Disaster's dead hand

Sometimes a proposition of law is asserted so casually -- and so misleadingly -- that a properly measured response could consume an entire professional lifetime. Though it's an aprocryphal tale attributable almost entirely to Eric Temple Bell's inspiring if inaccurate book, Men of Mathematics, I've always taken romantic refuge in the story of French mathematician Evariste Galois desperately trying to write down his vast knowledge of mathematics in the final hours before he died in a duel at the age of 20. So much to say, so little time. For me, a legal item on Hurricane Katrina's aftermath represents today's "Galois moment."

In an August 9 story published in the New Orleans Times-Picauyne and reprinted in Corporate Watch, Pam Radtke Russell reports on Entergy Corporation's embarrassment of financial and legal riches. Entergy "is raking in millions supplying power to New Orleans' suburbs and three other states," asks Ms. Russell, "so why can't it use that money to help out its customers in Katrina-devastated New Orleans?"

Despite asking for millions of dollars from New Orleans customers and the federal government to rebuild its shattered electric and gas system, Entergy Corp. on Tuesday reported millions in profits for the third quarter in a row since Hurricane Katrina struck.

Though its earnings were slightly down from last year, Entergy Corp. reported earning $282 million between April and June on revenue of $2.63 billion. Why, then, is the company's subsidiary, Entergy New Orleans, asking for rate increases of at least $45 per month per customer, and why is Entergy Corp. taking the firm stance that it can't help bail out its hurricane-ravaged subsidiary and instead is asking for federal aid of $718 million?

Why indeed. Much of the problem arises from Entergy's understanding of public utility law, one evidently shared by regulators with the authority to carry out this travesty. Ms. Russell quotes Glen Thomas, former chairman of the Pennsylvania Public Utility Commission, for this proposition:

The general proposition for utilities is that they are freestanding entities that provide monopoly service. They are entitled to return on the investment; they are allowed to make a profit. That's a general rule of thumb, basic utility 101.

Thereupon Ms. Russell affirms Mr. Thomas's assessment of Entergy's legal standing: "It's [the] law, backed up by a landmark 1944 decision by the U.S. Supreme Court."

But this is hardly a correct, let alone definitive, characterization of the law. The 1944 case in question is Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591 (1944). Hope is widely and justifiably known for ending the regime of Smyth v. Ames, 169 U.S. 466 (1898), which directed federal courts to guarantee that regulated utility companies recover the replacement value of property dedicated to public service.

Hope endorsed an alternative ratemaking regime, one based on the historic cost rather than the replacement value benchmark established by Smyth. But Hope emphatically did not dictate that regulators must always permit a utility to earn a rate of return on all of the investments it has historically sunk. Indeed, there is a solid economic case for rejecting the admittedly convenient historic cost rule upheld in Hope. Sunk investments are just that, sunk. Hope and the broader law of economic regulation do entitle Entergy to stay solvent under regulatory ovesight, but no single methodology is binding on ratemakers, let alone one that so odiously transfers wealth in a way as to make Entergy an effective profiteer from the misery wreaked by Hurricane Katrina.

Sorting out the mess left by Smyth, Hope, and this entire branch of public utility law, to say nothing of its interplay with natural disasters, takes more time and space than Jurisdynamics permits. At least with respect to the public utility side of the equation, I take aim at the problem in The Death of the Regulatory Compact, 67 Ohio St. L.J. (forthcoming 2006) (available via SSRN). With any luck, I will have considerably more time to solve this puzzle than was apportioned to the tragically brilliant Evariste Galois.