Opinion ID: 3040019
Heading Depth: 2
Heading Rank: 1

Heading: The Federal Power Act and Mobile-Sierra

Text: The FPA governs the actions of public utilities, defined as “any person who owns or operates facilities subject to the jurisdiction of the [Federal Energy Regulatory] Commission.” 16 U.S.C. § 824(e). The Commission’s jurisdiction covers the “transmission of electric energy in interstate commerce and 3 This shorthand takes its name from two Supreme Court cases decided on the same day, United Gas Pipe Line Co. v. Mobile Gas Service Corp. (Mobile), 350 U.S. 332 (1956), and Federal Power Commission v. Sierra Pacific Power Co. (Sierra), 350 U.S. 348 (1956). 4 We use the term “Mobile-Sierra” throughout this opinion to refer both to the two original Supreme Court cases and to the doctrine derived from them. 19550 PUBLIC UTILITY DISTRICT v. FERC the sale of such energy at wholesale in interstate commerce.” Id. § 824(a). This definition encompasses activities carried out by all of the Intervenor-Respondent companies. The FPA requires FERC to regulate public utilities for the benefit of consumers. See Pa. Water & Power Co. v. Fed. Power Comm’n, 343 U.S. 414, 418 (1952) (“A major purpose of the whole [Federal Power] Act is to protect power consumers against excessive prices.”); California ex rel. Lockyer v. FERC (Lockyer), 383 F.3d 1006, 1017 (9th Cir. 2004) (describing “protecting consumers” as the FPA’s “primary purpose”); see also Atl. Ref. Co. v. Pub. Serv. Comm’n, 360 U.S. 378, 388 (1959) (“The [Natural Gas] Act was so framed as to afford consumers a complete, permanent and effective bond of protection from excessive rates and charges.”). Two FPA provisions, sections 205 and 206, 16 U.S.C. §§ 824d, 824e, govern FERC’s authority and establish its obligation to regulate rates for the interstate sale and transmission of electricity. Through these provisions, the FPA empowers FERC to regulate wholesale electricity rates but not the rates charged directly to consumers by local utilities. See 16 U.S.C. § 824(a), (b)(1). The protection the FPA accords consumers is therefore indirect: By assuring that wholesale purveyors of electric power charge fair rates to retailers, the FPA protects against the need to pass excessive rates on to consumers. At the same time, by assuring that wholesale purveyors of electric power receive a fair rate of return, the FPA assures that such sellers have the incentive to continue to produce and supply power. The First Circuit has aptly described the interaction of sections 205 and 206: In regulating electricity rates, the Federal Power Act follows (with variations) a well-developed model: the utility sets the rates in the first instance, 16 U.S.C. § 824d(a), subject to a basic statutory obligaPUBLIC UTILITY DISTRICT v. FERC 19551 tion that rates be just and reasonable and not unduly discriminatory or preferential, id. §§ 824d(a)-(b). FERC, which inherited the powers of its predecessor (the Federal Power Commission), can investigate a newly filed rate (section 205, id. § 824d(e)), or an existing rate (section 206, id. § 824e(a)), and, if the rate is inconsistent with the statutory standard, order a change in the rate to make it conform to that stan- dard, id. §§ 824d(e), 824e(a)-(b). The procedural incidents and FERC’s ability to provide refunds vary depending on whether the proceeding is one to investigate a new rate filing or an existing rate. For example, in the former case, the burden is on the utility to show that its rate is lawful, 16 U.S.C. § 824d(e), and, in the latter, the burden is on the FERC staff or the customer to show that the rate is unlawful, id. § 824e(b). In both circum- stances, however, the statutory test of lawfulness is phrased in the same terms. Boston Edison Co. v. FERC, 233 F.3d 60, 64 (1st Cir. 2000) (footnote omitted). Additionally, when utilities set rates in the first instance, they may do so via privately-negotiated contracts, filed pursuant to section 205(c)-(d), 16 U.S.C. § 824d(c)-(d).5 Thus, the FPA, by its terms, creates a role for 5 Section 205(c)-(d), 16 U.S.C. § 824d(c)-(d), provides: (c) Schedules Under such rules and regulations as the Commission may prescribe, every public utility shall file with the Commission, within such time and in such form as the Commission may designate, and shall keep open in convenient form and place for public inspection schedules showing all rates and charges for any transmission or sale subject to the jurisdiction of the Commission, and the classifications, practices, and regulations affecting such rates and charges, together with all contracts which in any manner affect or relate to such rates, charges, classifications, and services. 19552 PUBLIC UTILITY DISTRICT v. FERC privately negotiated wholesale power contracts, balanced by FERC’s obligation to ensure that those contracts rates, like unilaterally filed rates, are “just and reasonable.” Two Supreme Court decisions, announced on the same day in 1956, explain the approach that federal regulators must apply in certain circumstances when reviewing challenges maintaining that contracted rates are too low to be just and reasonable. See United Gas Pipe Line Co. v. Mobile Gas Serv. Corp. (Mobile), 350 U.S. 332 (1956);6 Fed. Power Comm’n v. Sierra Pac. Power Co. (Sierra), 350 U.S. 348 (1956). These decisions explain how, in the context of the energy industry as it existed in 1956, FERC was to ensure that wholesale contracts were “just and reasonable.” In Mobile, a seller agreed to a long-term fixed rate contract with another business, and the agency accepted it for filing (d) Notice required for rate changes Unless the Commission otherwise orders, no change shall be made by any public utility in any such rate, charge, classification, or service, or in any rule, regulation, or contract relating thereto, except after sixty days’ notice to the Commission and to the public. Such notice shall be given by filing with the Commission and keeping open for public inspection new schedules stating plainly the change or changes to be made in the schedule or schedules then in force and the time when the change or changes will go into effect. The Commission, for good cause shown, may allow changes to take effect without requiring the sixty days’ notice herein provided for by an order specifying the changes so to be made and the time when they shall take effect and the manner in which they shall be filed and published. (Emphases added). 6 Mobile related to the Natural Gas Act, and so did not involve a FPA claim. The Supreme Court, however, referred in Mobile to “the virtually identical provisions of the Federal Power Act,” 350 U.S. at 346, and the doctrine derived from Mobile always has been understood to be fully applicable to FPA section 206(a) cases. PUBLIC UTILITY DISTRICT v. FERC 19553 under section 205. The Court held that the seller could not unilaterally increase a contracted rate by filing a new rate under section 205(d), reasoning that the statute “evinces no purpose to abrogate private rate contracts,” Mobile, 350 U.S. at 338, and recognizing the need for “individualized arrangements” between suppliers and distributors, id. at 339. The Court emphasized that the public is served by the negotiation and enforcement of private contracts: “By preserving the integrity of contracts, [the Natural Gas Act] permits the stability of supply arrangements which all agree is essential to the health of the . . . industry.” Id. at 344. At the same time, the Court made clear that while “permit[ting] the relations between the parties to be established initially by contract,” the Natural Gas Act provided for “the protection of the public interest . . . by supervision of the individual contracts, which to that end must be filed with the Commission and made public.” Id. at 339. Sierra took up where Mobile left off, echoing the principle that a unilateral filing of a new rate cannot supersede a contract rate, even if the new rate is just and reasonable. Sierra, 350 U.S. at 352-53. The Court then extended Mobile to section 206 cases, holding that when a public utility agrees “by contract to a rate affording less than a fair return,” then the “sole concern” of the Federal Power Commission (FERC’s predecessor) in section 206(a) review is “whether the rate is so low as to adversely affect the public interest.” Id. at 355 (emphases added). As the emphasized language indicates, Sierra dealt only with whether a challenged contract rate was too low to serve the public interest. It did not deal with a contract rate alleged to be too high. In these low-rate cases, the Court declared, “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,” as “a contract may not be said to be either ‘unjust’ or ‘unreasonable’ simply because it is unprofitable to the public utility.” Id. (emphasis added). 19554 PUBLIC UTILITY DISTRICT v. FERC Sierra thus did not purport to abandon the “just and reasonable” standard in the statute. Rather, it gave substance to that standard in circumstances in which the contention is that the seller of energy finds a long-term contract it entered into no longer profitable. Relying on section 201 of the FPA and reciting that “the scheme of regulation imposed by [the FPA] is necessary in the public interest,” the Court held that when a seller seeks to raise rates after a contract has gone into effect, only “public interest” factors are pertinent to the “just and reasonable” inquiry, including whether the 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.” Id. (internal quotation marks omitted). Mobile-Sierra, then, stands for the proposition that in certain circumstances, a presumption applies that private parties to a wholesale electric power contract have negotiated a “just and reasonable” contract over a designated period of time, lawful under the FPA throughout that period.7 That presumption can be rebutted by establishing that the contract adversely affects the public interest — that is, the interests of the consuming public that the FPA protects.8 7 The parties and some of the cases speak as if two alternative standards for reviewing wholesale electricity rates exist — the statutory “just and reasonable” standard and the Mobile-Sierra public interest standard. We do not find this way of viewing the statutory terrain useful. The FPA establishes a single, albeit general, standard for FERC’s adjudication of contract challenges like the present one: whether the challenged contract is “just and reasonable.” 16 U.S.C. § 824e(a). The question therefore cannot be not whether the Mobile-Sierra or the “just and reasonable” standard of review applies. Instead, we understand Mobile-Sierra to establish presumptions regarding whether certain electricity contracts meet the statutory standard, and hold that lack of profitability alone is not a basis for deeming a contract unreasonable when the seller has agreed to the rate that proves unprofitable. 8 As already noted, the specific factors mentioned in Sierra as rebutting this presumption apply to cases challenging a contract rate for being too low. Mobile and Sierra had no occasion to determine what factors must be shown in other situations. PUBLIC UTILITY DISTRICT v. FERC 19555 As we explain in Part II of this opinion, Mobile and Sierra arose in a regulatory context in which there was an opportunity for traditional cost-based just and reasonable review before the energy contracts at issue became effective. The regulatory regime evolved, however, and FERC shifted its inquiry from the permissible cost-basis of rates to the determination of a seller’s market power. We therefore confront here, for the first time, the intersection of two doctrines — one, the Mobile-Sierra doctrine, the product of the courts; the other, market-based rate authorization, the product of recent agency policy — as they affect the application of the just and reasonable standard. No case that we have found concerns the intersection of these two doctrines. While the object of the Mobile-Sierra doctrine was an individual contract, the market-based rate authorization inquiry applies to an individual seller, with regard to any covered contract for electrical energy it enters into. The former inquiry occurred contemporaneously with a contract’s formation, while the latter inquiry transpires before each contract is formed. This dual shift distinguishes the regulatory context here from that present in Mobile and Sierra in two material respects: (1) the timing of the agency’s initial review has moved to a point before contract formation, and (2) the substance of that review no longer focuses on the terms of the contract. In other words, since Mobile and Sierra were decided, both the questions that FERC asks in its initial regulatory review of rates and when it asks them have changed. Although this regulatory evolution does not render MobileSierra a dead letter, it reinforces the need to delineate carefully the prerequisites for its application in the present environment. Our principal question is therefore whether the circumstances that trigger the Mobile-Sierra presumption are present in this case. As we explain in Part IV of this opinion, we conclude from the context of Mobile-Sierra and from later cases that three prerequisites are necessary to establish the Mobile-Sierra presumption: (1) the contract by its own terms 19556 PUBLIC UTILITY DISTRICT v. FERC must not preclude the limited Mobile-Sierra review; (2) the regulatory scheme in which the contracts are formed must provide FERC with an opportunity for effective, timely review of the contracted rates; and (3) where, as here, FERC is relying on a market-based rate-setting system to produce just and reasonable rates, this review must permit consideration of all factors relevant to the propriety of the contract’s formation. Taken together, the satisfaction of these three conditions justifies a presumption that parties have negotiated a contract that is just and reasonable between them and therefore triggers the Mobile-Sierra public interest mode of review, adjusted to account for the circumstance in which it is the buyer rather than the seller that is challenging the existing contract. When the prerequisites have not been met, however, the Mobile-Sierra presumption cannot apply, and FERC must find another method of evaluating whether the challenged rates are just and reasonable. To explain the origins of these Mobile-Sierra prerequisites and illuminate the current role of the doctrine, we begin by considering the historical and regulatory context in which Mobile-Sierra developed and the changes in that context since those cases were decided. We then turn to the facts and proceedings underlying the current dispute and, finally, to the derivation and application of the Mobile-Sierra prerequisites and standards.