(Slip Opinion) OCTOBER TERM, 2007 1 

Syllabus 

NOTE: Where it is feasible, a syllabus (headnote) will be released, as is

being done in connection with this case, at the time the opinion is issued.

The syllabus constitutes no part of the opinion of the Court but has been

prepared by the Reporter of Decisions for the convenience of the reader. 

See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337. 

SUPREME COURT OF THE UNITED STATES 

Syllabus 

MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTILITY DISTRICT NO. 1 OF SNOHOMISH COUNTY 

ET AL. 

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR 

THE NINTH CIRCUIT 

No. 06–1457. Argued February 19, 2008—Decided June 26, 2008* 

Under the Mobile-Sierra doctrine, the Federal Energy Regulatory

Commission (FERC) must presume that the electricity rate set in a

freely negotiated wholesale-energy contract meets the “just and reasonable” requirement of the Federal Power Act (FPA), see 16 U. S. C.

§824d(a), and the presumption may be overcome only if FERC concludes that the contract seriously harms the public interest. See 

United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U. S. 332; 

FPC v. Sierra Pacific Power Co., 350 U. S. 348. Under FERC’s current regulatory regime, a wholesale electricity seller may file a “market-based” tariff, which simply states that the utility will enter into

freely negotiated contracts with purchasers. Those contracts are not 

filed with FERC before they go into effect. In 2000 and 2001, there 

was a dramatic increase in the price of electricity in the western 

United States. As a result, respondents entered into long-term contracts with petitioners that locked in rates that were very high by

historical standards. Respondents subsequently asked FERC to modify the contracts, contending that the rates should not be presumed

just and reasonable under Mobile-Sierra. The Administrative Law 

Judge concluded that the presumption applied and that the contracts 

did not seriously harm the public interest. FERC affirmed, but the 

Ninth Circuit remanded. The court held that contract rates are pre-

—————— 

*Together with No. 06–1462, American Electric Power Service Corp. 

et al. v. Public Utility District No. 1 of Snohomish County et al., also on 

certiorari to the same court. 
 

2 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

Syllabus 

sumptively reasonable only where FERC has had an initial opportunity to review the contracts without applying the Mobile-Sierra presumption and therefore that the presumption should not apply to

contracts entered into under “market-based” tariffs. The court alternatively held that there is a different standard for overcoming the 

Mobile-Sierra presumption when a purchaser challenges a contract:

whether the contract exceeds a “zone of reasonableness.” 

Held: 

1. The Commission was required to apply the Mobile-Sierra presumption in evaluating the contracts here. Sierra held that a rate set 

out in a contract must be presumed to be just and reasonable absent

serious harm to the public interest, regardless of when the contract is

challenged. FPC v. Texaco Inc., 417 U. S. 380, distinguished. Also, 

the Ninth Circuit’s rule requiring FERC to ask whether a contract

was formed in an environment of market “dysfunction” is not supported by this Court’s cases and plainly undermines the role of contracts in the FPA’s statutory scheme. Pp. 15–19. 

2. The Ninth Circuit’s “zone of reasonableness” test fails to accord 

an adequate level of protection to contracts. The standard for a 

buyer’s rate-increase challenge must be the same, generally, as the 

standard for a seller’s challenge: The contract rate must seriously

harm the public interest. The Ninth Circuit misread Sierra in holding that the standard for evaluating a high-rate challenge and setting

aside a contract rate is whether consumers’ electricity bills were 

higher than they would have been had the contract rates equaled 

“marginal cost.” Under the Mobile-Sierra presumption, setting aside

a contract rate requires a finding of “unequivocal public necessity,” 

Permian Basin Area Rate Cases, 390 U. S. 747, 822, or “extraordinary 

circumstances,” Arkansas Louisiana Gas Co. v. Hall, 453 U. S. 571, 

582. Pp. 19–23. 

3. The judgment below is nonetheless affirmed on alternative 

grounds, based on two defects in FERC’s analysis. First, the analysis 

was flawed or incomplete to the extent FERC looked simply to

whether consumers’ rates increased immediately upon conclusion of 

the relevant contracts, rather than determining whether the contracts imposed an excessive burden “down the line,” relative to the

rates consumers could have obtained (but for the contracts) after 

elimination of the dysfunctional market. Sierra’s “excessive burden” 

on customers was the current burden, not just the burden imposed at 

the contract’s outset. See 350 U. S., at 355. Second, it is unclear 

from FERC’s orders whether it found respondents’ evidence inadequate to support their claim that petitioners engaged in unlawful 

market manipulation that altered the playing field for contract negotiations. In such a case, the Commission should not presume that a 
 

Cite as: 554 U. S. ____ (2008) 3 

Syllabus 

contract is just and reasonable. Like fraud and duress, unlawful 

market activity directly affecting contract negotiations eliminates the 

premise on which the Mobile-Sierra presumption rests: that the contract rates are the product of fair, arms-length negotiations. On remand, FERC should amplify or clarify its findings on these two 

points. Pp. 23–26. 

471 F. 3d 1053, affirmed and remanded. 

SCALIA, J., delivered the opinion of the Court, in which KENNEDY, 

THOMAS, and ALITO, JJ., joined, and in which GINSBURG, J., joined as to 

Part III. GINSBURG, J., filed an opinion concurring in part and concurring in the judgment. STEVENS, J., filed a dissenting opinion, in which 

SOUTER, J., joined. ROBERTS, C. J., and BREYER, J., took no part in the 

consideration or decision of the cases. 
 

 

_________________ 

_________________ 

Cite as: 554 U. S. ____ (2008) 1 

Opinion of the Court 

NOTICE: This opinion is subject to formal revision before publication in the

preliminary print of the United States Reports. Readers are requested to

notify the Reporter of Decisions, Supreme Court of the United States, Washington, D. C. 20543, of any typographical or other formal errors, in order

that corrections may be made before the preliminary print goes to press. 

SUPREME COURT OF THE UNITED STATES 

Nos. 06–1457 and 06–1462 

MORGAN STANLEY CAPITAL GROUP INC., 

PETITIONER 

06–1457 v. 

PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH 

COUNTY, WASHINGTON, ET AL. 

AMERICAN ELECTRIC POWER SERVICE 

CORPORATION, ET AL., PETITIONERS 

06–1462 v. 

PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH 

COUNTY, WASHINGTON, ET AL. 

ON WRITS OF CERTIORARI TO THE UNITED STATES COURT OF 

APPEALS FOR THE NINTH CIRCUIT 

[June 26, 2008] 

JUSTICE SCALIA delivered the opinion of the Court. 

 Under the Mobile-Sierra doctrine, the Federal Energy

Regulatory Commission (FERC or Commission) must

presume that the rate set out in a freely negotiated wholesale-energy contract meets the “just and reasonable”

requirement imposed by law. The presumption may be

overcome only if FERC concludes that the contract seriously harms the public interest. These cases present two 

questions about the scope of the Mobile-Sierra doctrine: 

First, does the presumption apply only when FERC has

had an initial opportunity to review a contract rate without the presumption? Second, does the presumption im­
2 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

Opinion of the Court 

pose as high a bar to challenges by purchasers of wholesale electricity as it does to challenges by sellers? 

I 

A 

Statutory Background 

The Federal Power Act (FPA), 41 Stat. 1063, as

amended, gives the Commission1 the authority to regulate

the sale of electricity in interstate commerce—a market

historically characterized by natural monopoly and therefore subject to abuses of market power. See 16 U. S. C. 

§824 et seq. Modeled on the Interstate Commerce Act, the 

FPA requires regulated utilities to file compilations of

their rate schedules, or “tariffs,” with the Commission, 

and to provide service to electricity purchasers on the

terms and prices there set forth. §824d(c). Utilities wishing to change their tariffs must notify the Commission 60 

days before the change is to go into effect. §824d(d).

Unlike the Interstate Commerce Act, however, the FPA 

also permits utilities to set rates with individual electricity purchasers through bilateral contracts. §824d(c), (d). 

As we have explained elsewhere, the FPA “departed from

the scheme of purely tariff-based regulation and acknowledged that contracts between commercial buyers and 

sellers could be used in ratesetting.” Verizon Communications Inc. v. FCC, 535 U. S. 467, 479 (2002). Like tariffs, 

contracts must be filed with the Commission before they

go into effect. 16 U. S. C. §824d(c), (d). 

The FPA requires all wholesale-electricity rates to be 

“just and reasonable.” §824d(a). When a utility files a 

new rate with the Commission, through a change to its

tariff or a new contract, the Commission may suspend the 

rate for up to five months while it investigates whether 

—————— 

1We also use “Commission” to refer to the Federal Power Commission, FERC’s predecessor. 
 

 

Cite as: 554 U. S. ____ (2008) 3 

Opinion of the Court 

the rate is just and reasonable. §824d(e). The Commission may, however, decline to investigate and permit the 

rate to go into effect—which does not amount to a determination that the rate is “just and reasonable.” See 18 

CFR §35.4 (2007). After a rate goes into effect, whether or 

not the Commission deemed it just and reasonable when

filed, the Commission may conclude, in response to a

complaint or on its own motion, that the rate is not just 

and reasonable and replace it with a lawful rate. 16 

U. S. C. §824e(a) (2000 ed., Supp. V). 

The statutory requirement that rates be “just and reasonable” is obviously incapable of precise judicial definition, and we afford great deference to the Commission in 

its rate decisions. See FPC v. Texaco Inc., 417 U. S. 380, 

389 (1974); Permian Basin Area Rate Cases, 390 U. S. 747, 

767 (1968). We have repeatedly emphasized that the

Commission is not bound to any one ratemaking formula.

See Mobil Oil Exploration & Producing Southeast, Inc. v. 

United Distribution Cos., 498 U. S. 211, 224 (1991); Permian Basin, supra, at 776–777. But FERC must choose a 

method that entails an appropriate “balancing of the 

investor and the consumer interests.” FPC v. Hope Natural Gas Co., 320 U. S. 591, 603 (1944). In exercising its

broad discretion, the Commission traditionally reviewed

and set tariff rates under the “cost-of-service” method, 

which ensures that a seller of electricity recovers its costs

plus a rate of return sufficient to attract necessary capital.

See J. McGrew, Federal Energy Regulatory Commission 

152, 160–161 (2003) (hereinafter McGrew). 

In two cases decided on the same day in 1956, we addressed the authority of the Commission to modify rates 

set bilaterally by contract rather than unilaterally by 

tariff. In United Gas Pipe Line Co. v. Mobile Gas Service 

Corp., 350 U. S. 332, we rejected a natural-gas utility’s 

argument that the Natural Gas Act’s requirement that it

file all new rates with the Commission authorized it to 
 

4 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

Opinion of the Court 

abrogate a lawful contract with a purchaser simply by

filing a new tariff, see id., at 336–337. The filing requirement, we explained, is merely a precondition to changing a 

rate, not an authorization to change rates in violation of a

lawful contract (i.e., a contract that sets a just and reasonable rate). See id., at 339–344. 

In FPC v. Sierra Pacific Power Co., 350 U. S. 348, 352– 

353 (1956), we applied the holding of Mobile to the analogous provisions of the FPA, concluding that the complaining utility could not supersede a contract rate simply by 

filing a new tariff. In Sierra, however, the Commission 

had concluded not only (contrary to our holding) that the

newly filed tariff superseded the contract, but also that

the contract rate itself was not just and reasonable, “solely 

because it yield[ed] less than a fair return on the net 

invested capital” of the utility. Id., at 355. Thus, we were 

confronted with the question of how the Commission may 

evaluate whether a contract rate is just and reasonable. 

We answered that question in the following way: 

“[T]he Commission’s conclusion appears on its face to 

be based on an erroneous standard. . . . [W]hile it may 

be that the Commission may not normally impose 

upon a public utility a rate which would produce less 

than a fair return, it does not follow that the public 

utility may not itself agree by contract to a rate affording less than a fair return or that, if it does so, it 

is entitled to be relieved of its improvident bargain. . . . In such circumstances the sole concern of the 

Commission 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 discriminatory.” Id., at 354–355 (emphasis deleted). 

As we said in a later case, “[t]he regulatory system created 
 

Cite as: 554 U. S. ____ (2008) 5 

Opinion of the Court 

by the [FPA] is premised on contractual agreements voluntarily devised by the regulated companies; it contemplates abrogation of these agreements only in circumstances of unequivocal public necessity.” Permian Basin, 

supra, at 822. 

Over the past 50 years, decisions of this Court and the

Courts of Appeals have refined the Mobile-Sierra presumption to allow greater freedom of contract. In United 

Gas Pipe Line Co. v. Memphis Light, Gas and Water Div., 

358 U. S. 103, 110–113 (1958), we held that parties could 

contract out of the Mobile-Sierra presumption by specifying in their contracts that a new rate filed with the Commission would supersede the contract rate. Courts of 

Appeals have held that contracting parties may also agree 

to a middle option between Mobile-Sierra and Memphis 

Light: A contract that does not allow the seller to supersede the contract rate by filing a new rate may nonetheless permit the Commission to set aside the contract rate

if it results in an unfair rate of return, not just if it violates the public interest. See, e.g., Papago Tribal Util. 

Auth. v. FERC, 723 F. 2d 950, 953 (CADC 1983); Louisiana Power & Light Co. v. FERC, 587 F. 2d 671, 675–676 

(CA5 1979). Thus, as the Mobile-Sierra doctrine has 

developed, regulated parties have retained broad authority to specify whether FERC can review a contract rate

solely for whether it violates the public interest or also for 

whether it results in an unfair rate of return. But the 

Mobile-Sierra presumption remains the default rule. 

Moreover, even though the challenges in Mobile and 

Sierra were brought by sellers, lower courts have concluded that the Mobile-Sierra presumption also applies

where a purchaser, rather than a seller, asks FERC to

modify a contract. See Potomac Elec. Power Co. v. FERC, 

210 F. 3d 403, 404–405, 409–410 (CADC 2000); Boston 

Edison Co. v. FERC, 856 F. 2d 361, 372 (CA1 1988). This 

Court has seemingly blessed that conclusion, explaining 
 

 

6 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

Opinion of the Court 

that under the FPA, “[w]hen commercial parties . . . avail 

themselves of rate agreements, the principal regulatory

responsibility [is] not to relieve a contracting party of an

unreasonable rate.” Verizon, 535 U. S., at 479 (citing 

Sierra, supra, at 355).

Over the years, the Commission began to refer to the two

modes of review—one with the Mobile-Sierra presumption 

and the other without—as the “public interest standard” 

and the “just and reasonable standard.” See, e.g., Southern 

Co. Servs., Inc. Gulf States Utils. Co. v. Southern Co. 

Servs., Inc., 39 FERC ¶63,026, pp. 65,134, 65,141 (1987).

Decisions from the Courts of Appeals did likewise. See, 

e.g., Kansas Cities v. FERC, 723 F. 2d 82, 87–88 (CADC 

1983); Northeast Utils. Serv. Co. v. FERC, 993 F. 2d 937, 

961 (CA1 1993). We do not take this nomenclature to 

stand for the obviously indefensible proposition that a 

standard different from the statutory just-and-reasonable

standard applies to contract rates. Rather, the term “public interest standard” refers to the differing application of 

that just-and-reasonable standard to contract rates. See 

Philadelphia Elec. Co., 58 F. P. C. 88, 90 (1977). (It would 

be less confusing to adopt the Solicitor General’s terminology, referring to the two differing applications of the justand-reasonable standard as the “ordinary” “just and reasonable standard” and the “public interest standard.” See 

Reply Brief for Respondent FERC 6.) 

B 

Recent FERC Innovations; Market-Based Tariffs 

In recent decades, the Commission has undertaken an 

ambitious program of market-based reforms. Part of the 

impetus for those changes was technological evolution.

Historically, electric utilities had been vertically integrated monopolies. For a particular geographic area, a 

single utility would control the generation of electricity, its

transmission, and its distribution to consumers. See 
 

Cite as: 554 U. S. ____ (2008) 7 

Opinion of the Court 

Midwest ISO Transmission Owners v. FERC, 373 F. 3d 

1361, 1363 (CADC 2004). Since the 1970’s, however, 

engineering innovations have lowered the cost of generating electricity and transmitting it over long distances, 

enabling new entrants to challenge the regional generating monopolies of traditional utilities. See generally New 

York v. FERC, 535 U. S. 1, 7–8 (2002); Public Util. Dist. 

No. 1 of Snohomish Cty. v. FERC, 272 F. 3d 607, 610 

(CADC 2001). 

To take advantage of these changes, the Commission

has attempted to break down regulatory and economic 

barriers that hinder a free market in wholesale electricity.

It has sought to promote competition in those areas of the

industry amenable to competition, such as the segment 

that generates electric power, while ensuring that the

segment of the industry characterized by natural monopoly—namely, the transmission grid that conveys the generated electricity—cannot exert monopolistic influence 

over other areas. See New York, supra, at 9–10; Snohomish, supra. To that end, FERC required in Order No.

888 that each transmission provider offer transmission 

service to all customers on an equal basis by filing an 

“open access transmission tariff.” Promoting Wholesale

Competition Through Open Access Non-Discriminatory

Transmission Services by Public Utilities, 61 Fed. Reg. 

21540 (1996); see New York, supra, at 10–12. That requirement prevents the utilities that own the grid from 

offering more favorable transmission terms to their own

affiliates and thereby extending their monopoly power to 

other areas of the industry. 

To further pry open the wholesale-electricity market

and to reduce technical inefficiencies caused when different utilities operate different portions of the grid independently, the Commission has encouraged transmission 

providers to establish “Regional Transmission Organizations”—entities to which transmission providers would 
 

8 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

Opinion of the Court 

transfer operational control of their facilities for the purpose of efficient coordination. Order No. 2000, 65 Fed. 

Reg. 810, 811–812 (2000); see Midwest ISO, supra, at 

1364. It has encouraged the management of those entities

by “Independent System Operators,” not-for-profit entities 

that operate transmission facilities in a nondiscriminatory 

manner. See Midwest ISO, supra. In addition to coordinating transmission service, Regional Transmission Organizations perform other functions, such as running 

auction markets for electricity sales and offering contracts

for hedging against potential grid congestion. See Blumsack, Measuring the Benefits and Costs of Regional Electric Grid Integration, 28 Energy L. J. 147, 147 (2007).

Against this backdrop of technological change and market-based reforms, the Commission over the past two

decades has begun to permit sellers of wholesale electricity to file “market-based” tariffs. These tariffs, instead of 

setting forth rate schedules or rate-fixing contracts, simply

state that the seller will enter into freely negotiated contracts with purchasers. See generally Market-Based

Rates For Wholesale Sales Of Electric Energy, Capacity

And Ancillary Services By Public Utilities, Order No. 697, 

72 Fed. Reg. 39904 (2007) (hereinafter Market-Based

Rates); McGrew 160–167. FERC does not subject the 

contracts entered into under these tariffs (as it subjected

traditional wholesale-power contracts) to §824d’s requirement of immediate filing, apparently on the theory that 

the requirement has been satisfied by the initial filing of 

the market-based tariffs themselves. See Brief for Respondent FERC 28–29 (hereinafter Brief for FERC). 

FERC will grant approval of a market-based tariff only 

if a utility demonstrates that it lacks or has adequately 

mitigated market power, lacks the capacity to erect other

barriers to entry, and has avoided giving preferences to its 

affiliates. See Market-Based Rates, ¶7, 72 Fed. Reg. 39907. 

In addition to the initial authorization of a market-based 
 

Cite as: 554 U. S. ____ (2008) 9 

Opinion of the Court 

tariff, FERC imposes ongoing reporting requirements. A 

seller must file quarterly reports summarizing the contracts that it has entered into, even extremely short-term 

contracts. See California ex rel. Lockyer v. FERC, 383 

F. 3d 1006, 1013 (CA9 2004). It must also demonstrate 

every four months that it still lacks or has adequately 

mitigated market power. See ibid. If FERC determines 

from these filings that a seller has reattained market 

power, it may revoke the authority prospectively. See 

Market-Based Rates, ¶5, 72 Fed. Reg. 39906. And if the 

Commission finds that a seller has violated its Regional 

Transmission Organization’s market rules, its tariff, or 

Commission orders, the Commission may take appropriate 

remedial action, such as ordering refunds, requiring disgorgement of profits, and imposing civil penalties. See 

ibid. 

Both the Ninth Circuit and the D. C. Circuit have generally approved FERC’s scheme of market-based tariffs. 

See Lockyer, supra, at 1011–1013; Louisiana Energy & 

Power Auth. v. FERC, 141 F. 3d 364, 365 (CADC 1998).

We have not hitherto approved, and express no opinion 

today, on the lawfulness of the market-based-tariff system, which is not one of the issues before us. It suffices for 

the present cases to recognize that when a seller files a

market-based tariff, purchasers no longer have the option 

of buying electricity at a rate set by tariff and contracts no

longer need to be filed with FERC (and subjected to its

investigatory power) before going into effect. 

C 

California’s Electricity Regulation and 

Its Consequences 

In 1996, California enacted Assembly Bill 1890 (AB 

1890), which massively restructured the California electricity market. See 1996 Cal. Stat. ch. 854 (codified at Cal. 

Pub. Util. Code Ann. §§330–398.5 (West 2004 and Supp. 
 

 

10 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

Opinion of the Court 

2008)); see generally Cudahy, Whither Deregulation: A 

Look at the Portents, 58 N. Y. U. Annual Survey of Am.

Law 155, 172–185 (2001) (hereinafter Cudahy). The bill 

transferred operational control of the transmission facilities of California’s three largest investor-owned utilities to

an Independent Service Operator (Cal-ISO). See Pacific 

Gas & Elec. Co. v. FERC, 464 F. 3d 861, 864 (CA9 2006). 

It also established the California Power Exchange 

(CalPX), a nonprofit entity that operated a short-term

market—or “spot market”—for electricity. The bill required California’s three largest investor-owned utilities to

divest most of their electricity-generation facilities. It 

then required those utilities to purchase and sell the bulk

of their electricity from and to the CalPX’s spot market,

permitting only limited leeway for them to enter into longterm contracts. See Public Util. Dist. No. 1 of Snohomish 

Cty. v. FERC, 471 F. 3d 1053, 1068 (CA9 2006) (case 

below).

In 1997, FERC approved the Cal-ISO as consistent with

the requirements for an Independent Service Operator

established in Order No. 888. FERC also approved the

CalPX and the investor-owned utilities’ authority to make 

sales at market-based rates in the CalPX, finding that, in 

light of the divesture of their generation units and other

conditions imposed under the restructuring plan, those 

utilities had adequately mitigated their market power. 

See Pacific Gas & Elec. Co., 81 FERC ¶61,122, pp. 61,435,

61,435–61,436, 61,537–61,548 (1997). 

The CalPX opened for business in March 1998. In the 

summer of 1999, it expanded to include an auction for 

sales of electricity under “forward contracts”—contracts in 

which sellers promise to deliver electricity more than one

day in the future (sometimes many years). But the participation of California’s large investor-owned utilities in

that forward market was limited because, as we have said, 

AB 1890 strictly capped the amount of power that they 
 

Cite as: 554 U. S. ____ (2008) 11 

Opinion of the Court 

could purchase outside of the spot market. See 471 F. 3d, 

at 1068. 

That diminishment of the role of long-term contracts in

the California electricity market turned out to be one of 

the seeds of an energy crisis. In the summer of 2000, the 

price of electricity in the CalPX’s spot market jumped

dramatically—more than fifteenfold. See ibid. The increase was the result of a combination of natural, economic, and regulatory factors: “flawed market rules; inadequate addition of generating facilities in the preceding 

years; a drop in available hydropower due to drought 

conditions; a rupture of a major pipeline supplying natural

gas into California; strong growth in the economy and in

electricity demand; unusually high temperatures; an

increase in unplanned outages of extremely old generating

facilities; and market manipulation.” CAlifornians for 

Renewable Energy, Inc. v. Sellers of Energy and Ancillary 

Servs., 119 FERC ¶61,058, pp. 61,243, 61,246 (2007). 

Because California’s investor-owned utilities had for the 

most part been forbidden to obtain their power through

long-term contracts, the turmoil in the spot market hit 

them hard. See Cudahy 174. The high prices led to rolling blackouts and saddled utilities with mounting debt. 

In late 2000, the Commission took action. A central 

plank of its emergency effort was to eliminate the utilities’ 

reliance on the CalPX’s spot market and to shift their 

purchases to the forward market. To that end, FERC 

abolished the requirement that investor-owned utilities

purchase and sell all power through the CalPX and encouraged them to enter into long-term contracts. See San 

Diego Gas & Electric Co. v. Sellers of Energy and Ancillary 

Servs., 93 FERC ¶61,294, pp. 61,980, 61,982 (2000); see 

also 471 F. 3d, at 1069. The Commission also put price 

caps on wholesale electricity. See San Diego Gas & Elec. 

Co. v. Sellers of Energy and Ancillary Servs., 95 FERC 

¶61,418, p. 62,545 (2001). By June 2001, electricity prices 
 

12 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

Opinion of the Court 

began to decline to normal levels. Id., at 62,456. 

D 

Genesis of These Cases 

The principal respondents in these cases are western

utilities that purchased power under long-term contracts

during that tumultuous period in 2000 and 2001. Although they are not located in California, the high prices

in California spilled over into other Western States. See 

471 F. 3d, at 1069. Petitioners are the sellers that entered 

into the contracts with respondents. 

The contracts between the parties included rates that

were very high by historical standards. For example,

respondent Snohomish signed a 9-year contract to purchase electricity from petitioner Morgan Stanley at a rate

of $105/megawatt hour (MWh), whereas prices in the 

Pacific Northwest have historically averaged $24/MWh.

The contract prices were substantially lower, however, 

than the prices that Snohomish would have paid in the 

spot market during the energy crisis, when prices peaked 

at $3,300/MWh. See id., at 1069–1070. 

After the crisis had passed, buyer’s remorse set in and 

respondents asked FERC to modify the contracts. They

contended that the rates in the contracts should not be 

presumed to be just and reasonable under Mobile-Sierra 

because, given the sellers’ market-based tariffs, the 

contracts had never been initially approved by the Commission without the presumption. See Nevada Power Co. 

v. Enron Power Marketing, Inc., 103 FERC ¶61,353,

pp. 62,382, 62,387 (2003). Respondents also argued that

contract modification was warranted even under the Mobile-Sierra presumption because the contract rates were so 

high that they violated the public interest. See 103 FERC, 

at 62,383, 62,387–62,395. 

In a preliminary order, the Commission instructed the

Administrative Law Judge (ALJ) to consider 12 different 
Cite as: 554 U. S. ____ (2008) 13 

Opinion of the Court 

factors in deciding whether the presumption could be

overcome for the contracts, such as the terms of the contracts, the available alternatives at the time of sale, the 

relationship of the rates to Commission benchmarks, the

effect of the contracts on the financial health of the purchasers, and the impact of contract modification on national energy markets. After a hearing, the ALJ concluded that the Mobile-Sierra presumption should apply to 

the contracts and that the contracts did not seriously 

harm the public interest. In fact, according to the ALJ, 

even if the Mobile-Sierra presumption did not apply,

respondents would not be entitled to have the contracts 

modified. 103 FERC, at 62,390–62,394. 

Between the ALJ’s decision and the Commission’s ruling, the Commission’s staff issued a report (Staff Report)

concluding that unlawful activities of various sellers in the 

spot market had affected prices in the forward market. 

See id., at 62,396. Respondents raised the report at oral

argument before the Commission, and some of them argued that petitioners “were unlawfully manipulating 

market prices, thereby engaging in fraud and deception in 

violation of their market-based rate tariffs.” Ibid. Petitioners contended, however, that the Staff Report demonstrated only a correlation between rates in the spot and

forward markets, not a causal connection. See ibid. 

FERC affirmed the ALJ. The Commission first held 

that the Mobile-Sierra presumption did apply to the contracts at issue. Although agreeing with respondents that

the presumption applies only where FERC has had an

initial opportunity to review a contract rate, the Commission relied on the somewhat metaphysical ground that the

grant of market-based authority to petitioners qualified as

that initial opportunity. See 103 FERC, at 62,388–62,389. 

The Commission then held that respondents could not 

overcome the Mobile-Sierra presumption. It recognized

that the Staff Report had “found that spot market distor­
 

14 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

Opinion of the Court 

tions flowed through to forward power prices,” 103 FERC,

at 62,396–62,397, but concluded that this finding, even if 

true, was not “determinative” because: 

“a finding that the unjust and unreasonable spot market caused forward bilateral prices to be unjust and 

unreasonable would be relevant to contract modification only where there is a ‘just and reasonable’ standard of review. . . . Under the ‘public interest’ standard, to justify contract modification it is not enough 

to show that forward prices became unjust and unreasonable due to the impact of spot market dysfunctions;

it must be shown that the rates, terms and conditions 

are contrary to the public interest.” Id., at 62,397. 

The Commission determined that under the factors 

identified in Sierra, as well as under a totality-of-thecircumstances test, respondents had not demonstrated 

that the contracts threatened the public interest. See 103 

FERC, at 62,397–62,399. On rehearing, respondents

reiterated their complaints, including their charge that

“their contracts were the product of market manipulation 

by Enron, Morgan Stanley and other [sellers].” 105 FERC 

¶61,185, pp. 61,979, 61,989 (2003). The Commission answered that there was “no evidence to support a finding of 

market manipulation that specifically affected the contracts at issue.” Ibid. 

Respondents filed petitions for review in the Ninth

Circuit, which granted the petitions and remanded to the

Commission, finding two flaws in the Commission’s analysis.2 First, the court agreed with respondents that rates 

set by contract (whether pursuant to a market-based tariff 

—————— 

2 In a holding not challenged before this Court, the Ninth Circuit concluded that the contracts at issue did not contain “Memphis clause[s],” 

471 F. 3d 1053, 1079 (2006) (citing United Gas Pipe Line Co. v. Memphis 

Light, Gas and Water Div., 358 U. S. 103 (1958)), see supra, at 5, that 

would have precluded application of the Mobile-Sierra presumption. 
 

Cite as: 554 U. S. ____ (2008) 15 

Opinion of the Court 

or not) are presumptively reasonable only where FERC 

has had an initial opportunity to review the contracts

without applying the Mobile-Sierra presumption. To 

satisfy that prerequisite under the market-based tariff 

regime, the court said, the Commission must promptly 

review the terms of contracts after their formation and 

must modify those that do not appear to be just and reasonable when evaluated without the Mobile-Sierra presumption (rather than merely revoking market-based 

authority prospectively but leaving pre-existing contracts 

intact). See 471 F. 3d, at 1075–1077, 1079–1085. This 

initial review must include an inquiry into “the market 

conditions in which the contracts at issue were formed,” 

and market “dysfunction” is a ground for finding a contract not to be just and reasonable. Id., at 1085–1087. 

Second, the Ninth Circuit held that even assuming that 

the Mobile-Sierra presumption applied, the standard for

overcoming that presumption is different for a purchaser’s

challenge to a contract, namely, whether the contract rate

exceeds a “zone of reasonableness.” 471 F. 3d, at 1088– 

1090. 

We granted certiorari. See 551 U. S. ___ (2007). 

II 

A 

Application of Mobile-Sierra Presumption to 

Contracts Concluded under Market-Based 

Rate Authority 

As noted earlier, the FERC order under review here 

agreed with the Ninth Circuit’s premise that the Commission must have an initial opportunity to review a contract

without the Mobile-Sierra presumption, but maintained

that the authorization for market-based rate authority

qualified as that initial review. Before this Court, however, FERC changes its tune, arguing that there is no such 

prerequisite—or at least that FERC could reasonably 
 

16 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

Opinion of the Court 

conclude so and therefore that Chevron deference is in 

order. See Brief for FERC 20–21, 33–34; Chevron U. S. A. 

Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 

837 (1984). We will not uphold a discretionary agency

decision where the agency has offered a justification in 

court different from what it provided in its opinion. See 

SEC v. Chenery Corp., 318 U. S. 80, 94–95 (1943). But 

FERC has lucked out: The Chenery doctrine has no application to these cases, because we conclude that the Commission was required, under our decision in Sierra, to 

apply the Mobile-Sierra presumption in its evaluation of

the contracts here. That it provided a different rationale 

for the necessary result is no cause for upsetting its ruling.

“To remand would be an idle and useless formality. Chenery does not require that we convert judicial review of 

agency action into a ping-pong game.” NLRB v. WymanGordon Co., 394 U. S. 759, 766–767, n. 6 (1969) (plurality 

opinion).

We are in broad agreement with the Ninth Circuit on a 

central premise: There is only one statutory standard for

assessing wholesale electricity rates, whether set by contract or tariff—the just-and-reasonable standard. The 

plain text of the FPA states that “[a]ll rates . . . shall be 

just and reasonable.” 16 U. S. C. §824d(a); see also

§824e(a) (2000 ed., Supp. V). But we disagree with the

Ninth Circuit’s interpretation of Sierra as requiring (contrary to the statute) that the Commission apply the standard differently, depending on when a contract rate is 

challenged. In the Ninth Circuit’s view, Sierra was premised on the idea that “as long as the rate was just and

reasonable when the contract was formed, there would be 

a presumption. . .that the reasonableness continued 

throughout the term of the contract.” 471 F. 3d, at 1077. 

In other words, so long as the Commission concludes 

(either after a hearing or by allowing a rate to go into

effect) that a contract rate is just and reasonable when 
 

Cite as: 554 U. S. ____ (2008) 17 

Opinion of the Court 

initially filed, the rate will be presumed just and reasonable in future proceedings. 

That is a misreading of Sierra. Sierra was grounded in

the commonsense notion that “[i]n wholesale markets, the 

party charging the rate and the party charged [are] often

sophisticated businesses enjoying presumptively equal

bargaining power, who could be expected to negotiate a 

‘just and reasonable’ rate as between the two of them.” 

Verizon, 535 U. S., at 479. Therefore, only when the mutually agreed-upon contract rate seriously harms the 

consuming public may the Commission declare it not to be 

just and reasonable.3 Sierra thus provided a definition of 

what it means for a rate to satisfy the just-and-reasonable

standard in the contract context—a definition that applies 

regardless of when the contract is reviewed. The Ninth 

Circuit, by contrast, essentially read Sierra “as the equivalent of an estoppel doctrine,” whereby an initial Commission opportunity for review prevents the Commission from 

modifying the rates absent serious future harm to the 

public interest. Tewksbury & Lim, Applying the MobileSierra Doctrine to Market-Based Rate Contracts, 26 Energy L. J. 437, 457–458 (2005). But Sierra said nothing of

the sort. And given that the Commission’s passive permission for a rate to go into effect does not constitute a

finding that the rate is just and reasonable, it would be

odd to treat that initial “opportunity for review” as curtailing later challenges.

The Ninth Circuit found support for its prerequisite in

our decision in FPC v. Texaco Inc., 417 U. S. 380 (1974).

In that case, we warned that the Commission’s attempt to 

rely solely on market forces to evaluate rates charged by 

—————— 

3We do not say, as the dissent alleges, post, at 7 (opinion of 

STEVENS, J.), that the public interest is not also relevant in a challenge

to unilaterally set rates. But it is the “‘sole concern’” in a contract case. 

See FPC v. Sierra Pacific Power Co., 350 U. S. 348, 355 (1956). 
 

 

18 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

Opinion of the Court 

small natural-gas producers was inconsistent with the 

Natural Gas Act’s insistence that rates be just and reasonable. See id., at 397. The Ninth Circuit apparently

took this to mean that all initially filed contracts must be 

subject to review without the Mobile-Sierra presumption.

But Texaco had nothing to do with that doctrine. It held 

that the Commission had improperly implemented a 

scheme of total deregulation by applying no standard of

review at all to small-producer rates. See 417 U. S., at 

395–397. It did not cast doubt on the proposition that in a

proper regulatory scheme, the ordinary mode for evaluating contractually set rates is to look to whether the rates 

seriously harm the public interest, not to whether they are 

unfair to one of the parties that voluntarily assented to

the contract. Cf. id., at 391, n. 4. 

Nor do we agree with the Ninth Circuit that FERC must

inquire into whether a contract was formed in an environment of market “dysfunction” before applying the 

Mobile-Sierra presumption. Markets are not perfect, and

one of the reasons that parties enter into wholesale-power 

contracts is precisely to hedge against the volatility that 

market imperfections produce. That is why one of the 

Commission’s responses to the energy crisis was to remove 

regulatory barriers to long-term contracts. It would be a 

perverse rule that rendered contracts less likely to be

enforced when there is volatility in the market. (Such a 

rule would come into play, after all, only when a contract 

formed in a period of “dysfunction” did not significantly

harm the consuming public, since contracts that seriously 

harm the public should be set aside even under the Mobile-Sierra presumption.) By enabling sophisticated parties who weathered market turmoil by entering long-term

contracts to renounce those contracts once the storm has 

passed, the Ninth Circuit’s holding would reduce the

incentive to conclude such contracts in the future. Such a 

rule has no support in our case law and plainly under­
Cite as: 554 U. S. ____ (2008) 19 

Opinion of the Court 

mines the role of contracts in the FPA’s statutory scheme. 

To be sure, FERC has ample authority to set aside a

contract where there is unfair dealing at the contract

formation stage—for instance, if it finds traditional 

grounds for the abrogation of the contract such as fraud or

duress. See 103 FERC, at 62,399–62,400 (“[T]here is no 

evidence of unfairness, bad faith, or duress in the original 

negotiations”). In addition, if the “dysfunctional” market 

conditions under which the contract was formed were 

caused by illegal action of one of the parties, FERC should

not apply the Mobile-Sierra presumption. See Part III, 

infra. But the mere fact that the market is imperfect, or

even chaotic, is no reason to undermine the stabilizing 

force of contracts that the FPA embraced as an alternative 

to “purely tariff-based regulation.” Verizon, 535 U. S., at 

479. We may add that evaluating market “dysfunction” is 

a very difficult and highly speculative task—not one that 

the FPA would likely require the agency to engage in 

before holding sophisticated parties to their bargains. 

We reiterate that we do not address the lawfulness of 

FERC’s market-based-rates scheme, which assuredly has 

its critics. But any needed revision in that scheme is 

properly addressed in a challenge to the scheme itself, not 

through a disfigurement of the venerable Mobile-Sierra 

doctrine. We hold only that FERC may abrogate a valid 

contract only if it harms the public interest. 

B 

Application of “Excessive Burden”

Exception to High-Rate Challenges
 

We turn now to the Ninth Circuit’s second holding: that

a “zone of reasonableness” test should be used to evaluate 

a buyer’s challenge that a rate is too high. In our view 

that fails to accord an adequate level of protection to 

contracts. The standard for a buyer’s challenge must be

the same, generally speaking, as the standard for a seller’s 
 

20 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

Opinion of the Court 

challenge: The contract rate must seriously harm the 

public interest. That is the standard that the Commission 

applied in the proceedings below.

We are again in agreement with the Ninth Circuit on a 

starting premise: It is clear that the three factors we 

identified in Sierra—“where [a rate] might impair the 

financial ability of the public utility to continue its service, 

cast upon other consumers an excessive burden, or be

unduly discriminatory,” 350 U. S., at 355—are not all 

precisely applicable to the high-rate challenge of a purchaser (where, for example, the relevant question is not 

whether “other customers” [of the utility] would be excessively burdened, but whether any customers of the purchaser would be); and that those three factors are in any 

event not the exclusive components of the public interest. 

In its decision below, the Commission recognized both 

these realities. See 103 FERC, at 62,397 (“Nevada Companies failed to show that the contract terms at issue 

impose an excessive burden on their customers” (emphasis 

added)); id., at 62,398 (“The record also demonstrates that 

Snohomish presented no evidence that its contract with

Morgan Stanley adversely affected Snohomish or its ratepayers” (emphasis added)); id., at 62,398–62,399 (evaluating the “totality of circumstances”); see also Brief for

FERC 41–42.4 

Where we disagree with the Ninth Circuit is on the 

—————— 

4The dissent criticizes the Commission’s decision because it took into 

account under the heading “totality of the circumstances” only the

circumstances of the contract formation, not “circumstances exogenous 

to contract negotiations, including natural disasters and market 

manipulation by entities not parties to the challenged contract.” Post, 

at 13. Those considerations are relevant to whether the contracts 

impose an “excessive burden” on consumers relative to what they would

have paid absent the contracts. It is precisely our uncertainty whether 

the Commission considered those “circumstances exogenous to contract

negotiations,” discussed in Part III of our opinion, that causes us to

approve the remand to FERC. 
 

 

Cite as: 554 U. S. ____ (2008) 21 

Opinion of the Court 

overarching “zone of reasonableness” standard it established for evaluating a high-rate challenge and setting 

aside a contract rate: whether consumers’ electricity bills

“are higher than they would otherwise have been had the 

challenged contracts called for rates within the just and 

reasonable range,” i.e., rates that equal “marginal cost.”5 

471 F. 3d, at 1089. The Ninth Circuit derived this test 

from our statement in Sierra that a contract rate would 

have to be modified if it were so low that it imposed an 

“excessive burden” on other wholesale purchasers. The 

Ninth Circuit took “excessive burden” to mean merely the 

burden caused when one set of consumers is forced to pay 

above marginal cost to compensate for below-marginal­

—————— 

5Elsewhere the Ninth Circuit softened this standard somewhat, saying that “[e]ven if a particular rate exceeds marginal cost . . . it may 

still be within this reasonable range—or ‘zone of reasonableness’—if 

that higher-than-cost-based price results from normal market forces 

and is part of a general trend toward rates that do reflect cost.” 471 

F. 3d, at 1089. We are not sure (and we think no one can be sure) 

precisely what this means. It has no basis in our opinions, and is in

any event wrong because its point of departure (the general principle 

that rates cannot exceed marginal cost) contradicts Mobile-Sierra. 

The Ninth Circuit purported to find support for its “zone of reasonableness” test in the case law of the District of Columbia Circuit. But 

the cited case stands only for the proposition that a market-based

scheme must assure that market forces will, “over the long pull,” cause

rates to approximate marginal cost. Interstate Natural Gas Assn. of 

Am. v. FERC, 285 F. 3d 18, 31 (2002). Nowhere does the opinion

suggest that the standard for reforming a particular contract validly

entered into under a market-based scheme is whether the rates approximate marginal cost.

By the same token, our approval of FERC’s decision not to set prospective area rates solely with reference to pre-existing contract prices, 

Permian Basin Area Rate Cases, 390 U. S. 747, 792–793 (1968), does

not support, as the dissent thinks, post, at 8, n. 2, the view that the 

standard for abrogating an existing, valid contract is anything less than 

the Mobile-Sierra standard. That is the standard Permian Basin 

applied when actually confronted with the issue of contract modification. See 390 U. S., at 781–784, 821–822. 
22 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

Opinion of the Court 

cost rates charged other consumers. See 471 F. 3d, at 

1088. And it proceeded to apply a similar notion of “excessive burden” to high-rate challenges (where all the burden

of the above-marginal-cost contract rate falls on the purchaser’s own customers, and does not affect the customers 

of third parties). Id., at 1089. That is a misreading of 

Sierra and our later cases. A presumption of validity that

disappears when the rate is above marginal cost is no 

presumption of validity at all, but a reinstitution of costbased rather than contract-based regulation. We have 

said that, under the Mobile-Sierra presumption, setting

aside a contract rate requires a finding of “unequivocal 

public necessity,” Permian Basin, 390 U. S., at 822, or 

“extraordinary circumstances,” Arkansas Louisiana Gas 

Co. v. Hall, 453 U. S. 571, 582 (1981). In no way can these

descriptions be thought to refer to the mere exceeding of 

marginal cost.

The Ninth Circuit’s standard would give short shrift to

the important role of contracts in the FPA, as reflected in 

our decision in Sierra, and would threaten to inject more 

volatility into the electricity market by undermining a key 

source of stability. The FPA recognizes that contract

stability ultimately benefits consumers, even if short-term 

rates for a subset of the public might be high by historical

standards—which is why it permits rates to be set by 

contract and not just by tariff. As the Commission has 

recently put it, its “first and foremost duty is to protect 

consumers from unjust and unreasonable rates; however, 

. . . uncertainties regarding rate stability and contract 

sanctity can have a chilling effect on investments and a

seller’s willingness to enter into long-term contracts and 

this, in turn, can harm customers in the long run.” Market-Based Rates, ¶6, 72 Fed. Reg. 33906–33907. 

Besides being wrong in principle, in its practical effect 

the Ninth Circuit’s rule would impose an onerous new 

burden on the Commission, requiring it to calculate the 
 

 

 

Cite as: 554 U. S. ____ (2008) 23 

Opinion of the Court 

marginal cost of the power sold under a market-based 

contract. Assuming that FERC even ventured to undertake such an analysis, rather than reverting to the ancien 

régime of cost-of-service ratesetting, the regulatory costs

would be enormous. We think that the FPA intended to 

reserve the Commission’s contract-abrogation power for

those extraordinary circumstances where the public will 

be severely harmed.6 

III 

Defects in FERC’s Analysis Supporting Remand 

Despite our significant disagreement with the Ninth 

—————— 

6The dissent claims that we have misread the FPA because its provisions “do not distinguish between rates set unilaterally by tariff and

rates set bilaterally by contract.” Post, at 2. But the dissent’s interpretation, whatever plausibility it has as an original matter, cannot be

squared with Sierra, which plainly distinguished between unilaterally 

and bilaterally set rates, and said that the only relevant consideration 

for the Commission in the latter case is whether the public interest is

harmed. And the circumstances identified in Sierra as implicating the

public interest refer to something more than a small dent in the consumer’s pocket, which is why our subsequent cases have described the

standard as a high one. 

At the end of the day, the dissent simply argues against the settled

understanding of the FPA that has prevailed in this Court, lower 

courts, and the Commission for half a century. Although the dissent is 

correct that we have never used the phrase “Mobile-Sierra doctrine” in 

our cases, that is probably because the understanding of it was so

uniform that no circuit split concerning its meaning arose until the

Ninth Circuit’s erroneous decision in these cases. If one searches the 

Commission’s reports, over 600 decisions since 2000 alone have cited

the doctrine, see Brief for Electric Power Supply Association et al. as 

Amici Curiae 15, and the Courts of Appeals have used the term “Mobile-Sierra doctrine” (or “Sierra-Mobile” doctrine) over 75 times since 

1974. If there were ever a context where long-settled understanding 

should be honored it is here, where a statutory decision (subject to

revision by Congress) has been understood the same way for many 

years by lower courts, by this Court, by the federal agency the statute

governs, and hence surely by the private actors trying to observe the 

law. 
24 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

Opinion of the Court 

Circuit, we find two errors in the Commission’s analysis,

and we therefore affirm the judgment below on alternative 

grounds.

First, it appears, as the Ninth Circuit concluded, see 471 

F. 3d, at 1090, that the Commission may have looked 

simply to whether consumers’ rates increased immediately

upon the relevant contracts’ going into effect, rather than

determining whether the contracts imposed an excessive

burden on consumers “down the line,” relative to the rates 

they could have obtained (but for the contracts) after 

elimination of the dysfunctional market. For example, the 

Commission concluded that two of the respondents would

experience “rate decreases of approximately 20 percent for 

retail service” during the period covered by the contracts. 

103 FERC, at 62,397. But the baseline for that computation was the rate they were paying before the contracts

went into effect. That disparity is certainly a relevant 

consideration; but so is the disparity between the contract 

rate and the rates consumers would have paid (but for the

contracts) further down the line, when the open market

was no longer dysfunctional. That disparity, past a certain point, could amount to an “excessive burden.” That is 

what was contemplated by Sierra, which involved a challenge 5 years into a 15-year contract. The “excessive 

burden” on other customers to which the opinion referred

was assuredly the current burden, and not only the burden imposed at the very outset of the contract. See 350 

U. S., at 355. The “unequivocal public necessity” that

justifies overriding the Mobile-Sierra presumption does

not disappear as a factor once the contract enters into 

force. Thus, FERC’s analysis on this point was flawed—or 

at least incomplete. As the Ninth Circuit put it, “[i]t is

entirely possible that rates had increased so high during

the energy crises because of dysfunction in the spot market that, even with the acknowledged decrease in rates, 

consumers still paid more under the forward contracts 
Cite as: 554 U. S. ____ (2008) 25 

Opinion of the Court 

than they otherwise would have.” 471 F. 3d, at 1090. If 

that is so, and if that increase is so great that, even taking

into account the desirability of fostering marketstabilizing long-term contracts, the rates impose an excessive burden on consumers or otherwise seriously harm the 

public interest, the rates must be disallowed.

Second, respondents alleged before FERC that some of 

the petitioners in these cases had engaged in market 

manipulation in the spot market. See, e.g., 105 FERC, at 

61,989 (“Snohomish and Nevada Companies argue that 

their contracts were the product of market manipulation 

by Enron, Morgan Stanley and other Respondents, which,

as established by the Commission Staff, engaged in market manipulation”). The Staff Report concluded, as we 

have said, that the abnormally high prices in the spot 

market during the energy crisis influenced the terms of 

contracts in the forward market. But the Commission 

dismissed the relevance of the Staff Report on the ground 

that it had not demonstrated that forward market prices 

were so high as to overcome the Mobile-Sierra presumption. We conclude, however, that if it is clear that one 

party to a contract engaged in such extensive unlawful 

market manipulation as to alter the playing field for contract negotiations, the Commission should not presume 

that the contract is just and reasonable. Like fraud and 

duress, unlawful market activity that directly affects

contract negotiations eliminates the premise on which the 

Mobile-Sierra presumption rests: that the contract rates 

are the product of fair, arms-length negotiations. The 

mere fact that the unlawful activity occurred in a different

(but related) market does not automatically establish that 

it had no effect upon the contract—especially given the 

Staff Report’s (unsurprising) finding that high prices in

the one market produced high prices in the other. We are 

unable to determine from the Commission’s orders 

whether it found the evidence inadequate to support the 

claim that respondents’ alleged unlawful activities af­
26 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

Opinion of the Court 

fected the contracts at issue here. It said in its order on 

rehearing, 105 FERC, at 61,989, that “[w]e . . . found no 

evidence to support a finding of market manipulation [by

respondents] that specifically affected the contracts at

issue.” But perhaps that must be read in light of the

Commission’s above described rejection of the Staff Report 

on the ground that high spot market prices caused by

manipulation are irrelevant unless the forward market 

prices fail the Mobile-Sierra standard; and in light of the 

statement in its initial order, in apparent response to the

claim of spot-market manipulation by respondents, 103 

FERC, at 62,397, that “a finding that the unjust and 

unreasonable spot market prices caused forward bilateral

prices to be unjust and unreasonable would be relevant to

contract modification only where there is a ‘just and reasonable’ standard of review.” 

We emphasize that the mere fact of a party’s engaging

in unlawful activity in the spot market does not deprive its 

forward contracts of the benefit of the Mobile-Sierra presumption. There is no reason why FERC should be able to 

abrogate a contract on these grounds without finding a

causal connection between unlawful activity and the 

contract rate. Where, however, causality has been established, the Mobile-Sierra presumption should not apply. 

On remand, the Commission should amplify or clarify

its findings on these two points. The judgment of the

Court of Appeals is affirmed, and the cases are remanded 

for proceedings consistent with this opinion. 

It is so ordered. 

THE CHIEF JUSTICE and JUSTICE BREYER took no part in 

the consideration or decision of these cases. 
_________________ 

_________________ 

Cite as: 554 U. S. ____ (2008) 1 

Opinion of GINSBURG, J. 

SUPREME COURT OF THE UNITED STATES 

Nos. 06–1457 and 06–1462 

MORGAN STANLEY CAPITAL GROUP INC., 

PETITIONER 

06–1457 v.

PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH 

COUNTY, WASHINGTON, ET AL. 

AMERICAN ELECTRIC POWER SERVICE 

CORPORATION, ET AL., PETITIONERS 

06–1462 v.

PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH 

COUNTY, WASHINGTON, ET AL. 

ON WRITS OF CERTIORARI TO THE UNITED STATES COURT OF 

APPEALS FOR THE NINTH CIRCUIT 

[June 26, 2008] 

JUSTICE GINSBURG, concurring in part and concurring in 

the judgment. 

Recommending denial of the petition for certiorari in

these cases, the Federal Energy Regulatory Commission 

urged that review “would be premature” given “the interlocutory nature of th[e] issues.” Brief for Respondent

Federal Energy Regulatory Commission in Opposition 22, 

25. In this regard, the Commission called our attention to

“new measures” it had taken, as well as recent enactments 

by Congress, bearing on “the evaluation of contracts under 

Mobile-Sierra.” Id., at 14–16. In view of these developments, the Commission suggested, this Court should await 

“the better-developed record that would be produced by

FER[C] . . . on remand.” Id., at 22. I agree that the Court 

would have been better informed had it awaited the Com-
2 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

Opinion of GINSBURG, J. 

mission’s decision on remand. I think it plain, however, 

that the Commission erred in the two respects identified

by the Court. See ante, at 24–26. I therefore concur in the 

Court’s judgment and join Part III of the Court’s opinion. 
_________________ 

_________________ 

Cite as: 554 U. S. ____ (2008) 1 

STEVENS, J., dissenting 

SUPREME COURT OF THE UNITED STATES 

Nos. 06–1457 and 06–1462 

MORGAN STANLEY CAPITAL GROUP INC., 

PETITIONER 

06–1457 v. 

PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH 

COUNTY, WASHINGTON, ET AL. 

AMERICAN ELECTRIC POWER SERVICE 

CORPORATION, ET AL., PETITIONERS 

06–1462 v. 

PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH 

COUNTY, WASHINGTON, ET AL. 

ON WRITS OF CERTIORARI TO THE UNITED STATES COURT OF 

APPEALS FOR THE NINTH CIRCUIT 

[June 26, 2008] 

JUSTICE STEVENS, with whom JUSTICE SOUTER joins,

dissenting. 

The basic question presented by these complicated cases

is whether “the Federal Energy Regulatory Commission 

(FERC or Commission) must presume that the rate set out 

in a freely negotiated wholesale-energy contract meets the 

‘just and reasonable’ requirement imposed by law.” Ante, 

at 1. The opening sentence of the Court’s opinion tells us

that the “Mobile-Sierra doctrine”—a term that makes its 

first appearance in the United States Reports today—

mandates an affirmative answer. This holding finds no

support in either case that lends its name to the doctrine. 

Nevertheless, in the interest of guarding against “disfigurement of the venerable Mobile-Sierra doctrine,” ante, at 

19, the Court mangles both the governing statute and 
 

 

 

 

2 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

STEVENS, J., dissenting 

precedent. 

I 

Under the Federal Power Act (FPA), 41 Stat. 1063, 16 

U. S. C. §791a et seq., wholesale electricity prices are 

established in the first instance by public utilities, either 

via tariffs or in contracts with purchasers. §824d(c).

Whether set by tariff or contract, all rates must be filed

with the Commission. See ibid. Section 205(a) of the FPA

provides, “All rates and charges . . . shall be just and 

reasonable, and any such rate or charge that is not just 

and reasonable is hereby declared to be unlawful.” 16 

U. S. C. §824d(a). Pursuant to §206(a), if FERC determines “that any rate . . . or that any rule, regulation,

practice, or contract affect[ing] such rate . . . is unjust [or]

unreasonable . . . , the Commission shall determine the 

just and reasonable rate, . . . rule, regulation, practice, or

contract to be thereafter observed and in force, and shall 

fix the same by order.” 16 U. S. C. §824e(a). These provisions distinguish between the rate-setting roles of utilities

(which initially set rates) and the Commission (which may

override utility-set rates that are not just and reasonable), 

but they do not distinguish between rates set unilaterally

by tariff and rates set bilaterally by contract. However the 

utility sets its prices, the standard of review is the same—

rates must be just and reasonable.

The Court purports to acknowledge that “[t]here is only

one statutory standard for assessing wholesale electricity

rates, whether set by contract or tariff—the just-andreasonable standard.” Ante, at 16. Unlike rates set by

tariff, however, the Court holds that any “freely negotiated” contract rate is presumptively just and reasonable 

unless it “seriously harms” the public interest. Ante, at 1. 

According to the Court, this presumption represents a 

“differing application of [the] just-and-reasonable standard,” but not a different standard altogether. Ante, at 6. 
 

Cite as: 554 U. S. ____ (2008) 3 

STEVENS, J., dissenting 

I disagree. There is no significant difference between

requiring a heightened showing to overcome an otherwise 

conclusive presumption and imposing a heightened standard of review. I agree that applying a separate standard

of review to contract rates is “obviously indefensible,” 

ibid., but that is also true with respect to the Court’s

presumption.

Even if the “Mobile-Sierra presumption” were not tantamount to a separate standard, nothing in the statute

mandates “differing application” of the statutory standard 

to rates set by contract. Ibid. Section 206(a) of the FPA

provides, “without qualification or exception,” that FERC 

may replace any unjust or unreasonable contract with a 

lawful contract. Permian Basin Area Rate Cases, 390 

U. S. 747, 783–784 (1968) (construing identical language 

in the Natural Gas Act, 15 U. S. C. §717d(a)). The statute 

does not say anything about a mandatory presumption for 

contracts, much less define the burden of proof for overcoming it or delineate the circumstances for its nonapplication. Cf. ante, at 1, 19. Nor does the statute prohibit 

FERC from considering marginal cost when reviewing 

rates set by contract. Cf. ante, at 20–22, and n. 5. 

If Congress had intended to impose such detailed constraints on the Commission’s authority to review contract

rates, it would have done so itself in the FPA. Congress 

instead used the general words “just and reasonable” 

because it wanted to give FERC, not the courts, wide 

latitude in setting policy. As we explained in Chevron 

U. S. A. Inc. v. Natural Resources Defense Council, Inc., 

467 U. S. 837, 843–844 (1984): 

 “‘The power of an administrative agency to administer a congressionally created . . . program necessarily requires the formulation of policy and the making 

of rules to fill any gap left, implicitly or explicitly, by 

Congress.’ Morton v. Ruiz, 415 U. S. 199, 231 (1974). 
 

4 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

STEVENS, J., dissenting 

If Congress has explicitly left a gap for the agency to 

fill, there is an express delegation of authority to the 

agency to elucidate a specific provision of the statute

by regulation. Such legislative regulations are given

controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute. Sometimes the legislative delegation to an agency on a particular question is implicit rather than explicit. In 

such a case, a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency.”

(Footnote omitted.) 

Consistent with this understanding of administrative

law, our cases interpreting the FPA have invariably “emphasized that courts are without authority to set aside any

rate adopted by the Commission which is within a ‘zone of

reasonableness.’” Permian Basin, 390 U. S., at 797. But 

see ante, at 19 (asserting that “a ‘zone of reasonableness’ 

test . . . fails to accord an adequate level of protection to

contracts”). This deference makes eminent sense because 

“rate-making agencies are not bound to the service of any

single regulatory formula; they are permitted, unless their

statutory authority otherwise plainly indicates, ‘to make

the pragmatic adjustments which may be called for by 

particular circumstances.’” Permian Basin, 390 U. S., at 

776–777. Despite paying lipservice to this principle, see 

ante, at 3, the Court binds the Commission to a rigid 

formula of the Court’s own making.

Having found no statutory text that supports its vision

of the Mobile-Sierra doctrine, the Court invokes the “important role of contracts in the FPA.” Ante, at 22. But 

contracts play an “important role” in the FPA only insofar 

as the statute “departed from the scheme of purely tariffbased regulation.” Verizon Communications Inc. v. FCC, 

535 U. S. 467, 479 (2002). In allowing parties to establish 
 

Cite as: 554 U. S. ____ (2008) 5 

STEVENS, J., dissenting 

rates by contract, Congress did not intend to immunize 

such rates from just-and-reasonable review. Both United 

Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U. S. 

332 (1956), and FPC v. Sierra Pacific Power Co., 350 U. S. 

348 (1956), the supposed progenitors of the “Mobile-Sierra 

presumption,” make this point in no uncertain terms. See 

Sierra, 350 U. S., at 353 (“The Commission has undoubted 

power under §206(a) to prescribe a change in contract 

rates whenever it determines such rates to be unlawful”); 

Mobile, 350 U. S., at 344 (“[C]ontracts remain fully subject 

to the paramount power of the Commission to modify

them when necessary in the public interest”).1 Accordingly, the fact that the FPA tolerates contracts does not

make it subservient to contracts. 

II 

Neither of the eponymous cases in the “Mobile-Sierra 

presumption,” nor any of our subsequent decisions, substantiates the Court’s atextual reading of §§205 and 206. 

As the Court acknowledges, Mobile itself says nothing

about what standard of review applies to rates established

by contract. See ante, at 3–4. Rather, Mobile merely held 

that utilities cannot unilaterally abrogate contracts with 

purchasers by filing new rate schedules with the Commission. See 350 U. S., at 339–341. The Court neglects to

mention, however, that although Mobile had no occasion to 

comment on the standard of review, it did imply that

Congress would not have permitted parties to establish 

rates by contract but for “the protection of the public 

—————— 

1See also, e.g., Arkansas Louisiana Gas Co. v. Hall, 453 U. S. 571, 

582 (1981) (Arkla) (“[T]he clear purpose of the congressional scheme” 

for rate filing is to “gran[t] the Commission an opportunity in every 

case to judge the reasonableness of the rate”); Permian Basin Area Rate 

Cases, 390 U. S. 747, 784 (1968) (“[T]he Commission has plenary 

authority to limit or to proscribe contractual arrangements that contravene the relevant public interests”). 
 

6 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

STEVENS, J., dissenting 

interest being afforded by supervision of the individual

contracts, which to that end must be filed with the Commission and made public.” Id., at 339. 

In Sierra, a public utility entered into a long-term contract to sell electricity “at a special low rate” in order to 

forestall potential competition. See 350 U. S., at 351–352. 

Several years later the utility complained that the rate

provided too little profit and was therefore not “just and 

reasonable.” The Commission agreed and set aside the 

rate “solely because it yield[ed] less than a fair return on

the net invested capital.” See id., at 354–355. The Court 

vacated and remanded on the ground that the Commission 

had applied an erroneous standard. “[W]hile it may be 

that the Commission may not normally impose upon a

public utility a rate which would produce less than a fair 

return,” the Court reasoned, “it does not follow that the 

public utility may not itself agree by contract to a rate

affording less than a fair return or that, if it does so, it is

entitled to be relieved of its improvident bargain.” Id., at 

355. When the seller has agreed to a rate that it later 

challenges as too low, “the sole concern of the Commission

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 discriminatory.” Ibid. The Court further elaborated on what it meant by the “public interest”: 

“That the purpose of the power given the Commission

by §206(a) is the protection of the public interest, as

distinguished from the private interests of the utilities, is evidenced by the recital in §201 of the Act that 

the scheme of regulation imposed ‘is necessary in the

public interest.’ When §206(a) is read in the light of 

this purpose, it is clear that a contract may not be 

said to be either ‘unjust’ or ‘unreasonable’ simply be-
Cite as: 554 U. S. ____ (2008) 7 

STEVENS, J., dissenting 

cause it is unprofitable to the public utility.” Ibid. 

Sierra therefore held that, in accordance with the 

statement of policy in the FPA, 16 U. S. C. §824(a),

whether a rate is “just and reasonable” is measured 

against the public interest, not the private interests of

regulated sellers. Contrary to the opinion of the Court, 

see ante, at 23, n. 6, Sierra instructs that the public interest is the touchstone for just-and-reasonable review of all 

rates, not just contract rates. Sierra drew a distinction 

between the Commission’s authority to impose low rates 

on utilities and its authority to abrogate low rates agreed

to by utilities because these actions impact the public 

interest differently, not because the public interest governs rates set bilaterally but not rates set unilaterally. 

When the Commission imposes rates that afford less than

a fair return, it compromises the public’s interest in attracting necessary capital. The impact is different, however, if a utility has agreed to a low rate because investors

recognize that the utility, not the regulator, is responsible 

for the unattractive rate of return. 

Sierra used “public interest” as shorthand for the interest of consumers in paying “‘the lowest possible reasonable rate consistent with the maintenance of adequate 

service in the public interest.’” Permian Basin, 390 U. S., 

at 793 (quoting Atlantic Refining Co. v. Public Serv. 

Comm’n of N. Y., 360 U. S. 378, 388 (1959)). Whereas 

high rates directly implicate this interest, low rates do so 

only indirectly, such as when the rate is so low that it

“might impair the financial ability of the public utility to 

continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory.” Sierra, 350 

U. S., at 355. Nothing in Sierra purports to mandate a

“serious harm” standard of review, or to require any assumption that high rates and low rates impose symmetric

burdens on the public interest. Cf. ante, at 19–20. As we 
 

8 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

STEVENS, J., dissenting 

later explained in FPC v. Texaco Inc., 417 U. S. 380, 399 

(1974), the Commission cannot ignore even “a small dent

in the consumer’s pocket” because “the Act makes unlawful all rates which are not just and reasonable, and does

not say a little unlawfulness is permitted.” 

Brushing aside the text of the FPA, as well as the holdings in Mobile and Sierra themselves, the Court cherry 

picks language from Verizon, Arkla, and Permian Basin. 

Both Verizon and Arkla mentioned the Mobile-Sierra line 

of cases only in passing, and neither case had anything to

do with just-and-reasonable review of rates. See Verizon, 

535 U. S., at 479; Arkla, 453 U. S. 571, 582 (1981). Furthermore, the statement in Permian Basin about “unequivocal public necessity,” 390 U. S., at 822, speaks to the

difficulty of establishing injury to the public interest in the 

context of a low-rate challenge, not a high-rate challenge.2 

—————— 

2The Court repeatedly quotes the following snippet from the 75-page 

opinion in Permian Basin: “The regulatory system created by the Act is 

premised on contractual agreements voluntarily devised by the regulated companies; it contemplates abrogation of these agreements only 

in circumstances of unequivocal public necessity.” 390 U. S., at 822 

(cited ante, at 5, 22, 24). Like FPC v. Sierra Pacific Power Co., 350 

U. S. 348 (1956), however, Permian Basin made this statement in the 

course of rejecting a low-rate challenge. Read in context, the Court’s 

reference to “unequivocal public necessity” is a loose restatement of 

Sierra, which required “evidence of injury to the public interest,” and

which underscored how rarely a utility will be able to demonstrate that

a “contract price is so ‘low as to adversely affect the public interest.’ ” 

390 U. S., at 820–821 (quoting Sierra, 350 U. S., at 355). The Court’s 

expansive reading of the “unequivocal public necessity” statement 

cannot be squared with Permian Basin’s discussion of the Commission’s 

authority to review rates set by contract: “Although the Natural Gas

Act is premised upon a continuing system of private contracting, the

Commission has plenary authority to limit or to proscribe contractual 

arrangements that contravene the relevant public interests.” 390 U. S., 

at 784 (citation omitted). Nor can it be reconciled with Permian Basin’s 

rejection of the producers’ arguments (1) that the Commission “wrongly

invalidated existing contracts” by imposing a ceiling on rates, see id., at 

781–784, and (2) that the Commission was compelled to adopt contract 
 

 

Cite as: 554 U. S. ____ (2008) 9 

STEVENS, J., dissenting 

The Court’s reliance on these few stray sentences calls to

mind our admonishment in Permian Basin: “The Commission’s exercise of its regulatory authority must be assessed 

in light of its purposes and consequences, and not by 

references to isolated phrases from previous cases.” Id., at 

791, n. 60. 

III 

Lacking any grounding in the FPA or precedent, the

Court concludes, as a matter of policy, that the MobileSierra presumption is necessary to ensure stability in

volatile energy markets and to reduce regulatory costs.

See ante, at 22–23. Of course, “the desirability of fostering

market-stabilizing long-term contracts,” ante, at 25, plays

into the public interest insofar as the “Commission’s responsibilities include the protection of future, as well as 

present, consumer interests,” Permian Basin, 390 U. S., at 

798; see also United Gas Pipe Line Co. v. Memphis Light, 

Gas and Water Div., 358 U. S. 103, 113 (1958) (“It seems

plain that Congress . . . was not only expressing its conviction that the public interest requires the protection of

consumers from excessive prices for natural gas, but was 

also manifesting its concern for the legitimate interests of

natural gas companies in whose financial stability the gasconsuming public has a vital stake”). But under the FPA, 

Congress has charged FERC, not the courts, with balancing the short-term and long-term interests of consumers.

See Permian Basin, 390 U. S., at 792 (“The court’s responsibility is not to supplant the Commission’s balance of 

these interests with one more nearly to its liking, but 

instead to assure itself that the Commission has given 

reasoned consideration to each of the pertinent factors”). 

Moreover, not even FERC has the authority to endorse 

the rule announced by the Court today. The FPA does not 

—————— 

prices as the basis for computing area rates, see id., at 792–795. 
10 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

STEVENS, J., dissenting 

indulge, much less require, a “practically insurmountable”

presumption, see Papago Tribal Util. Auth. v. FERC, 723 

F. 2d 950, 954 (CADC 1983) (opinion for the court by

Scalia, J.), that all rates set by contract comport with the 

public interest and are therefore just and reasonable. 

Congress enacted the FPA precisely because it concluded 

that regulation was necessary to protect consumers from 

deficient markets. It follows, then, that “the Commission 

lacks the authority to place exclusive reliance on market

prices.” Texaco, 417 U. S., at 400; see also id., at 399 (“In

subjecting producers to regulation because of anticompetitive conditions in the industry, Congress could not have

assumed that ‘just and reasonable’ rates could conclusively be determined by reference to market price”). For 

this reason, we have already rejected the policy rationale 

proffered by the Court today: 

“It may be, as some economists have persuasively argued, that the assumptions of the 1930’s about the

competitive structure of the natural gas industry, if

true then, are no longer true today. It may also be

that control of prices in this industry, in a time of 

shortage, if such there be, is counterproductive to the

interests of the consumer in increasing the production

of natural gas. It is not the Court’s role, however, to 

overturn congressional assumptions embedded into 

the framework of regulation established by the Act. 

This is a proper task for the Legislature where the 

public interest may be considered from the multifaceted points of view of the representational process.” 

Id., at 400 (footnote omitted). 

Balancing the short-term and long-term interests of

consumers entails difficult judgment calls, and to the 

extent FERC actually engages in this balancing, its reasoned determination is entitled to deference. But FERC 

cannot abdicate its statutory responsibility to ensure just 
 

 

Cite as: 554 U. S. ____ (2008) 11 

STEVENS, J., dissenting 

and reasonable rates through the expedient of a heavyhanded presumption. This is not to say that the Commission should abrogate any contract that increases rates, but 

to underscore that the agency is “obliged at each step of its 

regulatory process to assess the requirements of the broad 

public interests entrusted to its protection by Congress.” 

Permian Basin, 390 U. S., at 791. 

IV 

Even if, as the Court holds today, the “Mobile-Sierra 

presumption” is merely a “differing application” of the 

statutory just-and-reasonable standard, FERC’s orders 

must be set aside because they were not decided on this 

basis. 

The FERC orders repeatedly aver that the agency is

applying a “public interest” standard different from and 

distinctly more demanding than the statutory standard.

See, e.g., App. 1198a (“[T]he burden of showing that a 

contract is contrary to the public interest is a higher burden than showing that a contract is not just and reasonable. . . . The fact that a contract may be found to be unjust and unreasonable under [§§205 and 206] does not in

and of itself demonstrate that the contract is contrary to

the public interest under the Supreme Court cases”). 

Indeed, the Commission’s misunderstanding of our cases

is so egregious that the sellers, concerned that the orders

would be overturned, asked the Commission for “clarification that the public interest standard of review does not 

authorize unjust and unreasonable rates.” Id., at 1506a, 

1567a. FERC clarified as follows: 

“[I]f rates . . . become unjust and unreasonable and

the contract at issue is subject to the Mobile-Sierra 

standard of review, the Commission under court 

precedent may not change the contract simply because 

it is no longer just and reasonable. If parties’ marketbased rate contracts provide for the public interest 
 

12 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

STEVENS, J., dissenting 

standard of review, the Commission is bound to a 

higher burden to support modification of such contracts.” Id., at 1506a, 1567a. 

Whereas in Texaco we faulted the Commission for failing 

to “expressly mention the just-and-reasonable standard,” 

417 U. S., at 396, in these cases FERC refused outright to

apply that standard.3 

In addition to misrepresenting FERC’s understanding of 

the Mobile-Sierra doctrine as a presumption rather than a 

separate standard, the Court overstates the extent to

which FERC considered the lawfulness of the rates. The 

Court recognizes, as it must, that the three factors identified in Sierra are neither exclusive nor “precisely applicable to the high-rate challenge of a purchaser.” See ante, at 

20; Brief for Respondent FERC 41–42. Although FERC

applied what it termed the “Sierra Three-Prong Test,”

App. 1276a, the Court contends the agency did not err

because it also evaluated the “‘totality of the circumstances,’” see ante, at 20. But FERC’s totality-of-thecircumstances review was infected by its misapprehension 

of the standard “dictated by the U. S. Supreme Court

under the Mobile-Sierra doctrine.” App. 1229a. 

Whereas the focus of §§205(a) and 206(a) is on the reasonableness of the rates charged, not the conduct of the

contracting parties, FERC restricted its review to the 

contracting parties’ behavior around the time of formation. 

See id., at 1280a–1284a. FERC seems to have thought it 

was powerless to conduct just-and-reasonable review 

unless the contract was already subject to abrogation 

—————— 

3The Court contends that FERC’s application of the Mobile-Sierra 

doctrine “should be honored” because it represents the “settled understanding of the FPA.” Ante, at 23, n. 6. As explained above, however,

FERC’s interpretation of the FPA (and of our cases construing the FPA)

is “ ‘obviously indefensible,’ ” supra, at 3 (quoting ante, at 6), and is 

therefore not entitled to any deference. 
 

Cite as: 554 U. S. ____ (2008) 13 

STEVENS, J., dissenting 

based on contract defenses such as fraud or duress. By

including contracts within the scope of §206(a), however,

Congress must have concluded that contract defenses are 

insufficient to protect the public interest. But see ante, at 

19 (holding that the “Mobile-Sierra presumption” applies

in all circumstances absent “traditional grounds for . . .

abrogation” or “illegal action” by a contracting party).4 

Indeed, nothing in the FPA or this Court’s cases precludes 

FERC from considering circumstances exogenous to contract negotiations, including natural disasters and market 

manipulation by entities not parties to the challenged 

contract.5 FERC’s error is obvious from the face of the 

orders, which repeatedly state the Commission’s belief

that it could not consider evidence relevant to the reasonableness of the contract rates.6 

—————— 

4The Court quite sensibly instructs FERC that “if it is clear that one 

party to a contract engaged in such extensive unlawful market manipulation as to alter the playing field for contract negotiations, the Commission should not presume that the contract is just and reasonable”;

and that the “mere fact that the unlawful activity occurred in a different (but related) market does not automatically establish that it had no 

effect upon the contract—especially given the Staff Report’s (unsurprising) finding that high prices in the one market produced high prices in

the other.” Ante, at 25. I disagree, however, with the Court’s suggestion that the FPA restricts FERC’s review of contract rates to these 

limited criteria. 5The FPA does not specify how market deficiencies should weigh in 

FERC’s review of contract rates. Depending on the circumstances and

how one balances the short-term and long-term interests of consumers, 

evidence of “market turmoil” may, as the Court argues, support rather 

detract from a finding that contract rates are just and reasonable. See 

ante, at 18. Whether any given contract rate “ultimately benefits 

consumers,” ante, at 22, however, is a determination that Congress has

vested in FERC, not this Court. 6See, e.g., App. 1275a (“[A] finding that the unjust and unreasonable

spot market prices caused forward bilateral prices to be unjust and

unreasonable would be relevant to contract modification only where 

there is a ‘just and reasonable’ standard of review. As we have previously concluded, the contracts at issue in this proceeding do not provide 
 

14 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC 

UTIL. DIST. NO. 1 OF SNOHOMISH CTY. 

STEVENS, J., dissenting 

Although the Court and the Commission attempt to

recast FERC’s orders as applying the statutory standard, 

see ante, at 13–14; Brief for Respondent FERC 21, under 

the doctrine set forth in SEC v. Chenery Corp., 318 U. S. 

80 (1943), “we cannot accept appellate counsel’s post hoc

rationalizations for agency action; for an agency’s order

must be upheld, if at all, on the same basis articulated in

the order by the agency itself,” Texaco, 417 U. S., at 397 

(internal quotation marks omitted). Furthermore, even 

assuming FERC subjectively believed that it was applying

the just-and-reasonable standard despite its repeated 

declarations to the contrary, each order must be deemed

“so ambiguous that it falls short of that standard of clarity 

that administrative orders must exhibit.” Id., at 395–396. 

In order to get around the Chenery doctrine, the Court 

not only mischaracterizes FERC’s orders, but also takes a 

more radical tack: It concludes that whatever the rationale 

set forth in FERC’s orders, Chenery does not apply because “the Commission was required, under our decision 

in Sierra, to apply the Mobile-Sierra presumption in its

evaluation of the contracts here.” Ante, at 16. This point 

prompts the Court to comment that “FERC has lucked

out.” Ibid. If the Commission has “lucked out,” it is not 

only a purely fortuitous victory, but also a Pyrrhic one. 

—————— 

for such a standard but rather evidence an intent that the contracts 

may be changed only pursuant to the ‘public interest’ standard of 

review. Under the ‘public interest’ standard, to justify contract modification it is not enough to show that forward prices became unjust and 

unreasonable due to the impact of spot market dysfunctions” (footnote

omitted)); id., at 1527a (“Complainants were required to meet the 

public interest standard of review, not the just and reasonable standard

of review which could have taken into account the causal connection 

between the spot market prices and forward bilateral market prices”); 

id., at 1534a (“The Staff Report did not make any findings regarding 

the justness and reasonableness of any contract rates and any such 

findings would not be relevant here because the just and reasonable

standard is not applicable”). 
Cite as: 554 U. S. ____ (2008) 15 

STEVENS, J., dissenting 

Although FERC prevails in these cases despite having 

“offered a justification in court different from what it 

provided in its opinion,” ibid., it has paid a tremendous 

price. The Court has curtailed the agency’s authority to

interpret the terms “just and reasonable” and thereby 

substantially narrowed FERC’s discretion to protect the

public interest by the means it thinks best. Contrary to

congressional intent, FERC no longer has the flexibility to 

adjust its review of contractual rates to account for changing conditions in the energy markets or among consumers. 

Cf. Permian Basin, 390 U. S., at 784 (“[A]dministrative

authorities must be permitted, consistently with the obligations of due process, to adapt their rules and policies to

the demands of changing circumstances”). 

V 

The decision of the Court of Appeals for the Ninth Circuit deserves praise for its efforts to bring the freewheeling Mobile-Sierra doctrine back in line with the FPA and 

this Court’s cases. I cannot endorse the opinion in its

entirety, however, because it verges into the same sort of

improper policymaking that I have criticized in the Court’s

opinion. Both decisions would hobble the Commission, 

albeit from different sides. Congress has not authorized

courts to prescribe energy policy by imposing presumptions or prerequisites, or by making marginal cost the sole 

concern or no concern at all. I would therefore vacate and 

remand the cases in order to give the Commission an 

opportunity to evaluate the contract rates in light of a

proper understanding of its discretion. 

I respectfully dissent.