# United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 4, 2016 Decided July 1, 2016

No. 14

- 1281

O KLAHOMA G AS AND E LECTRIC C OMPANY

, P ETITIONER

v.

F EDERAL E NERGY R EGULATORY C OMMISSION

, R ESPONDENT

S OUTHWESTERN P UBLIC S ERVICE C OMPANY

, ET AL

., I NTERVENORS

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

Kenneth B. Driver argued the cause for petitioner and

supporting intervenors. With him on the joint briefs were

Stephen M. Spina

, J. Daniel Skees

, Barry S

. Spector

, Matthew

J. Binette

, Marvin T. Griff

, Linda G. Stuntz

, Ellen S. Young

, and Stephen J. Videto

.

Ross R. Fulton

, Federal Energy Regulatory Commission,

argued the cause for respondent. With him on the brief were

Robert H. Solomon

, Solicitor, and Lona T. Perry

, Deputy

Solicitor. Holly E. Cafer

, Attorney, entered an appearance.2

Michael R. Engleman was on the brief for intervenors LS

Power Transmission, LLC and LSP Transmission Holdings,

LLC in support of respondent.

Before: K AVANAUGH

, M ILLETT and W ILKINS

, Circuit

Judges

.

Opinion for the Court filed by Circuit Judge W ILKINS

.

W ILKINS

, Circuit Judge: Until recently, incumbent public

utilities were free to include in their tariffs and agreem ents

“the option to construct any new transmission fa cilities in

their particular service areas, even if the proposal for new

construction came from a third party.” S.C. Pub. Serv. Auth.

v. FERC ( South Carolina ), 762 F.3d 41, 72 (D.C. Cir. 2014)

(per curiam). In practice, the incumbent utilities were likel y

to exercise these “ rights of first refusal”

– a convention that

had certain downsides according to the Federal Energy

Regulatory Commission (“ FERC ” or “the Commission”). See

id. Fearful of deterring non

- incumbents from proposing

much

- needed infrastruct ure reforms, discouraging

competition within the industry, and potentially driving up the

cost of rates charged for wholesale electricity service

, the

Commission ordered utilities to remove rights of first refusal

from their existing tariffs and agreements

. See id. at 5 3

, 72

(citing Transmission Planning and Cost Allocation by

Transmission Owning and Operating Public Utilities

, F.E.R.C. Stats. & Regs. ¶ 31,323, 76 Fed. Reg. 49,842

(2011)) [hereinafter Order No. 1000].

In South Carolina

, we upheld the Comm ission’s removal

mandate. 762 F.3d at 71

- 81. In so doing, we found it

premature to address those petitioners’ argument that FERC

could not make them eliminate such provisions without

violating the Mobile

- Sierra doctrine. Id. at 81. Under3

Mobile

- Sierra

, FERC must presume a contract rate for

wholesale energy is just and reasonable and cannot set aside

the rate unless it is contrary to the public interest. See New

England Power Generators Ass’n, Inc. v. FERC

, 707 F.3d

364, 366 (D.C. Cir. 2013) (citing United Gas Pipe Line Co. v.

Mobile Gas Serv. Corp. ( Mobile ), 350 U.S. 332 (1956), and

Fed. Power Comm’n v. Sierra Pac. Power Co. ( Sierra ), 350

U.S. 348 (1956)).

The Commission had reserved judgment on whether to

apply this presumption to the rights of fi rst refusal until

evaluating the individual utilities’ compliance filings, and

therefore so did we. South Carolina

, 762 F.3d at 81. Utility

Petitioner Oklahoma Gas and Electric Company (“OG&E”),

as well as several Intervenors (collectively, “Petitioners” ) 1

,

now petition for review from FERC’s determination at the

compliance stage. They urge that the Commission erred in

concluding that Mobile

- Sierra does not in fact protect their

rights of first refusal contained in their Regional Transmission

1 Intervening in support of OG& E are Southwestern Public Service

Co., ITC Great Plains, LLC, Southwest Power Pool, Inc., Xcel

Energy Services, Inc., Mid

- Kansas Electric Co., LLC, and

Sunflower Electric Power Corp. Intervening on behalf of FERC are

Western Farmers Electric Cooperative, American Wind Energy

Assoc., Duke

- American Transmission Co., LLC, LS Power

Transmission, LLC, and LSP Transmission Holdings, LLC.

Because it is different from the basis on which the Commission

relied, see K N Energy, Inc. v. FERC

, 968 F.2d 1295, 1303 & n.4

(D.C. Cir. 1992), we reject the alternative argument offered in

separate briefing by Intervenors LSP Transmission Holding, LLC,

and LS Power Transmission, LLC, see Intervenors for Resp. Br. at

19

- 26 (contending that Petitioners never established that t hey lost a

contractual right as a result of the FERC orders under review).4

Organizatio n (“ RTO ”) Membership Agreement. We hold that

the Commission painted with a broader brush than necessary

in applying potentially applicable Supreme Court precedent,

but we deny the petition nonetheless because nothing in the

Mobile

- Sierra doctrine requires its extension to the anti

competitive rights of first refusal at issue here

.

I.

Petitioners are members of the RTO, Southwest Power

Pool, Inc. (“Southwest Power Pool”), which provides

transmission service to approximately 6 million households

across porti ons of eight states. Although public utilities

previously were vertically integrated

– meaning they

generated, transmitted, as well as distributed electricity

–

FERC in the past two decades has undertaken a number of

structural reforms to unbundle the who lesale sale of power

from its transmission, and to require utilities to provide open

access to transmission lines in a nondiscriminatory fashion.

See Atlantic City Elec. Co. v. FERC

, 295 F.3d 1, 4 (D.C. Cir.

2002). One of these reforms encouraged the for mation of

RTOs like Southwest Power Pool

. See Morgan Stanley

Capital Grp. Inc. v. Pub. Util. Dist. No. 1

, 554 U.S. 527, 536

(2008). RTOs are independent entities to which transmission

owning utilities have given operational control of their

facilities. See id. ; Midwest ISO Transmission Owners v.

FERC

, 373 F.3d 1361, 1364 (D.C. Cir. 2004) (explaining that

placing control of transmission lines in RTOs was expected to

promote competition and overcome inefficiencies).

Yet another reform was Order No. 1000, which required

the removal from utilities’ tariffs and agreements of federal

rights of first refusal to construct transmission facilities in the

regional transmission plan

. See Order No. 1000, ¶ 268, 76

Fed. Reg. at 49,888. Tariffs are the mechanism through5

which regulated utilities unilaterally set their rates and terms

of service. See Morgan Stanley

, 554 U.S. at 531; South

Carolina

, 762 F.3d at 71 n.5

. In contrast, rates and terms can

also be set by agreement with indiv idual electricity

purchasers, through bilateral contracts. See Morgan Stanley

, 554 U.S. at 531 (citing 16 U.S.C. § 824d(c), (d)). Both tariffs

and contracts must be filed with the Commission before they

go into effect. Id. Not only rates, but also “any rule,

regulation, practice, or contract affecting such rate[s],” 16

U.S.C. § 824e(a), are subject to FERC review to ensure they

are “just and reasonable,” id. § 824d(a). If found unjust or

unreasonable, FERC may replace the unlawful rate, practice,

or co ntract with a lawful one. See id. § 824e(a); Morgan

Stanley

, 554 U.S. at 532. In South Carolina

, we held that the

Commission properly exercised its authority under the

Federal Power Act (“FPA”) to regulate the rights of first

refusal as a practice affect ing a rate. 762 F.3d at 76; see also

id. at 76

- 81 (finding FERC supported its conclusion that the

rights were unjust or unreasonable with substantial evidence,

and that the ban on rights of first refusal was not otherwise

arbitrary or capricious on its fa ce ).

At issue here is a portion of the Membership Agreement

Petitioners executed with Southwest Power Pool to join the

RTO. Petitioners’ refusal rights were contained in Section 3.3

of their Agreement. Order No. 1000’s removal mandate thus

obligated Sout hwest Power Pool to revise that provision. In

its fili ng to comply with the order, Southwest Power Pool

proposed to FERC the necessary deletions to Section 3.3, but

simultaneously argued that FERC should not implement the

revisions because the Agreement i s protected by the Mobile

Sierra doctrine.

The Commission thought otherwise. See Southwest

Power Pool, Inc., Order on Compliance Filings, Docket No.6

ER13

- 366

- 000, et al.

, 144 FERC ¶ 61,059 (July 18, 2013)

(Initial Order), on reh’g

, 149 FERC ¶ 61,048 (Oc t. 16, 2014)

(Rehearing Order). It decided that, “in determining whether a

Mobile

- Sierra presumption applies in a specific instance, the

Commission must determine whether the instrument or

provision at issue embodies” certain characteristics.

Rehearing O rder ¶ 94. It distinguished between

individualized rates, terms, and conditions negotiated freely at

arm’s length, and generally applicable, so

- called “ tariff ”

provisions that do not arise from such negotiations. Initial

Order ¶ 127; Rehearing Order ¶ 94

. According to the

Commission, Mobile

- Sierra only applies to the former

because “‘the premise on which [it] rests’ is ‘that the contract

rates are the product of fair, arms

- length negotiations.’”

Rehearing Order ¶ 95 (citing Morgan Stanley

, 554 U.S. at

554). At the same time, FERC noted its discretion to apply

the presumption to the latter. Id. ¶ 94 (citing Initial Order

¶ 127; New England Power Generators Ass’n, Inc. v. FERC

, 707 F.3d 364, 370

- 71 (D.C. Cir. 2013)). It concluded that

Se ction 3.3 failed its threshold, arms

- length bargaining test.

Initial Order ¶ 130

- 35; Rehearing Order ¶ 100

- 112. On

rehearing, FERC did not alter its conclusion, but as an aside

clarified that the other Agreement provisions, not just Section

3.3, also amo unted to generally applicable terms and

conditions not subject to Mobile

- Sierra

. See Rehearing Order

¶ 100.

II.

Petitioners contend that any “valid, freely negotiated

contract automatically is subject to” Mobile

- Sierra

. Pet’r Br. 29. On the other ha nd, FERC is of the view that

Mobile

- Sierra requires it to determine whether the instrument

or provision at issue embodies an “individualized” rate, term,

or condition that “appl[ies] only to sophisticated parties who7

negotiated [it] freely at arm’s length, ” or whether instead the

provision is “generally applicable or

. . . arose in

circumstances that do not provide the assurance of justness

and reasonableness associated with arms

- length negotiations”

– with only the former qualifying for the Mobile

- Sierra

p resumption. Initial Order ¶ 127; Rehearing Order ¶ 94.

We begin by returning to Mobile and Sierra

. See New

York New York, LLC v. NLRB

, 313 F.3d 585, 590 (D.C. Cir.

2002) (“We are not obligated to defer to an agency's

interpretation of Supreme Court pre cedent under Chevron or

any other principle.”). T he doctrine first arose from those

cases in the context of rate

- setting. In Mobile

, the Supreme

Court held that the Natural Gas Act did not allow a gas utility

to file a new tariff with the Commission superseding the rates

set forth in a contract it had previously executed. 350 U.S. at

344. The same day, the Court confronted a similar situation

under the nearly identical provisions of the FPA in Sierra and

ruled the same way. 350 U.S. at 353.

S ierra raised an additional question regarding rate

setting. Even though the utility could not file with the

Commission and thereby unilatera lly impose a new tariff, the

Court further considered whether FERC was statutorily

authorized to set aside the contract rate as part of its Section

206(a) authority, which allows it to replace an unjust and

unreasonable rate with a just and reasonable one. See id.

(citing 16 U.S.C. § 824e(a)). The Court declined to allow

FERC to set aside a rate simply because it is not profitable.

See id. at 354

- 55. The Court explained that a public utility

may “agree by contract to a rate affording less than a fair

r eturn,” and such an agreement does not necessarily mean the

utility is “entitled to be relieved of its improvident bargain.”

Id. at 355. When evaluating whether a contract rate is just

and reasonable, “the sole concern of the Commission,”8

explained the C ourt, “would seem to be whether the rate is so

low as to adversely affect the public interest

– as where it

might impair the financial ability of the public utility to

continue its service, cast upon other consumers an excessive

burden, or be unduly discri minatory.” Id.

Subsequent decisions have refined the doctrine in several

ways

. In Morgan Stanley

, one of the two Supreme Court

cases other than Mobile and Sierra that Petitioners rely on,

see Pet’r Br. 29

- 37, the Court confronted long

- term contracts

through which utilities bought power at historically elevated

rates during an energy crisis, see 554 U.S. at 540

- 41.

Although it reaffirm ed that Mobile

- Sierra applied to those

utilities’ buyer’ s remorse

, id. at 548, the Court explained that

contract rates agreed to via fraud or duress do not merit the

presumption. Id. at 554; see also id. at 535 (clarifying that

the term, “public interest,” simply refers to a “differing

application of th[e] just

- and

- re asonable standard ” ); id. at 534

(describing the various ways parties can contract around

Mobile

- Sierra ). In NRG Power

, the second case Petitioners

invoke, the Court confirmed that Mobile

- Sierra attaches to the

challenged rates even in suits brought by non

- parties. NRG

Power Marketing, LLC v. Maine Public Utilities Commission

( NRG Power ), 558 U.S. 165, 176 (2010). That case involved

an agreement providing for auction prices pursuant to forward

capacity markets, where energy providers committed

themselves to purchasing a certain amount of capacity at a

particular price years in advance. See id. at 170. After t he

Court remanded to us to decide “[w]hether the rates at issue

qualify as ‘contract r ates,’” id. at 176

, we said that even

assuming some difference between auction and contract rates,

the Commission was free all the same to apply the logic of

Mobile

- Sierra

, s ee New England Power Generators Ass’n,

Inc. v. FERC

, 707 F.3d 364, 371 (D.C. Cir. 2013)

.9

These cases show that the Supreme Court has at least

thus far applied the doctrine to rates, although we are

presented here with a right of first refusal provision

. As

neither party advocates for restricting Mobile

- Sierra

exclusively to rates, there is no need to decide that question.

We assume arguendo that the presumption is not so limited

. More importantly, this precedent reflects that no matter the

contract provision at issue, even if the Mobile

- Sierra doctrine

might apply to it generally, FERC did not err in determining

that the doctrine does not extend to anti

- competitive measures

that were not arrived at through arms

- length bargaining. In

other words, the term must be the product of adversarial

negotiations betwee n sophisticated parties pursuing

independent interests. A lthough Sierra ’s holding arose in the

rate

- setting context, the Commission properly noted the

Supreme Court’s concern about the im propriety of interfering

with a “ bargain ,” however “improvident.” Sierra

, 350 U.S.

at 355 (emphasis added). Indeed, the doctrine “rests on ‘the

stabilizing force of contracts, ’ ” NRG Power

, 558 U.S. at 168

(citing Morgan Stanley

, 554 U.S. at 548)

, which thereby

ensures “the promotion of stable energy supply

arrangements, ” New England Power

, 707 F.3d at 368, though

not to the extent of protecting, for example, “unfair dealing at

the contract formation stage,” Morgan Stanley

, 554 U.S. at

547; see also NRG Power

, 558 U.S. at 167 ( describing the

doctrine as requiring a rate s et by “ a freely negotiated ”

contract) (citing Morgan Stanley

, 554 U.S. at 530)

. Just as

unfair dealing, fraud, or duress will remove a provision from

the ambit of Mobile

- Sierra

, so also will terms arrived at by

horizontal competitors with a common interes t to exclude any

future competition.

That is what happened with the rights at issue here. As

the Commission in its expert judgment already determined

, the rights of first refusal created “a pre

- existing barrier to10

entry” for nonincumbent transmission owners. South

Carolina

, 762 F.3d at 77 (citing Order No. 1000 ¶¶ 256

- 57,

76 Fed. Reg. at 49,886). Rather than promote competition,

FERC found they created disincentives for nonincumbents to

identify and commit resources to cost

- effective so lutions to

transmission needs. See id. The Seventh Circuit has gone so

far as to describe such self

- protective and anti

- competitive

agreements as cartel

- like. See MISO Transmission Owners v.

FERC

, 819 F.3d 329, 335 (7th Cir. 2016). We similarly think

that such terms through “which the parties are seeking to

protect themselves from competition from third parties” are a

far cry from those in the original Mobile

- Sierra cases. Id.

While Petitioners decline to acknowledge any anti

competitive intent behin d Section 3.3

, we accept the

Commission’s de termination that the provision restricts

competition

. 2 S ee Rehearing Order ¶ 101 (explaining that

new members “must accept th[e right of first refusal

provision] with limited room for negotiation”); id. ¶ 103

(d escribing “substantial barriers” to amending Section 3.3);

id. ¶ 101

- 02 (refuting allegations that other members

negotiated any departure from that provision); id. ¶ 104

(disagreeing that the option of voluntarily accepting section

3.3 or not transacting a t all transforms the provision into an

individually negotiated one).

All of this means that the Commission arrived at a legally

valid outcome without requiring us to decide the propriety of

its assumption that Mobile

- Sierra applies outside the context

of rates and procedures for setting rates. Indeed, both parties

have argued this case on the premise that Mobile

- Sierra is

2 We hold only that Mobile

- Sierra does not apply to the right of

first refusal provision in Section 3.3, and do not reach the

Commission’s statement in its Rehearing Order regarding the

characteristics of the larger Membership Agreement.11

generally available to all contractual provisions that have

some effect on rates

. To be clear, as we s tated in New

England Power

, the Commission certainly is free to exercise

its discretion to apply the presumption to terms other than

contract rates

, even where it is not required to do so

, at least

with respect to rate

- related terms

. See 707 F.3d at 371

( “ FERC's determi nation that the logic of Mobile

- Sierra still

applied [to an auction rate] is ‘ a reasonable choice within a

gap left open by Congress ’ and so within the purview of the

agency's discretion under § 205(a) of the FPA .”). Had FERC

used its two

- p art test in a truly discretionary manner, perhaps

we could uphold it on that basis. As it stands, the

Commission made no such discretionary judgment, and we

need not fully endorse the approach it did take as the law

requires deni al of the petition in any case. See Morgan

Stanley

, 554 U.S. at 545 (“That [FERC] provided a different

rationale for the necessary result is no cause for upsetting its

ruling.”)

.

***

For the for e going reasons, we deny the petition for

review.

So ordered.