Court Opinion

ID: 3219377
Source: CourtListenerOpinion
Date Created: 2016-07-01 15:01:17.599596+00
Date Added: 2024-06-11T12:46:44.261045
License: Public Domain

United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 4, 2016                      Decided July 1, 2016

                        No. 14-1281

         OKLAHOMA GAS AND ELECTRIC COMPANY,
                    PETITIONER

                             v.

       FEDERAL ENERGY REGULATORY COMMISSION,
                    RESPONDENT

     SOUTHWESTERN PUBLIC SERVICE COMPANY, ET AL.,
                    INTERVENORS

          On Petition for Review of Orders of the
          Federal Energy Regulatory Commission

     Kenneth B. Driver argued the cause for petitioner and
supporting intervenors. With him on the joint briefs were
Stephen M. Spina, J. Daniel Skees, Barry S. Spector, Matthew
J. Binette, Marvin T. Griff, Linda G. Stuntz, Ellen S. Young,
and Stephen J. Videto.

    Ross R. Fulton, Federal Energy Regulatory Commission,
argued the cause for respondent. With him on the brief were
Robert H. Solomon, Solicitor, and Lona T. Perry, Deputy
Solicitor. Holly E. Cafer, Attorney, entered an appearance.
                              2
   Michael R. Engleman was on the brief for intervenors LS
Power Transmission, LLC and LSP Transmission Holdings,
LLC in support of respondent.

    Before: KAVANAUGH, MILLETT and WILKINS, Circuit
Judges.

    Opinion for the Court filed by Circuit Judge WILKINS.

      WILKINS, Circuit Judge: Until recently, incumbent public
utilities were free to include in their tariffs and agreements
“the option to construct any new transmission facilities in
their particular service areas, even if the proposal for new
construction came from a third party.” S.C. Pub. Serv. Auth.
v. FERC (South Carolina), 762 F.3d 41, 72 (D.C. Cir. 2014)
(per curiam). In practice, the incumbent utilities were likely
to exercise these “rights of first refusal” – a convention that
had certain downsides according to the Federal Energy
Regulatory Commission (“FERC” or “the Commission”). See
id. Fearful of deterring non-incumbents from proposing
much-needed        infrastructure     reforms,     discouraging
competition within the industry, and potentially driving up the
cost of rates charged for wholesale electricity service, the
Commission ordered utilities to remove rights of first refusal
from their existing tariffs and agreements. See id. at 53, 72
(citing Transmission Planning and Cost Allocation by
Transmission Owning and Operating Public Utilities,
F.E.R.C. Stats. & Regs. ¶ 31,323, 76 Fed. Reg. 49,842
(2011)) [hereinafter Order No. 1000].

     In South Carolina, we upheld the Commission’s removal
mandate. 762 F.3d at 71-81. In so doing, we found it
premature to address those petitioners’ argument that FERC
could not make them eliminate such provisions without
violating the Mobile-Sierra doctrine. Id. at 81. Under
                                 3
Mobile-Sierra, FERC must presume a contract rate for
wholesale energy is just and reasonable and cannot set aside
the rate unless it is contrary to the public interest. See New
England Power Generators Ass’n, Inc. v. FERC, 707 F.3d
364, 366 (D.C. Cir. 2013) (citing United Gas Pipe Line Co. v.
Mobile Gas Serv. Corp. (Mobile), 350 U.S. 332 (1956), and
Fed. Power Comm’n v. Sierra Pac. Power Co. (Sierra), 350
U.S. 348 (1956)).

     The Commission had reserved judgment on whether to
apply this presumption to the rights of first refusal until
evaluating the individual utilities’ compliance filings, and
therefore so did we. South Carolina, 762 F.3d at 81. Utility
Petitioner Oklahoma Gas and Electric Company (“OG&E”),
as well as several Intervenors (collectively, “Petitioners”) 1 ,
now petition for review from FERC’s determination at the
compliance stage. They urge that the Commission erred in
concluding that Mobile-Sierra does not in fact protect their
rights of first refusal contained in their Regional Transmission

1
 Intervening in support of OG&E are Southwestern Public Service
Co., ITC Great Plains, LLC, Southwest Power Pool, Inc., Xcel
Energy Services, Inc., Mid-Kansas Electric Co., LLC, and
Sunflower Electric Power Corp. Intervening on behalf of FERC are
Western Farmers Electric Cooperative, American Wind Energy
Assoc., Duke-American Transmission Co., LLC, LS Power
Transmission, LLC, and LSP Transmission Holdings, LLC.

Because it is different from the basis on which the Commission
relied, see K N Energy, Inc. v. FERC, 968 F.2d 1295, 1303 & n.4
(D.C. Cir. 1992), we reject the alternative argument offered in
separate briefing by Intervenors LSP Transmission Holding, LLC,
and LS Power Transmission, LLC, see Intervenors for Resp. Br. at
19-26 (contending that Petitioners never established that they lost a
contractual right as a result of the FERC orders under review).
                                4
Organization (“RTO”) Membership Agreement. We hold that
the Commission painted with a broader brush than necessary
in applying potentially applicable Supreme Court precedent,
but we deny the petition nonetheless because nothing in the
Mobile-Sierra doctrine requires its extension to the anti-
competitive rights of first refusal at issue here.

                                I.

     Petitioners are members of the RTO, Southwest Power
Pool, Inc. (“Southwest Power Pool”), which provides
transmission service to approximately 6 million households
across portions of eight states. Although public utilities
previously were vertically integrated – meaning they
generated, transmitted, as well as distributed electricity –
FERC in the past two decades has undertaken a number of
structural reforms to unbundle the wholesale sale of power
from its transmission, and to require utilities to provide open
access to transmission lines in a nondiscriminatory fashion.
See Atlantic City Elec. Co. v. FERC, 295 F.3d 1, 4 (D.C. Cir.
2002). One of these reforms encouraged the formation of
RTOs like Southwest Power Pool. See Morgan Stanley
Capital Grp. Inc. v. Pub. Util. Dist. No. 1, 554 U.S. 527, 536
(2008). RTOs are independent entities to which transmission-
owning utilities have given operational control of their
facilities. See id.; Midwest ISO Transmission Owners v.
FERC, 373 F.3d 1361, 1364 (D.C. Cir. 2004) (explaining that
placing control of transmission lines in RTOs was expected to
promote competition and overcome inefficiencies).

     Yet another reform was Order No. 1000, which required
the removal from utilities’ tariffs and agreements of federal
rights of first refusal to construct transmission facilities in the
regional transmission plan. See Order No. 1000, ¶ 268, 76
Fed. Reg. at 49,888. Tariffs are the mechanism through
                               5
which regulated utilities unilaterally set their rates and terms
of service. See Morgan Stanley, 554 U.S. at 531; South
Carolina, 762 F.3d at 71 n.5. In contrast, rates and terms can
also be set by agreement with individual electricity
purchasers, through bilateral contracts. See Morgan Stanley,
554 U.S. at 531 (citing 16 U.S.C. § 824d(c), (d)). Both tariffs
and contracts must be filed with the Commission before they
go into effect. Id. Not only rates, but also “any rule,
regulation, practice, or contract affecting such rate[s],” 16
U.S.C. § 824e(a), are subject to FERC review to ensure they
are “just and reasonable,” id. § 824d(a). If found unjust or
unreasonable, FERC may replace the unlawful rate, practice,
or contract with a lawful one. See id. § 824e(a); Morgan
Stanley, 554 U.S. at 532. In South Carolina, we held that the
Commission properly exercised its authority under the
Federal Power Act (“FPA”) to regulate the rights of first
refusal as a practice affecting a rate. 762 F.3d at 76; see also
id. at 76-81 (finding FERC supported its conclusion that the
rights were unjust or unreasonable with substantial evidence,
and that the ban on rights of first refusal was not otherwise
arbitrary or capricious on its face).

     At issue here is a portion of the Membership Agreement
Petitioners executed with Southwest Power Pool to join the
RTO. Petitioners’ refusal rights were contained in Section 3.3
of their Agreement. Order No. 1000’s removal mandate thus
obligated Southwest Power Pool to revise that provision. In
its filing to comply with the order, Southwest Power Pool
proposed to FERC the necessary deletions to Section 3.3, but
simultaneously argued that FERC should not implement the
revisions because the Agreement is protected by the Mobile-
Sierra doctrine.

   The Commission thought otherwise. See Southwest
Power Pool, Inc., Order on Compliance Filings, Docket No.
                               6
ER13-366-000, et al., 144 FERC ¶ 61,059 (July 18, 2013)
(Initial Order), on reh’g, 149 FERC ¶ 61,048 (Oct. 16, 2014)
(Rehearing Order). It decided that, “in determining whether a
Mobile-Sierra presumption applies in a specific instance, the
Commission must determine whether the instrument or
provision at issue embodies” certain characteristics.
Rehearing Order ¶ 94.              It distinguished between
individualized rates, terms, and conditions negotiated freely at
arm’s length, and generally applicable, so-called “tariff”
provisions that do not arise from such negotiations. Initial
Order ¶ 127; Rehearing Order ¶ 94. According to the
Commission, Mobile-Sierra only applies to the former
because “‘the premise on which [it] rests’ is ‘that the contract
rates are the product of fair, arms-length negotiations.’”
Rehearing Order ¶ 95 (citing Morgan Stanley, 554 U.S. at
554). At the same time, FERC noted its discretion to apply
the presumption to the latter. Id. ¶ 94 (citing Initial Order
¶ 127; New England Power Generators Ass’n, Inc. v. FERC,
707 F.3d 364, 370-71 (D.C. Cir. 2013)). It concluded that
Section 3.3 failed its threshold, arms-length bargaining test.
Initial Order ¶ 130-35; Rehearing Order ¶ 100-112. On
rehearing, FERC did not alter its conclusion, but as an aside
clarified that the other Agreement provisions, not just Section
3.3, also amounted to generally applicable terms and
conditions not subject to Mobile-Sierra. See Rehearing Order
¶ 100.

                              II.

     Petitioners contend that any “valid, freely negotiated
contract automatically is subject to” Mobile-Sierra.
Pet’r Br. 29. On the other hand, FERC is of the view that
Mobile-Sierra requires it to determine whether the instrument
or provision at issue embodies an “individualized” rate, term,
or condition that “appl[ies] only to sophisticated parties who
                               7
negotiated [it] freely at arm’s length,” or whether instead the
provision is “generally applicable or . . . arose in
circumstances that do not provide the assurance of justness
and reasonableness associated with arms-length negotiations”
– with only the former qualifying for the Mobile-Sierra
presumption. Initial Order ¶ 127; Rehearing Order ¶ 94.

     We begin by returning to Mobile and Sierra. See New
York New York, LLC v. NLRB, 313 F.3d 585, 590 (D.C. Cir.
2002) (“We are not obligated to defer to an agency's
interpretation of Supreme Court precedent under Chevron or
any other principle.”). The doctrine first arose from those
cases in the context of rate-setting. In Mobile, the Supreme
Court held that the Natural Gas Act did not allow a gas utility
to file a new tariff with the Commission superseding the rates
set forth in a contract it had previously executed. 350 U.S. at
344. The same day, the Court confronted a similar situation
under the nearly identical provisions of the FPA in Sierra and
ruled the same way. 350 U.S. at 353.

      Sierra raised an additional question regarding rate-
setting. Even though the utility could not file with the
Commission and thereby unilaterally impose a new tariff, the
Court further considered whether FERC was statutorily
authorized to set aside the contract rate as part of its Section
206(a) authority, which allows it to replace an unjust and
unreasonable rate with a just and reasonable one. See id.
(citing 16 U.S.C. § 824e(a)). The Court declined to allow
FERC to set aside a rate simply because it is not profitable.
See id. at 354-55. The Court explained that a public utility
may “agree by contract to a rate affording less than a fair
return,” and such an agreement does not necessarily mean the
utility is “entitled to be relieved of its improvident bargain.”
Id. at 355. When evaluating whether a contract rate is just
and reasonable, “the sole concern of the Commission,”
                               8
explained the Court, “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.

      Subsequent decisions have refined the doctrine in several
ways. In Morgan Stanley, one of the two Supreme Court
cases other than Mobile and Sierra that Petitioners rely on,
see Pet’r Br. 29-37, the Court confronted long-term contracts
through which utilities bought power at historically elevated
rates during an energy crisis, see 554 U.S. at 540-41.
Although it reaffirmed that Mobile-Sierra applied to those
utilities’ buyer’s remorse, id. at 548, the Court explained that
contract rates agreed to via fraud or duress do not merit the
presumption. Id. at 554; see also id. at 535 (clarifying that
the term, “public interest,” simply refers to a “differing
application of th[e] just-and-reasonable standard”); id. at 534
(describing the various ways parties can contract around
Mobile-Sierra). In NRG Power, the second case Petitioners
invoke, the Court confirmed that Mobile-Sierra attaches to the
challenged rates even in suits brought by non-parties. NRG
Power Marketing, LLC v. Maine Public Utilities Commission
(NRG Power), 558 U.S. 165, 176 (2010). That case involved
an agreement providing for auction prices pursuant to forward
capacity markets, where energy providers committed
themselves to purchasing a certain amount of capacity at a
particular price years in advance. See id. at 170. After the
Court remanded to us to decide “[w]hether the rates at issue
qualify as ‘contract rates,’” id. at 176, we said that even
assuming some difference between auction and contract rates,
the Commission was free all the same to apply the logic of
Mobile-Sierra, see New England Power Generators Ass’n,
Inc. v. FERC, 707 F.3d 364, 371 (D.C. Cir. 2013).
                               9
     These cases show that the Supreme Court has at least
thus far applied the doctrine to rates, although we are
presented here with a right of first refusal provision. As
neither party advocates for restricting Mobile-Sierra
exclusively to rates, there is no need to decide that question.
We assume arguendo that the presumption is not so limited.
More importantly, this precedent reflects that no matter the
contract provision at issue, even if the Mobile-Sierra doctrine
might apply to it generally, FERC did not err in determining
that the doctrine does not extend to anti-competitive measures
that were not arrived at through arms-length bargaining. In
other words, the term must be the product of adversarial
negotiations between sophisticated parties pursuing
independent interests. Although Sierra’s holding arose in the
rate-setting context, the Commission properly noted the
Supreme Court’s concern about the impropriety of interfering
with a “bargain,” however “improvident.” Sierra, 350 U.S.
at 355 (emphasis added). Indeed, the doctrine “rests on ‘the
stabilizing force of contracts,’” NRG Power, 558 U.S. at 168
(citing Morgan Stanley, 554 U.S. at 548), which thereby
ensures “the promotion of stable energy supply
arrangements,” New England Power, 707 F.3d at 368, though
not to the extent of protecting, for example, “unfair dealing at
the contract formation stage,” Morgan Stanley, 554 U.S. at
547; see also NRG Power, 558 U.S. at 167 (describing the
doctrine as requiring a rate set by “a freely negotiated”
contract) (citing Morgan Stanley, 554 U.S. at 530). Just as
unfair dealing, fraud, or duress will remove a provision from
the ambit of Mobile-Sierra, so also will terms arrived at by
horizontal competitors with a common interest to exclude any
future competition.

    That is what happened with the rights at issue here. As
the Commission in its expert judgment already determined,
the rights of first refusal created “a pre-existing barrier to
                              10
entry” for nonincumbent transmission owners.             South
Carolina, 762 F.3d at 77 (citing Order No. 1000 ¶¶ 256-57,
76 Fed. Reg. at 49,886). Rather than promote competition,
FERC found they created disincentives for nonincumbents to
identify and commit resources to cost-effective solutions to
transmission needs. See id. The Seventh Circuit has gone so
far as to describe such self-protective and anti-competitive
agreements as cartel-like. See MISO Transmission Owners v.
FERC, 819 F.3d 329, 335 (7th Cir. 2016). We similarly think
that such terms through “which the parties are seeking to
protect themselves from competition from third parties” are a
far cry from those in the original Mobile-Sierra cases. Id.
While Petitioners decline to acknowledge any anti-
competitive intent behind Section 3.3, we accept the
Commission’s determination that the provision restricts
competition. 2 See Rehearing Order ¶ 101 (explaining that
new members “must accept th[e right of first refusal
provision] with limited room for negotiation”); id. ¶ 103
(describing “substantial barriers” to amending Section 3.3);
id. ¶ 101-02 (refuting allegations that other members
negotiated any departure from that provision); id. ¶ 104
(disagreeing that the option of voluntarily accepting section
3.3 or not transacting at all transforms the provision into an
individually negotiated one).

     All of this means that the Commission arrived at a legally
valid outcome without requiring us to decide the propriety of
its assumption that Mobile-Sierra applies outside the context
of rates and procedures for setting rates. Indeed, both parties
have argued this case on the premise that Mobile-Sierra is
2
  We hold only that Mobile-Sierra does not apply to the right of
first refusal provision in Section 3.3, and do not reach the
Commission’s statement in its Rehearing Order regarding the
characteristics of the larger Membership Agreement.
                              11
generally available to all contractual provisions that have
some effect on rates. To be clear, as we stated in New
England Power, the Commission certainly is free to exercise
its discretion to apply the presumption to terms other than
contract rates, even where it is not required to do so, at least
with respect to rate-related terms. See 707 F.3d at 371
(“FERC's determination that the logic of Mobile-Sierra still
applied [to an auction rate] is ‘a reasonable choice within a
gap left open by Congress’ and so within the purview of the
agency's discretion under § 205(a) of the FPA.”). Had FERC
used its two-part test in a truly discretionary manner, perhaps
we could uphold it on that basis. As it stands, the
Commission made no such discretionary judgment, and we
need not fully endorse the approach it did take as the law
requires denial of the petition in any case. See Morgan
Stanley, 554 U.S. at 545 (“That [FERC] provided a different
rationale for the necessary result is no cause for upsetting its
ruling.”).

                              ***

     For the foregoing reasons, we deny the petition for
review.

                                                    So ordered.