BOISSIERE, JR., et al., v. James M. CAIN, et al. NEW ORLEANS PUBLIC SERVICE INC., v. The COUNCIL OF the CITY OF NEW ORLEANS, et al.
• Court: Court of Appeal of Louisiana — District of US

Page 949

578 So.2d 949

125 P.U.R.4th 432

ALLIANCE FOR AFFORDABLE ENERGY, INC., et al., v. The COUNCIL OF the CITY OF NEW ORLEANS.

Lambert BOISSIERE, JR., et al., v. James M. CAIN, et al.

NEW ORLEANS PUBLIC SERVICE INC., v. The COUNCIL OF the CITY OF NEW ORLEANS, et al.

Nos. 90-CA-0420, 90-CA-0421 and 90-CA-0422.

Court of Appeal of Louisiana Fourth Circuit.

April 4, 1991.

Rehearing Denied May 23, 1991.

Joseph Bernstein, New Orleans, for appellants, Alliance for Affordable Energy, Inc., Citizens for Safe Energy, Inc., and Gary L. Groesch.

Herschel L. Abbott, Jr., Warren M. Schultz, Jr., David G. Radlauer, Edward H. Bergin, and Scott D. Wilson, Jones, Walker, Waechter, Poitevent, Carrere & Denegre, and Thomas O. Lind, New Orleans, for appellant, New Orleans Public Service Inc.

Okla Jones, II, City Atty., Bruce E. Naccari, Asst. City Atty., Michael W. Tifft, Deputy City Atty., Kenneth M. Carter, Sidney H. Cates, IV, Carter & Cates, New Orleans, Clinton A. Vince, Bernhardt K. Wruble, John S. Moot, Verner, Liipfert, Bernhard, McPherson and Hand, Washington, D.C., and Walter J. Wilkerson, Wilkerson, Henry & Perez, New Orleans, for appellee, Council of the City of New Orleans.

Before ARMSTRONG, PLOTKIN and BECKER, JJ.

PLOTKIN, Judge.

These two consolidated appeals present complex state and federal questions. The ultimate questions are: (1) whether New Orleans Public Service, Inc. (NOPSI) acted prudently or imprudently in its oversight and management of its participation in the construction project of the Grand Gulf I nuclear power plant, and (2) who should bear the excessive cost overruns of this project, the ratepayers/consumers of New Orleans or the stockholders of NOPSI.

New Orleans Public Service and the Alliance for Affordable Energy (Alliance) have each appealed the rate order decided by the New Orleans City Council (Council) on February 4, 1988, and its Reasons For Judgment, entitled "Prudence Investigation: Determinations and Order Regarding the Prudence of the Management of New Orleans Public Service, Inc. With Respect to Grand Gulf I." The rate order decision was affirmed by the civil district court of the Parish of Orleans.

The New Orleans City Council is the ratemaking body for the City of New Orleans. Under the City's Home Rule Charter, Section 4-1604, the Council is invested with "all powers of supervision, regulation and control over any" public utility within the City. The authority of the Home Rule Charter is recognized by the Louisiana Constitution, Art. 6, Section 5(E).

The Council found that approximately 31% of these costs, or $476 million, had been imprudently incurred. After considering the financial effects of a prudence disallowance on NOPSI, the Council decided not to permit $135 million of these imprudently incurred costs to be passed on to the ratepayers of New Orleans.

NOPSI has appealed this decision, contending that all its Grand Gulf costs should be passed on to the ratepayers. The Alliance has also appealed, contending that the entire amount of costs found to be imprudent should be disallowed from pass-through to the ratepayers.

The History

This litigation has a long and convoluted history in both state and federal court. The history was most recently summarized as follows by the U.S. Fifth Circuit in NOPSI v. The Council of the City of New Orleans, 911 F.2d 993 (5th Cir.1990) (NOPSI IV ):

NOPSI is a producer, wholesaler, and retailer of electricity, providing its retail services to the city of New Orleans. ¹ Along with Arkansas Power and Light [AP & L], Mississippi Power and Light [MP & L], and Louisiana Power and Light [LP & L], it is a wholly owned operating subsidiary of Middle South Utilities, Inc. [now known as Entergy Corporation]. MSU operates an integrated 'power pool' in which NOPSI and the three other power companies transmit the electricity they produce to a central dispatch center, and each draws back the power it needs to meet customer demand.

Through the 1950's and into the 1960's, most of the MSU system's generating plants were fueled with oil or gas. In the late 1960's, MSU sought to meet projected increases in demand by adding coal-fired and nuclear energy powered generating plants. Originally, MSU planned for each of the power companies to construct one or more nuclear facilities. Mississippi Power and Light was charged with constructing two plants at Port Gibson, Mississippi, to be known as Grand Gulf 1 and 2. The Grand Gulf project quickly proved too burdensome for one company, however. MSU created another subsidiary, separate from the power companies, known as Middle South Energy, Inc. ² [MSE, which is now known as Systems Energy Resources, Inc., or SERI] to finance, own, and operate the Grand Gulf plants. In 1974, MSE in turn contracted with the power companies to finance the project. The companies agreed to pay for the construction of the plants in exchange for the right to [purchase] their output. The estimated construction cost at that time was $1.2 billion.

As the project progressed, consumer demand for electric power proved to be much lower than MSU and the power companies had expected. At the same time, regulatory delays, enhanced construction requirements resulting from the Three Mile Island accident, and high inflation led to spiraling costs on the Grand Gulf project. As a result, MSE suspended construction of Grand Gulf 2, although it continued to build Grand Gulf 1. The cost of completing Grand Gulf 1 alone eventually exceeded $3 billion. ³

911 F.2d at 995-96 (footnotes omitted).

In late 1979, before Grand Gulf I became operational and before its costs were known, NOPSI applied to the Council for a "capacity adjustment clause" which would authorize an automatic pass-through of future Grand Gulf construction costs to its ratepayers. In January 1980, nine months after the Three Mile Island accident, but before the Council acted on the application, NOPSI made a voluntary commitment to a 29.8% share of Grand Gulf, although its actual consumption need was approximately 9%. NOPSI failed to inform the Council of its commitment to the Grand Gulf project until 1980 when it applied for the pass-through of costs to the ratepayers. The Council held hearings in May and September 1980, but declined to adopt the capacity adjustment clause.

The power companies considered various methods to allocate the cost of Grand Gulf in light of these developments. In 1982, MSU filed a Unit Power Sales Agreement with the Federal Energy Regulatory Commission [FERC], which set out the shares of Grand Gulf 1 output each company was required to purchase in order to pay construction costs. Arkansas Power and Light, which had finished its own nuclear plants, was not obligated to purchase any Grand Gulf power. Louisiana Power and Light, which had not finished its plant, was obligated to purchase 38.57%. Mississippi Power and Light was obligated to purchase 31.63%, and NOPSI 29.8%. MSU also filed a new System Agreement with FERC, which set forth the terms and conditions for coordinated operations and wholesale transactions among the four companies, but did not deal with the Grand Gulf costs.

FERC assigned the agreements to two separate Administrative Law Judges for the statutorily required task of determining whether they were just and reasonable. Both judges held that the failure to distribute the Grand Gulf costs among all the members rendered the agreements unduly discriminatory; ALJ Head further held that these costs should be allocated in proportion to each company's relative system demand. Middle South Services, Inc., 30 F.E.R.C. # 63,030, pp. 65,170-65,173 (1985) (System Agreement); Middle South Energy, Inc., 26 F.E.R.C. # 63,044, pp. 65-105-65,108 (1984) (Unit Power Sales Agreement) (ALJ Head). FERC consolidated the proceedings for review, and determined that an adjustment of the shares allocated in the Unit Power Sales Agreement was all that was necessary to render both agreements just and reasonable. FERC reduced NOPSI's share from 29.8% to 17%.

911 F.2d at 996 (footnotes omitted). The FERC allocations were affirmed on rehearing. Mississippi Industries v. FERC, 808 F.2d 1525, modified on rehearing 822 F.2d 1104 (D.C.Cir.), cert. denied, 484 U.S. 985, 108 S.Ct. 500, 98 L.Ed.2d 499 (1987); City of New Orleans v. FERC, 875 F.2d 903 (D.C.Cir.1989), cert. denied sub nom. Mississippi v. FERC, --- U.S. ----, 110 S.Ct. 1805, 108 L.Ed.2d 936 (1990).

After Grand Gulf became operational in July 1985, NOPSI filed an application with the Council to recover its construction and operating costs from the ratepayers, which would have resulted in an immediate 60% increase in retail utility rates. The Council denied an immediate rate increase, although it offered NOPSI interim rate relief. NOPSI rejected this offer and filed suit in federal court against the City, its mayor, and against the City Council collectively and its members individually. The district court dismissed the suit, holding that under the Johnson Act, 28 U.S.C. Sec. 1342, it lacked jurisdiction to proceed. The court further noted that if it did have jurisdiction, it would have abstained pursuant to Burford v. Sun Oil, Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943). The Fifth Circuit reversed, but then withdrew its original opinion and affirmed on rehearing, finding that abstention was proper under Burford and under Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971). NOPSI v. The City of New Orleans, 782 F.2d 1236, modified on rehearing, 798 F.2d 858 (5th Cir.1986) (NOPSI I.).

On October 10, 1985, the Council passed a resolution undertaking an investigation into the prudence of NOPSI's participation in the Grand Gulf project and the resulting costs incurred, as well as NOPSI's efforts to minimize such costs. NOPSI filed a second suit in federal district court, attempting to enjoin the Council from holding the hearings and preventing the pass-through of costs. The district...