Opinion ID: 3040019
Heading Depth: 2
Heading Rank: 4

Heading: Prerequisites To Applying Mobile-Sierra

Text: [1] As explained above, there is but one statutory standard addressing the lawfulness of wholesale electricity rates. That standard requires that all rates be “just and reasonable.” While 19584 PUBLIC UTILITY DISTRICT v. FERC there is language in some cases suggesting otherwise,21 we are convinced that Mobile-Sierra establishes one means of review under the just and reasonable standard, applicable in certain limited circumstances. The statute will admit of no other conclusion, and the Supreme Court case law supports it. Sierra framed its analysis as a determination as to whether the Federal Power Commission met its “condition precedent” to a section 206 remedy, a “finding that the existing rate is ‘unjust, unreasonable, unduly discriminatory or preferential.’ ” 350 U.S. at 353. It then faulted the Commission’s finding that the established rate was invalid not because it applied the usual section 206(a) “unreasonable” standard, but because “the Commission holds that the contract rate is unreasonable solely because it yields less than a fair return on the net invested capital.” Id. at 354-55. As the Sierra Court explained, [W]hile it may be that the Commission may not nor- mally 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. . . . [T]he 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 . . . . 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 because it is unprofitable to the public utility. 21 Boston Edison Co., 233 F.3d at 65, for example, refers to MobileSierra as establishing a “public interest standard,” separate from the statutory just and reasonable requirement, and referring to that standard as having been “created out of whole cloth.” PUBLIC UTILITY DISTRICT v. FERC 19585 Id. at 355. Sierra, then, simply held that considerations as to what is “unjust” or “unreasonable” differ in the context of an established bilateral contract, not that the statutory standards no longer govern. The Supreme Court confirmed this understanding in Verizon, explaining that “[i]n wholesale markets, the party charging the rate and the party charged were 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.” 535 U.S. at 479. Beginning with that understanding of Mobile-Sierra, we turn to the limited circumstances in which its presumption applies. Although no case has outlined these conditions succinctly, we derive three prerequisites from the context of Mobile-Sierra and from later cases employing the doctrine.
[2] As an initial matter, the contested contract by its own terms must not preclude the limited Mobile-Sierra mode of review. See Texaco Inc. v. FERC (Texaco II), 148 F.3d 1091, 1096 (D.C. Cir. 1998); Ne. Utils. Serv. Co. v. FERC (Ne. Utils. I), 993 F.2d 937, 960 (1st Cir. 1993). Mobile-Sierra presumes that private parties have negotiated an agreement that they view as just and reasonable over the time period covered. If, by the very terms of their agreement, the parties indicate otherwise, FERC cannot assume the mutual satisfaction of the parties. For example, parties can include in a contract an express reservation of a right to make changes unilaterally, known as a “Memphis clause.” See United Gas Pipe Line Co. v. Memphis Light, Gas & Water Div., 358 U.S. 103, 105, 112 (1958). Such a clause will preclude application of the Mobile-Sierra presumption. The rationale for enforcing such clauses is that if the contract does not settle rates as between the parties for the term of the agreement or call for limited, Mobile-Sierra 19586 PUBLIC UTILITY DISTRICT v. FERC review, then application of Mobile-Sierra does not stabilize or protect the sanctity of contract. See id. at 112 (noting that the “decisive difference” between Memphis and Mobile was that “in Mobile one party to a contract was asserting that the Natural Gas Act somehow gave it the right unilaterally to abrogate its contractual undertaking, whereas here petitioner seeks simply to assert, in accordance with the procedures specified by the Act, rights expressly reserved to it by contract”) (emphasis added). In other words, Mobile-Sierra serves to protect contracts from unilateral change, but that purpose is not served when the parties expressly have permitted such change.
Even if it is established that the parties contracted with the intent that Mobile-Sierra apply, a further barrier remains: The regulatory context in which the contracts were initially formed must provide a sound basis to believe that the resulting rates are just and reasonable. Absent such assurances, FERC’s reliance on the presumption would amount to a complete abdication of its statutory responsibility under the FPA. As the following sub-sections explain, two related conditions operate to ensure that a foundation for the presumption exists: (1) timely and procedurally effective review of rates — which in the contemporary regulatory regime can be limited to review of a utility’s market-based rate authority in the first instance, and (2) meaningful substantive standards for review of the circumstances of contract formation.
To justify the Mobile-Sierra mode of review, the regulatory scheme in which the contracts are formed must provide FERC with an opportunity for initial review of the contracted rate. In Mobile and Sierra, for example, the rates had been submitted to the agency previously under section 205 and allowed to remain in effect. See Mobile, 350 U.S. at 336; Sierra, 350 U.S. at 352. Such an initial review is an important precondiPUBLIC UTILITY DISTRICT v. FERC 19587 tion to Mobile-Sierra because, as FERC has explained, applying the doctrine in “first review cases would mean that ‘[the agency’s] ability to protect the public interest would be negligible and public regulation would consist of little more than rubber-stamping private contracts.’ ” Potomac Elec. Power Co. v. FERC (PEPCO), 210 F.3d 403, 409 (D.C. Cir. 2000) (quoting Ne. Utils. Serv. Co., 66 F.E.R.C. ¶ 61,332, at ¶ 62,087 (1994), aff’d, 55 F.3d 686 (1st Cir. 1995)); see also PEPCO, 210 F.3d at 406 (noting that challenged contracts had “been found to be just and reasonable when originally approved” by FERC). [3] Consistent with its previous rulings, FERC concedes here that an opportunity for initial review of whether a rate is just and reasonable is necessary for Mobile-Sierra to apply. The Intervenor-Respondents, however, cite to a thirty-year old D.C. Circuit decision, see Borough of Lansdale v. Fed. Power Comm’n, 494 F.2d 1104, 1112-14 (D.C. Cir. 1974), and argue that an opportunity for initial review is not necessary to trigger the Mobile-Sierra presumption. We disagree. The analysis in Lansdale is not applicable to this case. In Lansdale, a seller, joined by the Commission, sought to ignore a rate in a contract to which it had previously agreed but which it had not properly filed with the Commission, and instead file a higher rate, “as if the contract had never been negotiated.” Id. at 1112; see also id. at 1107-08. The D.C. Circuit refused to allow this unilateral revision of an agreement, holding that the Commission could not permit the higher rate of the second contract to go into effect unless and until it found that the original rates were unlawful. See id. at 1117. Lansdale did not allow the seller to “convert its statutory duty to file into a vehicle for breaching the 1971 contract with Lansdale.” Id. at 1112. In other words, Lansdale focused on whether Mobile-Sierra review allows the adoption of a second contract with a higher rate when the first was never correctly 19588 PUBLIC UTILITY DISTRICT v. FERC filed with the Commission. As such, Lansdale primarily reflected concern over a seller’s abuse of the rate-filing requirement. Lansdale did not decide, because the question was not before it, that the Mobile-Sierra presumption always applies to the filing of an initial rate, regardless of the circumstances. In this case, the answers to the questions presented turn in part upon whether Mobile-Sierra applies to the rate first set in a contract entered into under a seller’s market-based rate authority, rather than only to a later challenge maintaining that earlier-established rates are no longer just and reasonable. The local utilities do not maintain that the original contract is void because it was never filed, but rather that the rates set were unjust and unreasonable when established and should be modified. Lansdale’s position that a seller may not profit by failing properly to file a rate-setting contract it freely entered into is hardly remarkable, but is also not particularly pertinent to the questions at issue here. Indeed, just a year before Lansdale was decided, the Supreme Court recognized the importance of an opportunity for an initial just and reasonableness review to the overall statutory scheme. In Federal Power Commission v. Texaco, Inc. (Texaco I), 417 U.S. 380 (1974), the Court struck down an indirect regulatory scheme adopted by the Commission that would have provided a “blanket certificate procedure for small producers of natural gas.” See id. at 382, 395. One of the primary reasons for the decision was that “[t]here was no finding that these contemplated increased rates for flowing gas would be just and reasonable. The Commission merely asserts in its brief here that it was familiar with the existing contracts and must have considered the rates reserved to be acceptable under the Act.” Id. at 396. In short, FERC is correct to recognize that the MobileSierra doctrine apples only if a newly-entered contract PUBLIC UTILITY DISTRICT v. FERC 19589 remains in effect after there is an opportunity for plenary, “just and reasonable” agency review. 2. Meaningful Review of the Circumstances of Contract Formation [4] Not only must FERC have an opportunity for some initial review of rates, but the scope of that review must permit consideration of the factors relevant to the propriety of the contract’s formation. See Atl. City Elec. Co., 295 F.3d at 14 (holding that Mobile-Sierra applies “assuming that there was no reason to question what transpired at the contract formation stage”) (citing Town of Norwood v. FERC, 587 F.2d 1306, 1312 (D.C. Cir. 1978)). The original premise of MobileSierra was that as long as the rate was just and reasonable when the contract was formed, there would be a presumption — based on both the need to protect stability of contract and the likelihood that market participants entering into long-term contracts can protect their own interests — that the reasonableness continued throughout the term of the contract. See Verizon, 535 U.S. at 479 (“In wholesale markets, the party charging the rate and the party charged were 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.”). In the present regulatory regime, these relevant factors focus on whether the original negotiations occurred in a functional marketplace such that we may presume the contracted rates were originally just and reasonable.