Devon Power: The Mobile-Sierra Presumption, FERC's Use of Discretion, and What Interstate
Wholesale Energy Market Participants Can Do About It
Samuel J. Wellborn*
Recognized rate-setting options available to participants in the interstate wholesale
energy market have broadened since the passing of the Federal Power Act (FPA or the Act) in
1920, and have received increasing judicial scrutiny since the Supreme Court’s decisions in
United Gas Pipe Line Co. v. Mobile Gas Serv. Corp. and Fed. Power Comm’n v. Sierra Pacific
Power Co.1 Decisions made by the Federal Energy Regulatory Commission (FERC or the
Commission), the D.C. Circuit Court of Appeals, and the Supreme Court reveal a complicated
struggle between federal oversight, electric utility strategy, and increasing judicial preference for
the role of market forces in rate creation. The series of decisions under review represents a
fundamental metamorphosis in how FERC performs its primary mission of wholesale energy rate
regulation, stretching from the Supreme Court’s Mobile and Sierra decisions in 1956 to FERC’s
Devon Power decision in 2011. This research tracks that regulatory metamorphosis and the
judicial constraints placed on FERC, points out FERC’s recent missteps in its application of
established doctrine in the new regulatory environment, and offers guidance to participants
navigating the contemporary interstate wholesale energy market.
*
Wake Forest Journal of Law & Policy staff member.
United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332 (1956); Fed. Power Comm’n v. Sierra Pacific
Power Co., 350 U.S. 348 (1956).
1
1.
Wholesale energy transaction options and associated regulation
The Federal Power Act gives the Commission the statutory authority to review and
declare unlawful any rate connected with the interstate transmission of electricity.1 Indeed, its
“role with respect to protecting electricity customers is to ensure that prices in the wholesale
electricity market are just and reasonable and to oversee the interstate transmission of
electricity.”2 Under the Act, FERC may adjust any rate upon a finding that it is “unjust,
unreasonable, unduly discriminatory or preferential,” as well as order payment of associated
refunds.3 The Act, then, gives FERC substantial oversight and regulatory authority in this area of
interstate commerce.
“Under the Mobile-Sierra doctrine, [FERC] 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.”4 Without application of the Mobile-Sierra presumption, the default
just and reasonable standard of review applies. Moreover, if a contract-agreed upon rate is
unilaterally changed by the seller in accordance with § 824d(d) of FPA, the Mobile-Sierra
presumption evanesces and the Commission can review under the statutory just and reasonable
1
See 16 U.S.C. § 824(b) (2011) (“The provisions of this Part . . . shall apply to the transmission of electric energy in
interstate commerce and to the sale of electric energy at wholesale in interstate commerce . . . .”); 16 U.S.C. §
824d(a) (2011) (“All rates and charges made, demanded, or received by any public utility for or in connection with
the transmission or sale of electric energy subject to the jurisdiction of the Commission, and all rules and regulations
affecting or pertaining to such rates or charges shall be just and reasonable, and any such rate or charge that is not
just and reasonable is hereby declared to be unlawful.”).
2
U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-03-726R, ELECTRICITY MARKETS: FERC’S ROLE IN PROTECTING
CONSUMERS 4 (2003), available at http://www.gao.gov/new.items/d03726r.pdf.
3
16 U.S.C. §§ 824e(a)-(b) (2011).
4
Morgan Stanley Capital Grp. Inc. v. Pub. Util. Dist. No. 1, 554 U.S. 527, 530 (2008) (emphasis added).
standard.5 There are a number of methods by which utilities sell energy in the interstate market.
The products of these methods include wholesale energy rates, including unilaterally set tariff
rates, bilaterally set contract rates, bilateral or multilateral settlement rates, and auction set rates.
While FERC’s corresponding standard of review is clearly set forth by established judicial
precedent for some of these methods, the standard of review appropriate for other methods is less
clear.
A.
Unilaterally set tariff rates
FERC, as explained supra, has explicit authority to review and adjust interstate wholesale
energy rates. Such authority is implicated even when energy is purchased in an intrastate
transaction and then transmitted interstate.6 Utility-established rates do not receive the MobileSierra reasonableness presumption and are therefore freely reviewable by the Commission.7
Likewise, the unilateral adjustment by the selling utility of a negotiated wholesale contract rate
would also initiate automatic FERC review under the just and reasonable standard.8 The
contracting parties may preclude such a unilateral adjustment by contract provision which would,
in turn, preclude the FERC’s automatic just and reasonable review; nevertheless, FERC’s
authority to perform a “contrary to public interest” review would remain intact.9
5
Papago Tribal Util. Auth. v. Fed. Energy Regulatory Comm’n, 723 F.2d 950, 952 (1983).
See Jersey Cent. Power & Light Co. v. Fed. Power Comm’n, 319 U.S. 61, 71-72 (1943) (“If intervening companies
might purchase from producers in the state of production, free of federal control, cost would be fixed prior to the
incidence of federal regulation and federal rate control would be substantially impaired, if not rendered futile.”).
7
NRG Power Mktg. LLC v. Me. Pub. Util. Comm’n, 130 S. Ct. 693, 698 (2010) (“The Act allows regulated utilities
to set rates unilaterally by tariff; alternatively, sellers and buyers may agree on rates by contract. . . . Whether set by
tariff or contract, however, all rates must be ‘just and reasonable.’ § 824d(a).); Morgan Stanley, 554 U.S. at 530.
8
See Papago, 723 F.2d at 952 (“The seller may initiate rate changes under § 205 of the Act, by filing a new
schedule, which is subject to Commission review for justness and reasonableness.”
9
See id. at 953 (“[B]y broad waiver, the parties may eliminate both the utility’s right to make immediately effective
rate changes . . . and the Commission’s power to impose changes . . . except the indefeasible right of the
Commission . . . to replace rates that are contrary to the public interest, as where the existing rate structure might
impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive
burden, or be unduly discriminatory.”) (citation omitted).
6
B.
Bilaterally set contract rates with the Mobile-Sierra presumption
In Mobile, the Supreme Court held that the Commission may adjust bilateral wholesale
contracts only if it “determines the contract rate to be so low as to conflict with the public
interest . . . .”10 Mobile was decided under the Natural Gas Act, while Sierra Pacific was decided
under substantially similar language in the Federal Power Act.11 In Sierra Pacific, as in Mobile,
the Supreme Court gave deference to an existing privately agreed upon energy wholesale
contract where a utility had attempted to adjust the rate unilaterally given changed market
conditions (a dam had closed, increasing the cost of supplying energy). The Court held that “[i]n
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.”12 Mobile and Sierra Pacific together formed the Mobile-Sierra doctrine,
or what is sometimes referred to as the Mobile-Sierra presumption—that privately agreed upon
contract rates are just and reasonable, and such rates should not be disturbed except when the
public interest would be seriously harmed.13
The Supreme Court’s decision in Morgan Stanley in 2008 reinvigorated the MobileSierra doctrine. In that case, a long-term future energy wholesale contract was entered into
during a period of short-term market dysfunction. Due to extremely high short-term energy rates,
10
United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332, 345 (1956).
Fed. Power Comm’n v. Sierra Pacific Power Co., 350 U.S. 348, 350-51 (1956) (“The pertinent provisions of the
Federal Power Act . . . , are §§ 205 (c), (d), and (e), and 206 (a), which are substantially identical to §§ 4 (c), (d), and
(e), and 5 (a), respectively, of the Natural Gas Act.”).
12
Id. at 355.
13
Morgan Stanley, 554 U.S. at 530. See also id. at 551 n.6 (“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.”).
11
future rates at the time were also unusually high. After the crisis ended and rates returned to
normal, the purchaser experienced buyer’s remorse and challenged the rates citing harmed public
interest.14 The Supreme Court, disagreeing with the Ninth Circuit, further endorsed the
“venerable Mobile-Sierra doctrine,” holding that long-term energy contracts are a key source of
stability in the wholesale energy market and should not be disturbed, even if a group of
consumers must pay more than they would have otherwise.15
The opinion in Morgan Stanley took to developing the contours of a standard set in the
1956 Mobile and Sierra Pacific decisions, establishing that “excessive burden” means something
more than a rate exceeding marginal cost (as suggested by the Ninth Circuit), and that there is no
“soft” just and reasonable standard.16 The case gave further deference to rates determined by
contract, even when bargained for in unusual or dysfunctional market conditions or when a
group of consumers may be burdened by bad deal-making. That is not to say, however, that if the
contract formation were somehow influenced by unlawful activity (e.g. gouging, collusion, etc.),
FERC would not be able to review and set aside the rate. 17 Indeed, such activity dispels the
Mobile-Sierra presumption.18
C.
Bilaterally set contract rates without the Mobile-Sierra presumption
By contract provision, the selling utility may be barred from adjusting rates, and the
parties nevertheless choose to “contract out” of the Mobile-Sierra presumption. Such a provision
14
Id. at 541.
See id. at 548, 550.
16
In its review of Morgan Stanley, the Ninth Circuit took to coloring the “just and reasonable” requirement of
Mobile-Sierra as any rate in excess of marginal cost. Such an interpretation, however, as Scalia points out in
footnote five, is in direct contradiction of the Mobile-Sierra doctrine itself. Id. at 551 n.5.
17
See id. at 553.
18
Id. If no causal unlawful activity is discovered, however, such deference rewards energy wholesalers who have the
capacity to close future contracts during these periods of spot market dysfunction. These wholesalers, therefore,
would appear to gain from establishing positions of excess future capacity.
15
results in a bilaterally contracted rate but sets aside the Mobile-Sierra presumption allowing for
Commission review under the low-deference just and reasonable standard.19 Alternatively, the
contract may allow the selling utility to file a new rate with the Commission that supersedes the
contract rate; such a provision would eliminate the Mobile-Sierra presumption because the new
rate would not have been freely negotiated.20
D.
Settlement and auction-set wholesale rates
The Supreme Court decisions in this area have dealt mostly with wholesale energy rates
resulting from contract formation or unilaterally set tariffs, not other methods such as tariffs
resulting from auction or those resulting from multilateral settlements—methods which may
impact market participants not party to the ratemaking process. In NRG Power Mktg. LLC v. Me.
Pub. Utils. Comm’n, for example, the issue of whether tariffs resulting from auction qualify for
the Mobile-Sierra presumption remained open on remand to the D.C. Circuit.21 FERC had
contended that while the auction-set rates were not automatically subject to the Mobile-Sierra
19
Id. at 534 (“Courts of Appeals have held that . . . [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 also Papago, 723 F.2d at 953 (“[T]he parties
may contractually eliminate the utility’s right to make immediately effective rate changes under § 205 but leave
unaffected the power of the Commission under § 206 to replace not only rates that are contrary to the public interest
but also rates that are unjust, unreasonable, or unduly discriminatory or preferential to the detriment of the
contracting purchaser.”).
20
Morgan Stanley, 554 U.S. at 534 (“In [Memphis Light], we held that parties could contract out of the MobileSierra presumption by specifying in their contracts that a new rate filed with the Commission would supersede the
contract rate.”); United Gas Pipe Line Co. v. Memphis Light, Gas & Water Div., 358 U.S. 103 (1958) (holding that
participants in the wholesale energy market may “contract in” a provision allowing FERC to review the contracted
rate with no Mobile-Sierra deference).
21
NRG Power Mktg. LLC v. Me. Pub. Utils. Comm’n 130 S. Ct. 693, 701 (2010) (“Whether the [auction-created]
rates at issue qualify as ‘contract rates,’ and, if not, whether FERC had discretion to treat them analogously are
questions raised before, but not ruled upon by, the Court of Appeals. They remain open for that court’s consideration
on remand.”). That court did hold, however, that the Mobile-Sierra presumption applies to contract rates even if
challenged by a noncontracting party. Id.
presumption, the Commission could, in its discretion, apply that presumption.22 On remand to
the D.C. Circuit, that court held that it could not decide whether FERC’s “position [was]
reasonable . . . because it is certainly obvious — whatever else is confusing about this case —
that FERC never articulated in its orders a rationale for its discretion to approve a Mobile-Sierra
clause outside the contract context, or an explanation for exercising that discretion here.”23 The
case was then remanded to FERC for clarification, and the question was taken up in Devon
Power LLC.
The forward capacity auction addressed in this line of cases is an opt-in capacity pricing
system, not a typical auction. An independent system operator (ISO) serves as a mediator
between the generating utilities and the end-user capacity providers.24 The ISO sets the initial
price and purchasing capacity providers report the amount of energy they would purchase at that
price.25 The ISO then lowers the price and purchasing energy providers state how much energy
they would be willing to purchase at the new price.26 This process continues until available
future energy capacity has run out; the final price is termed the market clearing price.27 The ISO
then charges each utility its share of the total capacity requirement multiplied by the marketclearing price.28 As FERC reasons, “[s]ince this rate methodology applies even to parties who
did not agree contractually to [the rate’s] adoption, the rates set through the forward capacity
22
Id. (“FERC agrees that the rates covered by the settlement are not themselves contract rates to which the
Commission was required to apply Mobile-Sierra. . . . But, FERC urges, the Commission had discretion to do so.”)
(citation omitted). The NRG decision was important on its own accord because by it the Supreme Court declared
that the Mobile-Sierra presumption is not overridden by nonparty challenges, overruling the D.C. Circuit’s decision.
Id. Such a ruling further protects rates under Mobile-Sierra.
23
Me. Pub. Utils. Comm’n v. Fed. Energy Regulatory Comm’n, 625 F.3d 754, 759 (D.C. Cir. 2010).
24
Devon Power LLC, 134 F.E.R.C. P61,208 para. 13 (2011).
25
Id.
26
Id.
27
Id.
28
Id.
auction more closely resemble a tariff rate than a contract rate.”29 Nevertheless, FERC asserts
that it has the discretion to apply the Mobile-Sierra presumption to the resulting rate. As FERC
notes, “the FPA requires only that rates be just and reasonable; it does not specify the manner in
which that general formulation must be implemented in any particular context.”30 The
Commission further reasoned that because the FPA and related court decisions do not preclude
the Commission from applying the Mobile-Sierra just and reasonable presumption, it may apply
the presumption when “considerations relevant to what is ‘just and reasonable’ make that
approach appropriate.”31
2.
Devon Power and the standard of review looking forward
Interestingly, in forward capacity auctions, as FERC noted, end-user capacity providers
who were not a part of the rate-setting process (“non-settling parties”) are “as bound by the
auction as a settling party, and, thus, a non-settling party’s obligation to make a payment cannot
be said to be based on a contract executed by that party.”32 The non-settling party would,
therefore, be bound to a rate protected by the high-deference “contrary to public interest”
standard but would not have had the benefit of negotiating the rate. The dissent in Devon Power
notes that the order “establishes a policy that will be challenging for the Commission to
administer and [be] less protective of consumers, and potentially avoids [FERC’s] responsibility
under the Federal Power Act (FPA).”33 Indeed, the concurring commissioner hedges her
agreement, stating that rather than adopting the Mobile-Sierra presumption in auction cases
29
Id.
Id. para. 15.
31
Id. para. 16.
32
Id. para. 12.
33
Id. at 30 (Norris, Comm’r, dissenting).
30
wholesale, the Commission should determine application of that presumption “on the facts of
each case,” especially given the recent Supreme Court decisions of Morgan Stanley and NRG.34
In each case citing FERC’s Devon Power order since March 2011, the dissenting
commissioner in Devon Power has concurred separately, and in each order has disagreed as to
the Commission’s discretionary application of the Mobile-Sierra presumption:
For the reasons I expressed in my partial dissent in Devon Power
LLC, however, I disagree that the Commission can or should
exercise its discretion to extend the public interest standard of
review to non-contract rates, terms and conditions. Therefore, I
disagree with the analysis in this order of whether the Commission
should permit the application of the public interest standard to
future changes to the Settlement sought by the Commission or nonsettling parties.35
Similar language was used in that commissioner’s dissent in FERC’s order denying
rehearing of Devon Power.36 As the dissent suggests, what is alarming is not FERC’s reasoning
that market-derived rates should receive the Mobile-Sierra presumption, but that FERC has
discretion as to when to apply that standard. In one recent case, for example, South Carolina
Electric & Gas Co. (SCE&G) attempted to include a settlement agreement provision that would
implicate the Mobile-Sierra presumption even though modifications by any party may be made
after FERC review.37 FERC held that in the absence of contracted rates, “the Commission has
discretion as to whether to approve a request to impose the more rigorous application of the
statutory ‘just and reasonable’ standard of review that is often characterized as the Mobile-Sierra
34
Id. at 29 (Norris, Comm’r, dissenting).
Petal Gas Storage LLC, 135 F.E.R.C. P61,152, 61,900 (2011); Carolina Gas Transmission Corp., 136 F.E.R.C.
P61,014, 61,072 (2011); Southern LNG Co., 135 F.E.R.C. P61,153, 61,904 (2011); High Island Offshore Sys. LLC,
135 F.E.R.C. P61,105, 61,613-14 (2011); S.C. Electric & Gas Co., 137 F.E.R.C. P61,081, at 9 (2011); Duke Energy
Carolinas LLC, 137 F.E.R.C. P61,058, at 26-27 (2011).
36
Devon Power, 137 F.E.R.C. at 39.
37
S.C. Electric & Gas Co., 137 F.E.R.C. para. 5.
35
‘public interest’ standard of review.”38 The Commission held that because the SCE&G case did
not have the “compelling circumstances” of Devon Power, it did not warrant the Mobile-Sierra
presumption.39
A.
Does FERC have discretion to apply or not apply the Mobile-Sierra presumption?
Historically, FERC has not had discretion as to when the Mobile-Sierra presumption is
applicable; parameters for the applicability of the doctrine were instead handed down in various
Supreme Court decisions as explained supra. That both the Supreme Court and the D.C. Circuit
Court of Appeals have demanded explanations concerning FERC discretion in this area is further
evidence thereof. The Supreme Court remanded the question of FERC discretionary application
of the Mobile-Sierra presumption to the D.C. Circuit, who further remanded the matter to FERC
for clarification.40 On remand, the D.C. Circuit noted that it was refusing to take up the question
because “FERC never articulated . . . a rationale for its discretion to approve a Mobile-Sierra
clause outside the contract context, or an explanation for exercising that discretion.”41 The court
posed the following questions and remanded the matter to FERC: “Just how do the auction rates
reflect market conditions similar to freely-negotiated contract rates? Or does FERC base its
asserted discretion on some other ground?”42 FERC addressed these questions in Devon Power.43
38
Id.
Id.
40
In NRG, the Supreme Court noted that whether FERC had the discretion to bestow the Mobile-Sierra presumption
upon forward capacity auction-derived rates was a question not decided by the Court of Appeals and the Court
therefore remanded the question. NRG Power Mktg. LLC v. Me. Pub. Util. Comm’n, 130 S. Ct. 693, 701 (2010).
41
Me. Pub. Utils. Comm’n v. Fed. Energy Regulatory Comm’n, 625 F.3d 754, 759 (D.C. Cir. 2010).
42
Id. at 760.
43
Devon Power LLC, 134 F.E.R.C. P61,208 (2011).
39
First, FERC pointed out that FPA requires that rates be just and reasonable, and that this
imprecise mandate requires interpretive discretion.44 Quoting Morgan Stanley, FERC noted that
“courts have long ‘afforded great deference to the Commission in its rate decisions.’”45 Building
from that premise of deference to FERC, however, the Supreme Court in Morgan Stanley went
on to explain in detail how it had effectively constrained FERC’s discretion—discussing its
decisions in Mobile,46 Sierra,47 Memphis Light,48 and Papago,49 in sequence.50 Any interpretive
discretion required by FPA, it would seem, is made moot in the presence of certain conditions
such as rate determination by bilateral contract (which would, in accordance with Supreme Court
precedent, receive the Mobile-Sierra just and reasonable presumption) or a contract that dispels
the protection of Mobile-Sierra (which would, in accordance with Supreme Court precedent,
receive low-deference just and reasonable review). Outside of such conditions, FERC is correct
to assert its discretion, and must, as a matter of course, do so with the expectation of judicial
review. Indeed, FERC concludes its order, after making various other points, with a discussion of
the balance between its discretion and what the law, judicially established and otherwise,
requires. FERC noted that if it believed “locking in” application of the Mobile-Sierra
presumption to a non-contract rate-setting method would be unjust and unreasonable, “then the
Commission has the discretion not to impose that more stringent standard of review.”51
Second, FERC reasoned that rates resulting from forward capacity auctions “share with
freely-negotiated contracts certain market-based features that tend to assure just and reasonable
44
Id. para.15.
Id. (quoting Morgan Stanley Capital Grp. Inc. v. Pub. Util. Dist. No. 1, 554 U.S. 527, 532 (2008).).
46
United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332 (1956).
47
Fed. Power Comm’n v. Sierra Pacific Power Co., 350 U.S. 348 (1956).
48
United Gas Pipe Line Co. v. Memphis Light, Gas & Water Div., 358 U.S. 103 (1958)
49
Papago Tribal Util. Auth. v. Fed. Energy Regulatory Comm’n, 723 F.2d 950 (1983).
50
Morgan Stanley Capital Grp. Inc. v. Pub. Util. Dist. No. 1, 554 U.S. 527, 532-35 (2008).
51
Devon Power LLC, 134 F.E.R.C. P61,208 para. 24 (2011).
45
rates.”52 In Mobile, the foundation for the Supreme Court’s deference to contract-derived rates
was the value placed in the stability of long-term supply arrangements resulting from contracts
that could not be changed without good reason.53 Sierra summarily co-opted the reasoning stated
in Mobile.54 While the Mobile-Sierra presumption does not, on review, appear to be founded on
the virtues of market forces, the Supreme Court’s 2002 Verizon decision55 and 2008 Morgan
Stanley decision56 explain the context for the creation of that presumption: “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.’”57
These cases, therefore, support FERC’s reasoning that market-based rate-setting methods tend to
justify application of the Mobile-Sierra presumption (with the additional note that rate-setting
methods supporting stability in long-term supply relationships also help justify application of the
same).
Third, FERC noted that the application of the Mobile-Sierra presumption to auction
results would promote rate stability.58 The value of rate stability was foundational to the creation
of the Mobile-Sierra doctrine as explained in the paragraph supra. The stability contemplated by
the Mobile and Sierra decisions was not derived, however, from the arbitrary invocation of a
doctrinal shield to regulatory review; it was instead derived from the natural symbiosis between
52
Id. para. 19.
United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332, 344 (1956).
54
See Fed. Power Comm’n v. Sierra Pacific Power Co., 350 U.S. 348, 353 (1956) (“[F]or the reasons [] given [in
Mobile], we conclude that neither PG&E’s filing of the new rate nor the Commission’s finding that the new rate was
not unlawful was effective to change PG&E’s contract with Sierra.”).
55
Verizon Commc’ns v. Fed. Commc’ns Comm’n, 535 U.S. 467 (2002).
56
Morgan Stanley Capital Grp. Inc. v. Pub. Util. Dist. No. 1, 554 U.S. 527 (2008).
57
Id. at 545, quoting Verizon, 535 U.S., at 479. See also NRG Power Mktg. LLC v. Me. Pub. Util. Comm’n, 130 S.
Ct. 693 (2010) (holding that non-contracting parties are nevertheless subject to the Mobile-Sierra presumption when
the rates in question resulted from fair, arms-length negotiations).
58
Devon Power LLC, 134 F.E.R.C. P61,208 para. 21 (2011).
53
the sanctity of contracts and the need for stability in long-term supply arrangements.59 Whatever
virtues forward capacity auctions and other non-contract market-based rate-setting methods share
with contract-derived rates, inherent rate stability resulting from the sanctity of contracts is not
among them. While one could make the argument that upsetting market-determined rates would
have a detrimental effect on the stability of long-term supply relationships—an argument that
resonates with Mobile,60 Morgan Stanley,61 and NRG62—arbitrary application of a more
deferential standard of review for the purpose of promoting rate stability is provided for neither
by FPA nor by judicial precedent.
FPA does require rates to be just and reasonable, and such a mandate does require
application of discretion. The resulting discretion is not as absolute as the Devon Power order
implies, however; that discretion must be tempered both by established judicial principles and
the promise of judicial review. It is also accurate that forward capacity auctions bear market-like
features. However, the existence of market-like features is not itself dispositive of a just and
reasonable product. Non-contract rate-setting methods, while bearing market-like features, may
nevertheless not involve “sophisticated businesses enjoying presumptively equal bargaining
power” (e.g. rate-setting for generating homeowners selling energy back to the grid).63 Finally,
FERC’s discussion of the value of rate stability resulting from non-contract rate-setting methods
See NRG, 130 S. Ct. at 696, quoting Morgan Stanley, 554 U.S. at 548 (“The ‘venerable Mobile-Sierra doctrine’
rests on ‘the stabilizing force of contracts.’”).
60
See United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332, 344 (1956) (“By preserving the integrity
of contracts, it permits the stability of supply arrangements which all agree is essential to the health of the natural
gas industry.”).
61
See Morgan Stanley, 554 U.S. at 551 (“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.”).
62
See NRG, 130 S. Ct. at 700-01 (“[T]he D. C. Circuit’s confinement of Mobile-Sierra to rate challenges by
contracting parties diminishes the animating purpose of the doctrine: promotion of the stability of supply
arrangements which all agree is essential to the health of the energy industry.”) (citation omitted).
63
See Morgan Stanley, 554 U.S. at 545, quoting Verizon Commc’ns v. Fed. Commc’ns Comm’n, 535 U.S. 467, 479
(2002) (“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.’“).
59
is unpersuasive. Rate stability was never purported to be an end goal worth pursuing at all costs;
it was instead a serendipitously compatible partner to the sanctity of contracts.
On balance, FERC has little discretion in determining when to apply the Mobile-Sierra
presumption. Whether the Commission may apply the presumption to a rate-setting mechanism,
forward capacity auctions included, depends on the extent to which market forces are intertwined
with the rate-setting process. If those involved are “sophisticated businesses enjoying
presumptively equal bargaining power” negotiating rates and terms at arm’s length, it is clear
that the Mobile-Sierra presumption would apply.64 Certainly the 115 participants involved in the
Devon Power auction were such parties engaging in such a process; the resulting rate, therefore,
should receive Mobile-Sierra deference even though the that rate will apply to parties who did
not engage in the auction process.65 Even if the requisite Mobile-Sierra conditions are met in a
particular rate-making scheme and the just and reasonable presumption applies, the public
interest standard of review always looms at the ready.66
B.
FERC decisions since Devon Power
What is most interesting about FERC orders involving rate-setting following Devon
Power is that the Commission continues to emphasize the importance of its discretion when
FERC appears to be quite bound as to when and by what standard it may review rates.
Consider the circumstances of the SCE&G case. Before Devon Power, any contract
provision invoking the Mobile-Sierra presumption but which also allowed for unilateral rate
64
See Morgan Stanley, 554 U.S. at 545.
Devon Power LLC, 134 F.E.R.C. P61,208 para. 13 (2011). See NRG, 130 S. Ct. 693 (holding that non-contracting
parties are subject to the Mobile-Sierra presumption when the rates in question resulted from fair, arms-length
negotiations).
66
See Devon Power para. 25 (“The ‘public interest’ standard respects the settled expectations of parties, but still
allows the Commission to respond as necessary to the threat of serious harm to the public interest.”).
65
adjustment by the selling utility would be struck down without need for much doctrinal
discussion in accordance with a line of cases (specifically Papago).67 Precedent clearly
establishes that selling utilities may, by contract, dispel the Mobile-Sierra presumption, thereby
elevating the level of FERC review.68 Utilities may not, however, parry FERC review by
contract provision as was attempted in the SCE&G case.69 If the contract stipulates that rates may
be changed unilaterally by the selling utility, the Mobile-Sierra presumption no longer applies.70
Equally so, FERC may not upgrade its level of review. When a rate has been created by
contract, that rate cannot be upset unless “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.”71 That
standard, as noted supra, is very high. Indeed, in Papago, the D.C. Circuit called the public
interest standard “practically insurmountable” and noted that “the Commission itself is unaware
of any case granting relief under it.”72
Nevertheless, FERC repeatedly asserts its discretion in determining applicability of the
Mobile-Sierra presumption. In SCE&G, FERC noted that when rates are not contracted, “the
Commission has discretion as to whether to approve a request to impose the more
67
Papago outlined three basic options provided by the FPA for rate adjustment: 1) the selling utility may change
rates unilaterally with no Mobile-Sierra deference, 2) the selling utility may be contractually prohibited from
changing rates unilaterally and therefore rates receive Mobile-Sierra deference, or 3) the selling utility may be
contractually prohibited from changing rates and Mobile-Sierra deference is “contracted out” by the parties. See
Papago Tribal Util. Auth. v. Fed. Energy Regulatory Comm’n, 723 F.2d 950, 953 (1983).
68
NRG Power Mktg. LLC v. Me. Pub. Util. Comm’n, 130 S. Ct. 693, 699 n.3 (2010) (“Consistent with the lead role
of contracts recognized in Mobile-Sierra, we held in [Memphis Light] that parties may contract out of the MobileSierra presumption.”).
69
Id. (“[Parties may 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.”
70
See Papago, 723 F.2d at 953 (“[T]he parties may agree that new rates can be unilaterally . . . imposed by the
utility, subject . . . to ultimate Commission disallowance if they are not just and reasonable.”). See also Fed. Power
Comm’n v. Sierra Pacific Power Co., 350 U.S. 348, 353 (1956) (holding that unilateral contract changes cannot
supersede contracted-for rates not in opposition to public interest).
71
Sierra, 350 U.S. at 355.
72
Papago, 723 F.2d at 954.
rigorous . . . ‘public interest’ standard of review,” citing its Devon Power order.73 Applying this
discretion, the Commission found that the SCE&G settlement did not have the compelling
circumstances found in Devon Power (i.e. the need for price certainty and rates resulting from
freely negotiated, arm’s length dealing). Therefore, the Commission reasoned, it would be
“unjust and unreasonable to impose the more rigorous application of the ‘just and reasonable’
standard of review . . . with respect to future changes to the Settlement sought by the Commission
or non-settling parties.”74 Accordingly, FERC ordered a revision of the settlement’s standard of
review provision.75 Curiously, the FERC order did not address changes made by the selling
utility which would, by the settlement language, be subject to the more rigorous “contrary to
public interest” standard of review. In its compliance filing and in accordance with the FERC
order, SCE&G added the following language to the relevant settlement section: “The provisions
of this Section 21 are applicable only as to the modifications sought by the Parties to this
Settlement Agreement.”76 The settlement retained language, however, subjecting changes to the
settlement provisions to the Mobile-Sierra presumption.77 The settlement as amended, therefore,
contemplates a unilateral change by the selling utility that would receive Mobile-Sierra
deference.
The Petal Gas case presents a similar path resulting in a different settlement outcome.
The settlement, as in SCE&G, provided for unilateral changes by the selling utility (Petal):
“[N]othing in this Settlement shall preclude Petal from filing changes in its FERC Gas Tariff that
are not inconsistent with its obligations under this Settlement, or preclude the Settling
73
S.C. Electric & Gas Co., 137 F.E.R.C. P61,081 para. 5 (2011).
Id. para. 5 (emphasis added).
75
Id. para. 6.
76
S.C. Electric & Gas Co. Compliance Filing § 21 (2011), available at
http://elibrary.ferc.gov/idmws/common/OpenNat.asp?fileID=12813687.
77
Id. (“[A]ny modifications to the following provisions of the Settlement Agreement after the Settlement Agreement
has been approved by the Commission shall be subject to the ‘public interest’ application of the just and reasonable
standard of review.”).
74
Participants from challenging any such proposed changes by Petal.”78 Language in the settlement
precluding FERC review without the Mobile-Sierra presumption was rebuffed by FERC and sent
back to Petal Gas for revision, as in SCE&G.79 However, instead of retaining the Mobile-Sierra
presumption for changes made by the settling parties, including the utility, the relevant language
was changed to allow for just and reasonable review subsequent to a change in the settlement
terms by any party.80 It is additionally curious that in these orders mandating settlement revision,
FERC has consistently stated that imposition of the high-deference public interest standard of
review on the Commission would be unjust and unreasonable and is therefore untenable, but that
the parties are free to impose the high-deference public interest standard on themselves.81
FERC’s suggestion would have a strange result: parties could include a contract or settlement
provision that allows for contract modification by a party upon a finding that the rate is contrary
to the public interest. Such a provision would, of course, be irrelevant in light of FERC’s
constant authority to authorize rate modifications in such circumstances.82
In the High Island case, FERC took issue with the settlement’s provision that the
standard of review for any change to the settlement would be the high-deference public interest
standard of review. Specifically, FERC noted that, in accordance with Devon Power, it has the
78
Petal Gas Storage LLC Compliance Filing § 3.3 (2011), available at
http://elibrary.ferc.gov/idmws/common/OpenNat.asp?fileID=12671835.
79
See Petal Gas Storage LLC, 135 F.E.R.C. P61,152 para. 19 (2011).
80
Petal Gas Storage LLC Compliance Filing § 3.4 (2011) (“[T]he standard for review of any such change proposed
by a Settling Participant, or by the Commission acting sua sponte, shall be the ‘just and reasonable’ standard.”). Cf.
Petal Gas Storage LLC Offer of Settlement § 3.4 (2011), available at
http://elibrary.ferc.gov/idmws/common/OpenNat.asp?fileID=11787777 (“[T]he standard for review of any such
change proposed by a Settling Participant, or by the Commission acting sua sponte, shall be the ‘public interest’
standard for review.”).
81
See, e.g., Petal Gas Storage LLC, 135 F.E.R.C. P61,152 para. 18 (2011); S. LNG Co., 135 F.E.R.C. P61,153 para.
25 (2011); High Island Offshore Sys. LLC, 135 F.E.R.C. P61,105, 61,613 n.22 (2011).
82
See United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332, 345 (1956) (“[I]f the
Commission . . . determines the contract rate to be so low as to conflict with the public interest, it may . . . authorize
the natural gas company to file a schedule increasing the rate.”); Devon Power LLC, 134 F.E.R.C. P61,208 para. 25
(2011) (“The ‘public interest’ standard . . . still allows the Commission to respond as necessary to the threat of
serious harm to the public interest. The Commission has taken such action in the past, and we retain the ability to do
so in the future.”).
discretion to determine whether the high-deference public interest standard of review should
apply.83 The Commission reasoned that the “circumstances surrounding [the] Settlement [did]
not rise to the extraordinary level of those present in Devon Power.”84 Given that dynamic,
FERC ordered modification of the High Island standard of review provision. High Island
performed the modification, revising the standard of review language from “the standard of
review for any such proposed change shall be the ‘public interest’ standard for review” to “the
standard of review for any such proposed change shall be the ‘just and reasonable’ standard, not
the ‘public interest’ or ‘most stringent’ standard for review.”85
The result of cases such as High Island and Petal Gas is a standard of review that is
overly vulnerable to FERC intrusion. To avoid such a position, interstate wholesale market
participants could include a two-pronged provision allowing for two alternative levels of FERC
review. Such an approach would both protect rates from undue revision—thereby promoting rate
stability, and operational and investment efficiency—but also allow for FERC review when
appropriate. The two-pronged standard of review provision would be similar to the following:
a. To the extent the Commission reviews any provision(s) or any change to any
provision(s) of the Settlement (Contract) resulting from bilateral or multilateral negotiation
or dealing, it is agreed that the standard of review shall be the “public interest” standard of
review as provided by United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332
(1956); Fed. Power Comm’n v. Sierra Pacific Power Co., 350 U.S. 348 (1956); Morgan
83
High Island para. 23.
High Island para. 24.
85
High Island Offshore Sys. LLC Compliance Filing § 9.5 (2011), available at
http://elibrary.ferc.gov/idmws/common/opennat.asp?fileID=12661329.
84
Stanley Capital Group Inc. v. Public Utility District No. 1, 554 U.S. 527 (2008); and NRG
Power Marketing, LLC v. Maine Public Utilities Commission, 130 S. Ct. 693 (2010).
b. To the extent the Commission reviews any provision(s) or any change to any
provision(s) of the Settlement (Contract) resulting substantially from unilateral action, it is
agreed that the standard of review shall be the “just and reasonable” standard of review as
provided by United Gas Pipe Line Co. v. Mobile Gas Service Co., 350 U.S. 332 (1956);
Federal Power Commission v. Sierra Pacific Co., 350 U.S. 348 (1956); Morgan Stanley
Capital Group Inc. v. Public Utility District No. 1, 554 U.S. 527 (2008); and NRG Power
Marketing, LLC v. Maine Public Utilities Commission, 130 S. Ct. 693 (2010).
Rate stability, as argued by FERC in Devon Power, is a beneficial product of market forces.86
Participants in the interstate wholesale market can seize this benefit by devising more intelligent
and more imaginative rate creation and modification provisions. The two-pronged provision does
not impede FERC’s duty to make appropriate inspections under the law, nor does it allow parties
to modify rates with impunity. The provision does, however, provide clarity for parties involved
in the interstate wholesale energy market by putting them on notice as to judicially imposed
limits on exchange arrangements and their revision.
3.
Conclusion
Rate-setting options available to utilities have multiplied over the ninety-one years since
FPA was passed. Over that time, FERC, the D.C. Circuit Court of Appeals, and the Supreme
86
Devon Power para. 20 (“[T]he Commission determined that use of a more rigorous application of the statutory
‘just and reasonable’ standard to auction results, making them more difficult to challenge in the future, would
promote rate stability, which the Supreme Court has recognized as an important goal under the FPA.”).
Court have each weighed in on the meaning of its various provisions and how best to apply them.
It is clear that over that period of time, by the momentum of judicial opinion, increasing
deference has been granted to rates resulting from market-based mechanisms. It is equally clear
that corresponding review protocols have grown increasingly confusing, and made more so by
the assertion of FERC discretion. FERC issued its order denying rehearing of the Devon Power
decision in October 2011. No doubt the matter will soon be considered on appeal and new
guidance concerning applicability of the Mobile-Sierra provision will be handed down. Until that
time, utilities and capacity providers engaged in rate-setting contests must endure the uncertainty
that currently accompanies this area of the law.