Amicus Curiae Brief — Morgan Stanley Capital Group Inc. v. Public Util. Dist. No. 1 of Snohomish Cty.
Supreme Court brief2008
Ask Donna
What actually matters in this document.
Text
AS 5574 B
|
po 06-146
3n the
Supreme Court of the Uni
MORGAN STANLEY CAPITAL GROUP INC.
SAPS NOs.
We
PUBLIC UTIL. DIST. NO. 1 OF SNOHOMISH COUNTY, WA, et al.
CALPINE ENERGY SERVICES, L.P., et ai.
Vv.
PUBLIC UTIL. DIST. NO. 1 OF SNOHOMISH COUNTY, WA, et al.
On Writ of Certiorari to the
United States Court of Appeals
for the Ninth Circuit
BRIEF OF THE ELECTRIC POWER SUPPLY ASSOCIATION,
COLORADO INDEPENDENT ENERGY ASSOCIATION, ELECTRIC
POWER GENERATION ASSOCIATION, INDEPENDENT ENERGY
PRODUCERS ASSOCIATION, INDEPENDENT PETROLEUM
ASSOCIATION OF AMERICA, INDEPENDENT POWER
PRODUCERS OF NEW YORK, INTERSTATE NATURAL GAS
ASSOCIATION OF AMERICA, NATURAL GAS SUPPLY
ASSOCIATION, NEW ENGLAND POWER GENERATORS
ASSOCIATION, INC., NORTHEAST ENERGY AND COMMERCE
ASSOCIATION, NORTHWEST & INTERMOUNTAIN POWER
PRODUCERS COALITION, AND WESTERN POWER TRADING
FORUM AS AMICI CU RIAE IN SUPPORT OF PETITIONERS
NEIL L. LEVY KENNETH W. STARR
ROBERT R. GASAWAY Counsel of Record
ASHLEY C. PARRISH KIRKLAND & ELLIS LLP
DAVID G. TEWKSBURY 777 South Figueroa Street
ScoTT M. ABELES Los Angeles, CA 90017
KIRKLAND & ELLIS LLP (213) 680-8400
655 Fifteenth Street, N.W.
Washington, D.C. 20005
Attorneys for Electric Power Supply Association
November 28, 2007
2 TE A LES
WiLSON-EPES PRINTING CO., INC. — (202) 789-0096 -— WASHINGTON, D.C. 20002
Additional counsel:
NICHOLAS G. MULLER
EXECUTIVE DIRECTOR
COLORADO INDEPENDENT
ENERGY ASSOCIATION
475 17th Street, Ste 940
Denver, CO 80202
(303) 297-1970
Counsel for Colorado
Independent Energy
Association
JAN SMUTNY-JONES
EXECUTIVE DIRECTOR
INDEPENDENT
ENERGY PRODUCERS
ASSOCIATION
1215 K Street, Ste 900
Sacramento, CA 95814
(916) 448-9499
Counsel for Independent
Energy Producers Association
DAVID B. JOHNSON
READ & LANIADO, LLP
25 Eagle Street
Albany, NY 12207
(518) 465-9313
Counsel for Independent
Power Producers of New York
TERRANCE J. FITZPATRICK
GENERAL COUNSEL
ELECTRIC POWER
GENERATION
ASSOCIATION
800 N. Third Street, Ste 303
Harrisburg, PA 17102
(717) 909-3742
Counsel for Electric Power
Generation Association
BARRY RUSSELL
INDEPENDENT
PETROLEUM
ASSOCIATION OF
AMERICA
1201 15th Street, NW
Washington, DC 20005
(202) 857-4722
Counsel for Independent
Petroleum Association of
America
JOAN DRESKIN
TIMM ABENDROTH
INTERSTATE NATURAL
GAS ASSOCIATION OF
AMERICA
10 G Street, NE, Ste 700
Washington, DC 20002
(202) 216-5928
Counsel for Interstate
Natural Gas Association of
America
HENRY S. MAY, JR.
CATHERINE O’HARRA
VINSON & ELKINS LLP
2500 First City Tower
1001 Fannin Street
Houston, TX 77002
Counsel for Interstate Natural
Gas Association of America
CHRISTOPHER P. SHERMAN
GENERAL COUNSEL
NEW ENGLAND POWER
GENERATORS
ASSOCIATION, INC.
141 Tremont Street
Boston, MA 02111
(617) 902-2354
Counsel for New England
Power Generators Association,
Inc.
DAVID G. TEWKSBURY
KIRKLAND & ELLIS LLP
655 15th Street, NW
Washington, DC 20005
(202) 879-5000 |
Counsel for Northwest &
Intermountain Power
Producers Coalition
DAVID G. TEWKSBURY
KIRKLAND & ELLIS LLP
655 15th Street, NW
Washington, DC 20005
(202) 879-5000
Counsel for Natural Gas
Supply Association
PETER W. BROWN
BROWN, OLSON
& GOULD, P.C.
2 Delta Drive, Ste 301
Concord, NH 03301-7426
(603) 225-9716
Counsel for Northeast
Energy and Commerce
Association
DANIEL W. DOUGLASS
DOUGLASS & LIDDELL
21700 Oxnard Street
Woodland Hill, CA 91367
(818) 961-3001
Counsel for Western
Power Trading Forum
-9
i
QUESTION PRESENTED
Under the Federal Power Act, as interpreted by
this Court in United Gas Pipe Line Co. v. Mobile Gas
Service Corp., 350 U.S. 332 (1956), and Federal
Power Commission v. Sierra Pacific Power Co., 350
U.S. 348 (1956), the Federal Energy Regulatory
Commission may not modify the terms of valid
wholesale power contracts except in circumstances of
unequivocal public necessity. In conflict with
decisions of this Court and every other Court of
Appeals to consider the issue, the Ninth Circuit held
that the Commission may nullify a wholesale power
contract, even in the absence of public necessity, if
the contract rates are not pre-approved by the
Commission or if the contract is later deemed to have
been formed during’a period of market dysfunction.
The questions presented are:
1. Whether the Ninth Circuit erred in failing to
abide by this Court’s decisions precluding the
Federal Energy Regulatory Commission from
retroactively abrogating valid, bilaterally negotiated
wholesale power contracts absent a showing that
abrogation is required in the public interest.
2. Whether the Ninth Circuit erred in effectively
determining that the Mobile-Sierra public-interest
standard applies asymmetrically only to sellers (but
not to buyers) that seek to escape the terms of freely
negotiated wholesale power contracts.
EFI 6 OS. FINE BED incscnscccsecscsossonsetesionssensscuiasii i
TPR CO PORE RE i cccniiccceccsscsececetecesctnsaanensa’ iv
INTEREST OF AMICI CURIAE ...00.... ...cccccccccecseceseeees 1
INTRODUCTION AND SUMMARY OF
GIT, \itsnitiesssintssorsetinnstsiiingiaieainiadaada 4
PITT hicibinssntnnicsisectinanininvncnnidtguadumaiagemuaial 8
I. The Federal Power Act Protects The
Integrity Of Privately Negotiated Contracts. .....8
A. The Federal Power Act Provides that
Contract Rates Become Effective
Without Prior Review Or Approval By
BOR CRUD i cnircisssocscessnnasiiiidaiiediadinddaiaaaaiad 8
B. This Court Has Consistently
Interpreted The Federal Power Act As
Protecting The Integrity Of Private
CRORIIIIIEI,. .iciieccnnictonectnhinsininiiainiieiimiaipie Rieti 13
Il. The Decision Below Misapplies The
Statutory Requirements And Cannot Be
Squared With Settled Precedent. ...................... 17
A. The Ninth Circuit Has Overstepped
The Bounds Of Its Proper Judicial Role..... 18
B. The Decision Below Misunderstands
The Regulatory Scheme. .................:::0000000+ .20
1. The Federal Power Act Does Not
Require That Contract Rates Be
Reviewed Or Formally Approved. ....... 20
li
-
TABLE OF CONTENTS
il
2. The Meaning Of The Federal
Power Act Has Not Changed
Merely Because Congress And
The Commission Have Moved In
The Direction Of Market-Based
EE TE at ee 23
3. The Federal Power Act Does Not
Permit An Asymmetrical
ESE EIS at one 28
Ill. Reversing The Judgment Below And
Reaffirming Mobile-Sierra Will Further The
RESALE ROE See ee eee 31 :
A. Reversing The Judgment Below Will
Restore Certainty To The Nation’s
Wholesale Energy Markets......................... 31
B. The Federal Power Act Imposes A
Crucial Constraint On Agency
EET Aaa eR 35
EEE 38
lv
TABLE OF AUTHORITIES
Page(s)
Cases
AFL CIO v. Jones, Local 926,
Intl Union of Operating Eng’rs,
Te 31
Agostini v. Felton,
Cees 19
Alabama Power Co. v. FERC,
be EE 9
Arizona Corp. Comm’n v. FERC,
$87 F.3d 962 (D.C. Cir. 2005) .............000...0.0c000000 36
Arkansas Natural Gas Co. v.
Arkansas R.R. Comm'n,
ee 11, 15
Atlantic City Elec. Co. v. FERC,
Fg 16, 36
Bankamerica Corp. v. United States,
FE Oe 27
Barnhart v. Sigmon Coal Co.,
ET 13
Borough of Lansdale v. FPC,
494 F.2d 1104 (D.C. Cir. 1974)............................ 22
Boston Edison Co. v. FERC, |
SBS F.3a SO Chat Car. BOO) .....cccccccccsccccccscscccceiecs. AG
Boston Edison v. FERC,
856 F.2d 361 (1st Cir. 1998) ......................000 21, 29
California v. FERC,
Te en 19
Vv
Central Kan. Power Co. v. State Corp. Comm’n,
LS a ee 11
City of Winnfield v. FERC,
7144 F.2d 871 (D.C. Cir. 19B4)............cccccsscccccceeess 22
Consumers Energy Co. v. FERC,
367 F.34 916 @D.C. Cir. 3004)...............00...........-. 28
Deal v. United States,
eel 14
Dickerson v. United States,
TET iliaisaile 16
Federal Power Comm'n v. Sierra Pac. Power Co.,
a ae passim
FERC v. Pennzoil Producing Co.,
439 U.S. 508 (1979)............... lacisiiaael wenianiaemealll 26
FPC v. Hope Natural Gas Co.,
TL 29
Grand Council of Crees v. FERC,
908 Fe SEO CIC. Cig. BODO) once ccccccscccccccccrcenonss 29
Hamdan vu. Rumsfeld,
ITA EET 13
Herman & MaeLean v. Huddleston,
I sernciueon ae
IBP, Inc. v. Alvarez,
Ee 19
In re Permian Basin Area Rate Cases,
390'U.S. 747 (1066)......................... a passim
Interstate Natural Gas Ass’n v. FERC.
ED 23
Lechmere, Inc. v. NLRB, .
Ee oe
Louisiana Energy & Power Auth. v. FERC,
141 F.3d 364 (D.C. Cir. 1998).................-c00000cceee0
Louisiana Pub. Serv. Comm’n v. FCC,
ET ea
Maislin Indus., U.S., Inc. v. Primary Steel, Inc.,
Ae a ET
Montana-Dakota Utils. Co v.
Northwest Pub. Serv. Co.,
eel
NAACP v. FPC,
425 U.S. 662, 669-790 (1976) ..0..........ccccccceceeceeeees
National Cable & Telecomms. Ass'n v.
Brand X Internet Servs.,
ae
Natural Gas Pipeline Co. of Am. v. Harrington,
246 F.2d 915 (5th Cir. 1957).................cccececceeeees
Northeast Utils. Serv. Co. v. FERC,
55 F.3d 686 (ist Cir. 1996) .............................0000
Northeast Utils. Serv. Co. v. FERC,
993 F.2d 937 (ist Cir. 1993) ...............................
Otter Tail Power Co. v. United States,
ES RL
Potomac Elec. Power Co. v. FERC,
SA 8 Filey |
Public Serv. Comm’n v. FERC,
Gee F.2d 467 (D.C. Cir. 1968)..............................
ee ee ee eee, ee ee eee Te eee ee) eee, le ee Oe LS Ne OD Pe ee ee en. en eae
vii
Public Serv. Comm’n v. FPC,
543 F.2d 757 (D.C. Cir. 1974)...............censeoee. 30, 36
Public Util. Dist. No. 1 of
Snohomish County v. FERC,
471 F.3d 1053 (9th Cir. 2006)...................... passim
Public Utils. Comm’n of Calif. v. FERC,
474 F.3d 587 (9th Cir. 2006)..............ccecccmneeeeneneee 21
Reno v. Bossier Parish Sch. Bd.,
520 U.S. 471 (1997) ...........<......2... sacinaaiatiita scndiaeela 17
Rodriguez de Quijas v.
Shearson/Am. Express, Inc.,
490 U.S. 477 (1989).......... nl sshenienadtunsi antennal 17
Sam Rayburn Elec. Coop. v. FPC,
516 F.2d SOOO. Cir. 1978) .....05000000ccscccccseeseces 22
San Diego Gas & Elec. Co. v. FERC,
004 F.2d 7287 (DiC. Cir. 1980) .........441-02..002002.-0020. 30
Sunray Mid-Continent Oil Co. v. FPC,
364 U.S. 137 (1960).......... Siiientinents ictaeonsiapediiith sgnwccill 8
Tejas Power Corp. v. FERC,
908 F.2d 998 (D.C. Cir. 1990) ................ cece cece e 24
Town of Norwood v. FERC,
587 F.2d 1806 (Dil. Cir. 1978).....................0.0..6. 16
Transmission Access Policy Study Group v. FERC,
Treigle v. Acme Homestead Ass'n,
TT a 11
United Gas Pipe Line Co. v.
Memphis Light, Gas & Water Div.,
LL 14, 16, 21, 29
;
4
{
=.=
yy
viil
United Gas Pipe Line Co. v.
Mobile Gas Serv. Corp.,
I Gc csctensnanecbonasanene passim
United States v. National Broiler Mktg. Ass'n,
550 F.2d 1380 (11th Cir. 1977)....................-cee0e0. 27
Verizon Commce'ns, Inc. v. FCC,
ET 7, 10, 16
Wisconsin Pub. Power, Inc. v. FERC,
493 F.3d 239 (D.C. Cir. 2007).................. 16, 30, 36
Administrative Decisions
Nevada Power Co. v. Duke Energy Trading,
RD i) 28
Nevada Power Co. v. Enron Power,
103 FERC’9 61,353 (2008)............................. 24, 26
Pacific Gas & Elec. Co..,
Site ines eater tiicrnsatitedsnemnestil 21
Standard of Review for Proposed Changes to
Market-Based Rate Contracts for Wholesale
Sales of Elec. Energy by Pub. Utils.,
Proposed Policy Statement,
100 FERC 4 61,145 (2002).................ccernsensencnenes 33
United Gas Pipe Line Co., '
5 FPC 770 (1946)........ Diiliessanstnnosunenemags supemeinineen = |
Statutes and Regulations
a 10, 12, 13
tt crniiantsinnnennnniarniiibiecsnenieeedl 9, 10, 20
16 U.S.C. § 824e ........ a 10
|, 22
A Pe eee ere eee ae a a a ee ee ere SS ee ee ee a
ix
Ben snccsnesscratspsennananninectitqualives sheebenasbiannd 12
Taree 9, 22
18 C.F.R. § 35.4.......... TPS SOAS oN Pen eee 29
coe nscsiaccrinatiitiiintnbiatabinenil 12
in na esti iasceteeatnteisentsniaeial 12
ee _cnseuanonsvetionensesnevaneedatl 12
el 18
TE ee 12
Energy Policy Act of 1992,
Pub. L. No. 102-486, 106 Stat. 2776 (1992) ........ 16
Energy Policy Act of 2005,
Pub. L. No. 109-58, 119 Stat. 594 (20085) ............ 16
Other Authorities
Boxer, Barbara, U.S. Senator,
Ltr. to FERC Chairman Joseph T. Kelliher,
Docket No. EL02-60 (Mar. 28, 2007),
available at http://elibrary.ferc.gov/
IDMWS/search/results.asp ..................cc:ccccceeeeeees 37
Breyer, Stephen G.,
Analyzing Regulatory Failure: Mismatches,
Less Restrictive Alternatives, and Reform,
Giteeeyv. L. Bev. 540 (197G)..............0cceccccccsccceescees 25
CERA Advisory Services,
California Power Crisis Aftershock: The
Potential Modification of Western Power
Contracts (Apr. 2007),
available at http://www2.cera.com/
westernpowercontracts / ................0006 seems PASSIM
Electric Power Daily,
IPPs seen entering ‘sweet spot’ of nower cycle:
RI sar caeepetnnetanatiied 33
FERC, Office of Markets
Oversight and Investigations,
2004 State of the Markets Report
(June 2005), available at
http://ferc.goumarket-oversight/
st-mkt-over/som-rpt-2004.pdf ........ sendinliacetinibi 25, 34
Gergen, M., et a!.,
Market-Based Ratemaking and the Western
Energy Crisis of 2000 and 2001, |
24 Bmeray Lid. BB1 (BOOG)..cccccccccccscccccccsccsccccecceees 26
Harvey, Scott M., et al.,
Analysis of the Impact of Coordinated
Elec. Mkts. on Consumer Elec. Charges
(Nov. 20, 2006), available at http://www.pjm.
com/documents/downloads/reports/20061121-
analysis-coordinated-elec-mkts.pdf..................... 26
ISO/RTO Council,
The Progress of Organized Wholesale
Electricity Markets in N. Am. (Oct. 16, 2007),
available at http://www. isorto.org
latf/cf/%7B5B4E85C6-7EAC-40A0-
8DC3-003829518EBD%7D/IRC
_State_of_the_Markets_Report_103007.pdf....... 26
ISO/RTO Council,
The Value of Independent Reg Grid Operators
(Nov. 2005), available at http://www.caiso. 0.com/
1406/1406c4291aa40. pd ..........ccccccrrcseccccccesesescores 26
Kelliher, Joseph T.,
Opening Remarks at the Competition in
xl
Wholesale Power Markets Conference,
FERC Docket No. AD07-7-000 (Feb. 27, 2007),
availnble at http://elibrary.ferc.gov/idmws/
nvcommon/NVViewer.asp?Doc=11269177:0....... 24
Spence, David B. & Cross, Frank,
A Public Choice Case for
the Administrative State,
en I ..._.. . sssmneunassbusnepnaneons 37
Tewksbury, D. & Lim, S..,
Applying the Mobile-Sierra Doctrine to
Market-Based Rate Contracts,
BE BGS Lad. SET (BOOB) ..00ccccccoscccccccsccccccsscccosees 27
The Electric Energy Market Competition Task Force,
Report to Congress on Competition in Wholesale
and Retail Markets for Electric Energy
(Apr. 2007), available at
http://www.ferc.gov/legal/fed-sta/
ene-pol-act/epact-final-rpt.pdf ........... 25, 26, 28, 31
Wells, Jim
Statement, Meeting Energy Demand in the
21st Century, GAO-05-414T (Mar. 16, 2005),
available at http://www.gao.gov/
i ecccsccnecccccsenccscnnccncccssesasentsen 32
INTEREST OF AMICI CURIAE!
Amici represent a diverse array of participants in
the Nation’s electric and natural gas industries that
are directly affected by the issues raised in these
cases. Amici and their members have made
long-term financial commitments, involving
hundreds of billions of dollars, in reliance on this
Court’s settled authorities interpreting the Federal
Power Act and parallel provisions of the Natural Gas
Act as protecting the integrity of privately negotiated
contracts. Because the Ninth Circuit’s decision sets
aside congressional policy and_ grants’. the
Commission never-before-recognized authority to
abrogate contracts, amici are concerned that the
decision below will destabilize the Nation’s energy
markets, discourage much-needed investment, and
ultimately result in higher costs for consumers.
Electric Power Supply Association (“EPSA”).
EPSA is a national trade association representing
competitive electric power suppliers, including
independent power producers, merchant generators,
and power marketers.
Colorado Independent Energy Association
(“CIEA”). CIEA is a trade association of competitive
independent power producers operating in Colorado.
Its 30 members and 10 associated members are an
integral part of Colorado's energy industry,
1 Petitioners and respondents have consented to the filing of
this brief in letters on file in the Clerk’s office. Pursuant to S.
Ct. R. 37.6, amici state that no counsel for a party authored this
brief in whole or in part, and that no counsel or a party made a
monetary contribution intended to fund the preparation or
submission of the brief.
2
producing electricity with clean, efficient natural
gas-fired cogeneration and renewable technologies.
Electric Power Generation Association
(“EPGA”). EPGA is a regional trade association of
major electric generating companies that supply
wholesale power in Pennsylvania and surrounding
states. Its member companies collectively own and
operate more than 141,000 megawatts of generating
capacity, approximately half of which is located in
the mid-Atlantic region.
Independent Energy Producers Association
(“IEP”). IEP is a California non-profit mutual
benefit corporation whose members collectively own
and operate approximately one-third of California’s
installed generating capacity.
Independent Petroleum Association of
American (“IPAA”). IPAA is a national association
representing thousands of independent oil and
natural gas producers and service companies across
the United States.
Independent Power Producers of New York
(“IPPNY”). IPPNY is a_ not-for-profit trade
association representing more than 100 independent
power producers involved in the development of
generation, marketing, and sale of electric power and
natural gas in the state of New York.
Interstate Natural Gas _ Association of
America (“INGAA”). INGAA is a trade association
that represents virtually all of the interstate natural
gas pipeline and interstate natural gas storage
companies operating in the United States, as well as
comparable companies in Canada and Mexico. Its
members transport over 95 percent of the Nation’s
—_——
3
natural gas through a network of 180,000 miles of
pipelines. ,
Natural Gas Supply Association (“NGSA”).
NGSA _ represents U.S.-based producers and
marketers of natural gas on issues that broadly
affect the natural gas industry. NGSA is the voice of
suppliers who find, sell, transport and deliver 27
percent of the United States natural gas supply.
New England Power Generators Association,
Inc. (“NEPGA”). NEPGA is a trade association
representing electric generating companies in New
England. Its member companies account for over
20,000 megawatts of generating capacity in the
region.
Northeast Energy and Commerce Association
(“NECA”). NECA is a trade association serving
New England’s competitive electric power industry.
Its 600 members. include developers § and
owner/operators of competitive power projects, power
marketers and traders, fuel and equipment
suppliers, power consumers, and various service
providers to the power industry.
Northwest & Intermountain Power
Producers’ Coalition (“NIPPC”). NIPPC
represents developers, owners, and operators of
non-utility power plants in the Pacific Northwest and
Intermountain region.
Western Power Trading Forum (“WPTF’).
WPTF is a California non-profit, mutual benefit
corporation whose members actively participate in
California’s restructured’ electricity markets.
WPTF’s broad-based membership includes energy
service providers, scheduling coordinators,
generators, energy consultants, and public utilities.
INTRODUCTION AND
SUMMARY OF ARGUMENT
For more than fifty years, this Court, the lower
federal courts, and, with only a few notable
exceptions, the Federal Energy Regulatory
Commission have faithfully applied the Federal
Power Act’s statutory regime protecting the integrity
of privately negotiated contractual arrangements.
As this Court has recognized, the Act provides that
wholesale rates may be “established initially by
contract,” United Gas Pipe Line Co. v. Mobile Gas
Serv. Corp., 350 U.S. 332, 339 (1956), and that, once
so established, the resulting rates may not be
modified except in “extraordinary circumstances”
when unequivocally “necessary in the _ public
interest.” Jd. at 344; Federal Power Comm'n uv.
Sierra Pac. Power Co., 350 U.S. 348 (1956). The
stable regulatory regime established by the Act and
this Court’s precedents—including what heretofore
have been almost unquestioned assurances that
private agreements will be respected—has played a
central role in the development of the Nation’s
energy markets. Most importantly, this regulatory
stability has permitted buyers and sellers to lock in
energy transactions at specific prices and quantities
using negotiated arrangements tailored to their own
particular needs.
Until the decision below, no federal court of
appeals had ever questioned the fundamental
premise that privately negotiated wholesale energy
contracts are, without more, presumptively
enforceable absent some showing of extraordinary
circumstances. Instead, following Mobile and Sierra,
courts had held that, notwithstanding’ the
Commission’s broad authority to oversee wholesale
energy markets and to modify contracts when
necessary in the public interest, the Commission has
no general or vagrant authority to reformulate
private arrangements. Until the Ninth Circuit's
decision, courts had consistently rejected the notion
that contract modifications can be justified merely
because, in retrospect, the agreed-on rates might be
somewhat higher or lower than what one party or
the other might, with the benefit of hindsight, prefer.
By limiting the Commission’s authority to undo
private agreements, courts have responsibly
implemented Congress’s “reasonable accommodation
between the conflicting interests of contract stability
on the one hand and public regulation on the other.”
Mobile, 350 U.S. at 344.
The Ninth Circuit’s decision radically and
self-consciously departs from these heretofore stable
understandings. By reinterpreting the Federal
Power Act to alter the balanced, even-handed
public-interest standard on which thousands of
wholesale power contracts are premised, the decision
below unwisely intrudes on the Commission’s
regulatory prerogatives, subverts long-settled
expectations of market participants, and threatens to
destabilize the’ Nation’s energy markets. If allowed
to stand, the decision risks exposing consumers to
the same types of high and volatile prices and supply
shortages that prompted Congress and _ the
Commission to discard past regulatory regimes in
favor of more efficient, more competitive, and more
reliable market-based measures.
Significantly, the decision below is not the
offspring of any pre-existing uncertainty or judicial
disagreement over the proper interpretation of the
6
Federal Power Act or this Court’s precedents. Until
now, courts have had no difficulty applying the
statutory standards and abiding by this Court’s
decisions in Mobile and Sierra. The Ninth Circuit’s
doctrinal departures are instead the by-product of
that court’s misunderstanding of its proper judicial
role. Departing from precedent and disregarding the
Commission’s expert determinations as to what the
public interest requires—specifically, that
sophisticated parties should not be permitted to
escape their binding contractual commitments—the
Ninth Circuit unnecessarily took sides in the dispute
before it. While the Federal Power Act respects the
integrity of contracts, the Ninth Circuit fashioned a
new, more relaxed standard allowing contracts to be
rescinded or reformulated. In particular, the Ninth
Circuit purported to grant the Commission new
authority to modify any privately negotiated
arrangement the Commission has not previously
pre-approved, as well as any contract that might
later be deemed to have been formed during what
the Ninth Circuit loosely termed a period of market
“dysfunction.” Public Util. Dist. No. 1 of Snohomish
County v. FERC, 471 F.3d 1053, 1061, 1086 (9th ‘ir.
2006). The Ninth Circuit also reinterpreted the
Federal Power Act as creating a one-way ratchet
according to which buyer’s remorse—but not seller’s
remorse—can supply a basis for invoking the public
interest to abrogate voluntarily negotiated contract
rates. Id. at 1087-89.
As described below, the Ninth Circuit’s policy
innovations cannot be reconciled with the plain
terms of the Federal Power Act. Contrary to the
Ninth Circuit’s view, the statute contains no
requirement that the Commission pre-approve
7
contract rates. Instead, when two parties freely
negotiate the price term of an energy contract, the
resulting rates are presumed to satisfy statutory
standards of reasonableness, because “sophisticated
businesses enjoying presumptively equal bargaining
power” are “expected to negotiate a ‘just and
reasonable’ rate as between the two of them.”
Verizon Commce'ns, Inc. v. FCC, 535 U.S. 467, 479
(2002). Nor does anything in the Federal Power Act
suggest that Congress intended to create an
asymmetrical test that applies differently to
wholesale energy buyers as opposed to wholesale
energy sellers.
Enforcing the Federal Power Act as written,
including the respect it affords privately negotiated
arrangements, is essential to the proper functioning
of the Nation’s energy markets. This Court should
affirm its long-standing interpretation of the Federal
Power Act and reverse the decision below.
8
ARGUMENT
I. The Federal Power Act Protects The
Integrity Of Privately Negotiated Contracts.
The Federal Power Act preserves the integrity of
private contracts by establishing a regime under
which rates may be “established initially by
contract.” Mobile, 350 U.S. at 339. Hence, when
energy contracts arise from free and fair
negotiations, the resulting contract rates are
presumptively just and _ reasonable, and_ the
Commission may modify those rates only when —
necessary in the public interest.
A. The Federal Power Act Provides that
Contract Rates Become Effective Without
Prior Review Or Approval By The
Commission.
Congress enacted Part II of the Federal Power
Act in 1935, and the Natural Gas Act in 1938, to
ensure a stable and sufficient supply of affordable
energy. See, e.g., NAACP v. FPC, 425 U.S. 662,
669-790 (1976). The statutory scheme is built on a
“foundation of private contracts.” Sunray
Mid-Continent Oil Co. v. FPC, 364 U.S. 137, 154
(1960). The Federal Power Act thus respects the
integrity of privately negotiated agreements by
granting the Federal Energy Regulatory
Commission, the Federal Power Commission’s
successor, authority to modify such agreements only
in circumstances of “unequivocal public necessity.”
In re Permian Basin Area Rate Cases, 390 U.S. 747,
822 (1968).
To further these goals, “Congress rejected a
pervasive regulatory scheme ... in favor of voluntary
9
commercial relationships.” Otter Tail Power Co. v.
United States, 410 U.S. 366, 374 (1973). Although
the statute requires that “all rates and charges” in
connection with the transmission or sale of electric
energy be “just and reasonable,” and declares
“unlawful” any rate or charge that is not “just and
reasonable,” 16 U.S.C. § 824d(a), there is no
provision mandating that contract rates be set,
reviewed, or approved by the Commission. To the
contrary, Congress provided that rates may be
“established initially by contract.” Mobile, 350 U.S.
at 339. When two parties negotiate an agreement at
arm’s-length, the agreed-on rates are automatically
effective and presumptively valid until and unless
the Commission orders otherwise.
Section 205(c) of the Federal Power Act requires
that, “[uJnder such rules and regulations as the
Commission may prescribe,” every public utility
“shall file with the Commission” and “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.” 16 U.S.C. § 824d(c); see also 18 C.F.R.
§ 35.1(a); cf. 18 C.F.R. § 35.1(g) (setting out
circumstances where submission of contracts is not
required). The statute directs that, “[u]nless the
Commission otherwise orders,” rates and charges
become automatically effective. 16 U.S.C. § 824d(d)
(emphasis added); see also, e.g., Alabama Power Co.
v. FERC, 22 F.3d 270, 271 (11th Cir. 1994).
The Federal Power Act accordingly makes clear
that, absent a particular reason for the Commission
to further investigate, the Commission “accepts”
rates filed in accordance with Commission
regulations, and those rates are both effective and
10
presumptively lawful. To be sure, section 205
provides that, whenever a new or changed rate is
filed with the Commission, the Commission may
suspend the effectiveness of the rate for up to five
months pending a hearing “concerning | the
lawfulness” of the rate. 16 U.S.C. § 824d(e). In
addition, section 206 grants the Commission
authority to change rates “then in force” that are not
in the public interest, and to “determine” a “just and
reasonable” rate in cases where it has found an
existing rate “unjust, unreasonable, unduly
discriminatory or preferential.” 16 U.S.C. § 824e(a).
But even in those circumstances, Congress carefully
cabined the Commission’s authority so as not to cast
doubt on the principle that rates become effective
without the Commission’s review or approval. For
instance, the Commission may order refunds when a
rate is unlawful, but only prospectively for sales
occurring after the statutory “[rJefund effective date.”
Id.
In allowing contract rates to take effect without
prior Commission approval or review, Congress
recognized that “sophisticated businesses enjoying
presumptively equal bargaining power could be
expected to negotiate a ‘just and reasonable’ rate as
between the two of them.” Verizon, 535 U.S. at 479.
Congress thus “departed from the scheme of purely
tariff-based regulation” and “acknowledged that
contracts between commercial buyers and sellers
could be used in rate setting.” Jd. at 479.
In this regard, Congress expressly justified
federal regulation as “necessary in the public
interest” and made clear that the Commission’s
authority derived from its general obligation to
protect the public interest. 16 U.S.C. § 824a. The
11
statute’s invocation of the “public interest” is
significant because Congress was undoubtedly aware
of judicial decisions holding that “laws ... affecting
utility companies” must be “confined to purposes
reasonably connected with the public interest.”
Treigle v. Acme Homestead Ass’n, 297 U.S. 189, 197
(1936). As this Court recognized, although “the
obligations of contracts must yield to a proper
exercise of the police power,” that power may be
exercised only “for an end which is in fact public.”
Id. at 197; see also Central Kan. Power Co. v. State
Corp. Comm’n, 181 Kan. 817, 827 (1957)
(government's power to abrogate private rate
contracts is “incident to its power to regulate public
utilities, the exercise of which is conditioned on the
public interest”). A party’s dissatisfaction with an
“Improvident undertaking” has never been thought
to justify the government stepping in and interfering
with privately negotiated agreements: although the
“power to fix rates, when exerted, is for the public
welfare, to which private contracts must yield,” it is
“not an independent legislative function to vary or
set aside such contracts, however unwise and
unprofitable they may be.” Arkansas Natural Gas
Co. v. Arkansas R.R. Comm'n, 261 U.S. 379, 382-83
(1923) (it is the “intervention of the public interest”
that “justifies” and “conditions” the exercise of
authority).
In carefully cabining the Commission’s authority
and permitting rates to be set by private contract,
the Federal Power Act is markedly different from
“common carrier” statutes, such as the Interstate
Commerce Act, that effectively displace private rate
agreements by requiring “that the rates to all
shippers be uniform.” Mobile, 350 U.S. at 345. The
12
Federal Power Act also is unlike other statutes
under which Congress has dictated that private
contracts may not become effective unless and until
they have been reviewed and pre-approved by the
appropriate administrative agency. See, e.g., 46
U.S.C. § 814 (1970) (repealed) (Shipping Act: “[a]ny
agreement ... not approved, or disapproved, by the”
Federal Maritime Commission “shall be unlawful”);
16 U.S.C. § 825s (1944) (Flood Control Act: “rate
schedules to become effective upon confirmation and
approval by the Secretary of Energy”); 25 U.S.C.
§ 81(b) (2000) (providing that no “contract with an
Indian tribe that encumbers Indian lands ... shall be
valid unless that ... contract bears the approval of
the Secretary of the Interior”).
The general rate provisions of the Federal Power
Act described above also stand in marked contrast to
provisions of section 202 that provide more expansive
powers to the Commission in limited circumstances
not present here. Specifically, section 202(b)
provides that when the Commission directs a public
utility to connect “its transmission facilities with the
facilities” of another entity, the Commission may
“prescribe the terms and conditions of the
arrangement,” including “dictating the
apportionment of cost ... and the compensation or
reimbursement reasonably due.” 16 U.S.C.
§ 824a(b). Similarly, section 202(c) states that,
during war or in an emergency, “the Commission”
has authority to order “such generation, delivery,
interchange, or transmission of electric energy as in
its judgment will best meet the emergency and serve
the public interest.” 16 U.S.C. § 824a(c); see also 42
U.S.C. §§7151(b), 7172(a) (transferring section
202(c) powers to the Secretary of Energy). In these
13
narrow circumstances, if the “affected” parties
cannot agree on the terms of an arrangement, “the
Commission” may “prescribe ... such terms as it
finds to be just and reasonable, including the
compensation or reimbursement” to be paid. 16
U.S.C. § 824a(c).
In contrast to these limited, express grants of
authority, sections 205 and 206 of the Federal Power
Act do not vest the Commission with exclusive,
general, or vagrant rate-setting authority. See, e.g.,
Hamdan v. Rumsfeld, 126 S.Ct. 2749, 2765-66 (20:6)
(“a negative inference may be drawn from the
exclusion of language from one statutory provision
that is included in other provisions of the same
statute”); Barnhart v. Sigmon Coal Co., 534 U.S. 438,
452-53 (2002). To the contrary, the Commission’s
authority is limited to disapproving after the fact
privately negotiated rates that are _ initially
established by contract.
B. This Court Has Consistently Interpreted
The Federal Power Act As Protecting The
Integrity Of Private Contracts.
Over a half-century ago, the Court interpreted
the Federal Power Act and the Natural Gas Act, and
held in two unanimous decisions that the statutes
preserve the integrity of private contracts. The
Court's decisions, referred to collectively as
Mobile-Sierra, recognize that, because the Acts
establish regulatory systems based on privately
negotiated agreements, the Commission’s authority
to modify such agreements is limited. Unless the
parties specifically agree otherwise, freely-negotiated
rates may not be modified except in “extraordinary
circumstances” of “unequivocal public necessity.”
14
_ Permian, 390 U.S. at 822; see also United Gas Pipe
Line Co. v. Memphis Light, Gas & Water Div., 358
U.S. 103, 113 (1958) (the terms of a contract
determine when and how contracting parties may
seek to change contract rates).
In Mobile, the Court held that a party cannot
unilaterally change a contract rate by utilizing the
“filed-rate’ procedure” of the Natural Gas Act.
Mobile, 350 U.S. at 340-41. Stressing that the
Natural Gas Act, like the Federal Power Act,
“expressly recognizes that rates to particular
customers may be set by individual contracts,” the
Court held that the statute “evinces no purpose to
abrogate” such “private rate contracts.” Jd. at 338.
Accordingly, although “all rates are subject to being
modified by the Commission upon a finding that they
are unlawful,” id. at 341, modification is appropriate
only if “necessary in the public interest.” Jd. at 344.
The Court emphasized that, by “preserving the
integrity of contracts,” the statute “permits the ©
stability of supply arrangements” that “all agree” are
“essential to the health” of an industry that requires
“substantial investments” and “long-term
commitments.” Id.
The Court reiterated similar points in Sierra,
holding that the Federal Power Act’s mandate that
rates be “just and reasonable” must be construed in
light of the Commission’s overarching obligation to
protect the “public interest.” Sierra, 350 U.S. at
354-55; see also Deal v. United States, 508 U.S. 129,
132-34 (1993) (the meaning of words must be drawn
from the context in which they are used). The Court
emphasized that the Commission lacks authority to
protect a contracting party’s purely private interests
in being “relieved of [an] improvident bargain.”
15
Sierra, 350 U.S. at 354-55 (citing Arkansas Natural
Gas, 261 U.S. at 882-83). Although the Commission
had found that the contract rates at issue were
unreasonable, the Sierra Court ruled that the
Commission lacked authority to interfere with the
parties’ private agreement. See id. at 354. It
declared that the Commission may modify energy
contracts only where it has determined that an
agreed-on rate “adversely affect[s] the public
interest”—as where it might “impair the financial
ability of the public utility to continue its service,” or
“cast upon other consumers an excessive burden,” or
“be unduly discriminatory.” Id.
The Court’s Mobile-Sierra decisions have since
become towering landmarks in the jurisprudence
governing regulated energy markets. See, e.g.,
Boston Edison Co. v. FERC, 233 F.3d 60, 66 (1st Cir.
2000) (Mobile and Sierra are two of the “best-known
public utility decisions by the Supreme Court in this
century’). Relying on those decisions, investors and
market participants have made . enormous
investments in vital energy infrastructure. Although
the Mobile-Sierra decisions, and the respect for
settled expectations they demand, may appear as
lofty abstractions to the uninitiated, to participants
in the Nation’s energy markets the decisions are
foundational. A search of the Westlaw legal
database that collects Commission decisions shows
that of the approximately 5,000 administrative
decisions rendered by the Commission since 2000,
over 600 (approximately one in eight) mention
Mobile-Sierra. With market participants having
“bargain[ed] in the shadow” of Mobile-Sierra for
more than five decades, id. at 66, it may be only a
slight exaggeration, if it is an exaggeration at all, to
16
say that Mobile-Sierra is to energy transactions what
Miranda is to the law of criminal arrests. (Cf.
Dickerson v. United States, 530 U.S. 428, 443-44
(2000).
The continuing vitality of Mobile-Sierra has been
confirmed by this Court and assumed by lower courts
in an enduringly long—and consistent—line of cases.
See, e.g., Verizon, 535 U.S. at 479; Permian, 390 U.S.
at 820-22: Wisconsin Pub. Power, Inc. v. FERC, 493
F.3d 239, 271 (D.C. Cir. 2007); Atlantic City Elec. Co.
v. FERC, 295 F.3d 1, 14-15 (D.C. Cir. 2002);
Northeast Utils. Serv. Co. v. FERC, 993 F.2d 937,
960 (ist Cir. 1993). These decisions have reaffirmed
that enforcing contractual rights is in the public
interest because it protects the “legitimate interests”
of energy suppliers “in whose financial stability the
[energy]-consuming public has a vital stake.”
Memphis, 358 U.S. at 113. Until the Ninth Circuit’s
policy innovations below, the rule was clear: absent
duress or bad faith at the time a contract is
negotiated, parties must “live with their bargains as
time passes and various projections about the future
are proved correct or incorrect.” Town of Norwood v.
FERC, 587 F.2d 1306, 1312 (D.C. Cir. 1978).
Significantly, although Congress on numerous
occasions has amended the Federal Power Act, as
well as other aspects of the federal energy laws,
including making extensive revisions to the statute
in 1992 and 2005, see Energy Policy Act of 2005, Pub.
L. No. 109-58, § 1289, 119 Stat. 594 (2005); Energy
Policy Act of 1992, Pub. L. No. 102-486, 106 Stat.
2776 (1992), it has declined to change the
public-interest standard or to expand. the
Commission’s authority to modify private
agreements. See, e.g., Reno v. Bossier Parish Sch.
17
Bd., 520 U.S. 471, 483-84 (1997) (it is significant
when Congress fails to modify a statute in the face of
a long-standing judicial interpretation). Given this
Court’s long-standing interpretation of the Federal
Power Act, the legislative decision to leave the
relevant statutory provisions “intact” strongly
suggests that Congress has “ratified” this Court’s
interpretation. Herman & MacLean v. Huddleston,
459 U.S. 375, 385-86 (1983); Rodriguez de Quijas v.
Shearson/Am. Express, Inc., 490 U.S. 477, 486-87
(1989) (Stevens, J., dissenting) (it tips the “balance
between judicial and legislative authority” to depart
from earlier decisions giving “a statutory provision
concrete meaning, which Congress elects not to
amend during the ensuing 3 1/2 decades”).
II. The Decision Below Misapplies The
Statutory Requirements And Cannot Be
Squared With Settled Precedent.
Applying settled understandings of the Federal
Power Act, the Commission in the proceedings below
rejected attempts by buyers of wholesale electricity
to escape contracts they had voluntarily entered. In
reversing the Commission, the Ninth Circuit
invented a new test for determining whether
Mobile-Sierra’s public-interest standard applies to
contracts that incorporate market-based rates. The
Ninth Circuit also devised an entirely new legal
standard that favors granting relief in cases of
buyer’s—as opposed to seller’s—remorse. The Ninth
Circuit’s improper judicial policymaking exceeds the
bounds of its lawful authority and fundamentally
misunderstands the statutory requirements.
18
A. The Ninth Circuit Has Overstepped The
Bounds Of Its Proper Judicial Role.
The Ninth Circuit’s failure to respect this Court’s
prior decisions cannot be squared with its role as one
of twelve federal courts of appeals responsible for
faithfully reviewing the Commission’s administrative
orders in light of the Federal Power Act and the
Court’s precedents. Unlike the Commission’s
delegated authority to oversee the Nation’s wholesale
energy markets, the Ninth Circuit is not a primary
interpreter of the federal energy laws, nor has
Congress granted it any special or exclusive
authority to review the Commission’s administrative |
interpretations and applications of those laws. Cf. 42
U.S.C. § 7607(b) (granting the D.C. Circuit certain
special, exclusive authority to review administrative
determinations applying the Clean Air Act).
Nonetheless, the Ninth Circuit presumed to
fashion what is essentially a restatement of the law
of energy contracts. In the process, the Ninth Circuit
unabashedly revisited the historical antecedents of
energy law and__—s reinterpreted otherwise
unquestioned understandings of Mobile-Sierra.
Rather than faithfully applying the Act and binding
precedent, the Ninth Circuit recast Mobile-Sierra as
a narrow “mode of review” that applies only in
“certain limited circumstances.” Snohomish, 471
F.3d at 1061, 1074. According to the Ninth Circuit,
although “regulatory evolution” has not rendered
Mobile-Sierra a complete “dead letter,” lower courts
are nonetheless justified in delineating new
“prerequisites” for Mobile-Sierra’s “application in the
present environment.” Jd. at 1061.
19
The Ninth Circuit’s approach is irreconcilable
with its position in the Nation’s judicial hierarchy.
In particular, the Ninth Circuit appears to have
overlooked that our Constitution establishes only
“one Supreme Court.” U.S. Const., art. 1, § 1. As this
Court has taken pains to explain, given the Court’s
constitutional status as the Nation’s highest
tribunal, lower courts should not take it upon
themselves to “conclude” that the Court’s “more
recent cases have, by implication, overruled an
earlier precedent.” Agostini v. Felton, 521 U.S. 203,
237 (1997). Rather, “if a precedent of this Court has
direct application in a case, yet appears to rest on
reasons rejected in some other line of decisions, the
Court of Appeals should follow the case which
directly controls, leaving to this Court the
prerogative of overruling its own decisions.” IJd.; see
also Maislin Indus., U.S., Inc. v. Primary Steel, Inc.,
497 U.S. 116, 131 (1990). Here, far from being
undermined by later decisions, Mobile-Sierra was,
until the decision below, in the ruddiest and most
unquestioned of jurisprudential health.
Instead of inventing false distinctions with this
Court’s Mobile-Sierra precedent, the Ninth Circuit
should have recognized that, even if this Court were
to reexamine Mobile-Sierra, it would itself confront
the fact that stare decisis carries maximum force in
contexts where, as here, “a unanimous interpretation
of a statute has been accepted as settled law for
several decades.” JBP, Inc. v. Alvarez, 546 U.S. 21,
32 (2005). Accordingly, as “longstanding and
well-entrenched decisions” interpreting statutes that
“underlie” a “complex regulatory regime,” California
v. FERC, 495 U.S. 490, 499 (1990), Mobile-Sierra
remains solid, binding precedent worthy of this
20
Court’s adherence and the Ninth Circuit’s respectful
application. In sum, the Ninth Circuit had no
warrant to go looking for ways to rework the Court’s
precedents instead of applying them. |
B. The Decision Below Misunderstands The
Regulatory Scheme.
Apart from its unwarranted break from
precedent, the decision below also should be reversed
because the Ninth Circuit’s newly-fashioned test
rests on at least three fundamental misconceptions
of the Federal Power Act’s requirements.
1. The Federal Power Act Does Not
Require That Contract Rates Be
Reviewed Or Formally Approved.
According to the Ninth Circuit, Mobile-Sierra
established mere “presumptions” that are irrelevant
unless the Commission has had an opportunity to
complete a timely, effective review of the contract
rates. Snohomish, 471 F.3d at 1076-77, 1085-86.
Manufactured from whole cloth, this limitation on
Mobile-Sierra cannot be squared with the statutory
scheme.
The Federal Power Act does not condition the
lawfulness of rates on prior Commission review and
approval. To the contrary, as demonstrated above,
the statute makes clear that rates fixed by private
contract are deemed valid and enforceable “unless”
and until they are “otherwise” declared unlawful by
the Commission. 16 U.S.C. § 824d(d). Congress
contemplated that, “except as specifically limited” by
statute, the rate-making powers of energy companies
“were to be no different from those they would
possess in the absence” of the statute: “to establish
?
21
ex parte, and change at will, the rates offered to
prospective customers; or to fix by contract, and
change only by mutual agreement, the rate agreed
upon with a particular customer.” Mobile, 350 U.S.
at 343. Unless “it has undertaken by contract not to
do so,” a public utility, “like the seller of any
unregulated commodity, has the right ... to change
its rates ... [at] will.” Memphis, 358 U.S. at 113.
Moreover, even if the Commission were to review
rates on a contract-by-contract basis, it is not
required to make affirmative findings that the rates
are just and reasonable. See, e.g., Boston Edison uv.
FERC, 856 F.2d 361, 368 (ist Cir. 1998) (“the
legality of rates ... is not conditioned upon the
Commission’s approval”) (quoting Montana-Dakota
Utils. Co v. Northwest Pub. Serv. Co., 341 U.S. 246,
255-56 (1951) (Frankfurter, J., dissenting)). The
Ninth Circuit takes a very different—and utterly
erroneous—view. In its companion decision to this
case, the Ninth Circuit held that the Commission’s
individual review and acceptance of one of the
challenged contracts was inadequate because the
Commission stated that its acceptance “did ‘not
constitute approval of any ... rate.” Public Utils.
Comm'n of Calif. v. FERC, 474 F.3d 587, 595 (9th
Cir. 2006). But that statement employs virtually the
same language as the language included in the
orders accepting the very contracts that were at
issue in Mobile and in Sierra. See United Gas Pipe
Line Co., 5 FPC 770 (1946) (accepting contract with
caveat that “[n]othing contained in this order ... shall
be construed as ... constituting approval by this
Commission ... of any rate”); Pacific Gas & Elec. Co.,
7 FPC 832 (1948) (same). As the Commission’s
regulations make clear, the “fact that the
22
Commission permits a rate schedule or any part
thereof ... to become effective shall not constitute
approval by the Commission of such rate schedule or
part thereof.” 18 C.F.R. § 35.4. The Commission
thus often plays “an essentially passive and reactive
role” under section 205 of the Federal Power Act.
City of Winnfield v. FERC, 744 F.2d 871, 876 (D.C.
Cir. 1984) (Scalia, J.).
The notion that the Commission must pre-review
and pre-approve contracts before Mobile-Sierra
applies stands the Federal Power Act “on its head.”
Borough of Lansdale v. FPC, 494 F.2d 1104, 1113
(D.C. Cir. 1974); Sam Rayburn Elec. Coop. v. FPC,
515 F.2d 998, 1008 (D.C. Cir. 1975) (rejecting the
“conten[tion] that the Sierra-Mobile doctrine applies
only to contracts previously accepted as lawful by the
Commission”). Contracts govern the “legality of
filings ... because the regulatory statutes permit the
relations between the parties to be established
initially by contract.” Lansdale, 494 F.2d at 1113
(citing Mobile, 350 U.S. at 339). Under this regime,
the public interest is fully protected by the
Commission’s supervisory authority to prescribe
rules and procedures for filing rates. See 18 C.F.R.
§ 35.1. Indeed, a failure to comply with the
Commission’s filing procedures, while potentially
subjecting the violator to hefty fines and penalties,
see 16 U.S.C. § 8250 (criminal penalties); 16 U.S.C.
§ 8250-1 (civil penalties), does not invalidate the
privately negotiated agreement. As courts have
recognized, the “regulatory force of a contract arises
before, and survives in the absence of the physical
filing of the document with the Commission.”
Lansdale, 494 F.2d at 1113-14; see also Natural Gas
23
Pipeline Co. of Am. v. Harrington, 246 F.2d 915, 919
(5th Cir. 1957).
2. The Meaning Of The Federal Power
Act Has Not Changed Merely Because
Congress And The Commission Have
Moved In The Direction Of Market-.
Based Rate Regulation.
The Ninth Circuit also concluded that this Court’s
interpretation of the Federal Power Act is no longer
relevant because the “regulatory regime” has
“evolved” into a “market-based rate-setting system.”
Snohomish, 471 F.3d at 1060-61. According to the
Ninth Circuit, if the Commission authorizes an
energy supplier to sell electricity at market-based
rates, contracts to which the supplier is a party can
be modified even if modification is not required in
the public interest.
Under the market-based rate system, the
Commission will authorize a utility to sell electricity
at “market-based” rates only if the utility “and its
affiliates do not have, or adequately have mitigated,
market power in the generation and transmission” of
electricity. Louisiana, 141 F.3d at 365. The
Commission then continues to exercise its “general
oversight” authority to ensure that market-based
pricing is producing rates consistent with a
competitive market. See, e.g., Interstate Natural Gas
Ass'n v. FERC, 285 F.3d 18, 31, 34 (D.C. Cir. 2002);
see also FERC Br. 7-8, 30-32 (describing the
market-based rate regime). Hence, even if the
Commission were required to pre-review contract
rates be‘ore they become effective, its grant of
market-based rate authority would satisfy that
requirement. See Nevada Power Co. v. Enron Power,
24
103 FERC 461,353, at 437 (2003). The
market-oriented regulatory regime complies with the
statute because, “[i]n a competitive market, where
neither buyer nor seller has significant market
power, it is rational to assume that the terms of their
voluntary exchange are reasonable” and in the public
interest. Tejas Power Corp. v. FERC, 908 F.2d 998,
1004 (D.C. Cir. 1990).
Contrary to the Ninth Circuit's view that
market-based regulation requires a_ radical
reinterpretation of the Act to grant the Commission
new authority, Congress has taken a different
approach. Rather than calling for administratively
determined energy rates, Congress has moved
steadily in the opposite direction, recognizing that
competitive markets offer substantial long-term
benefits to consumers. As the Commission’s
Chairman recently observed, the Energy Policy Act
of 2005 represents the “third major federal law
enacted in the last 25 years to embrace wholesale
competition.” Joseph T. Kelliher, Opening Remarks
at the Competition in Wholesale Power Markets
Conference, FERC Docket No. ADO7-7-000 (Feb. 27,
2007). According to Chairman Kelliher, whether
“competition is the correct national policy” is not an
open question. /d.; see also FERC Br. 29-30
(describing specific provisions of the Energy Policy
Act predicated on the Commission’s continued
implementation of a market-based rate regime).
Following Congress’s lead, the Commission has
implemented initiatives designed to _ correct
inefficiencies inherent in the command-and-control
model of regulation favored by the Ninth Circuit.
See Stephen G. Breyer, Analyzing Regulatory
Failure: Mismatches, Less Restrictive Alternatives,
25
and Reform, 92 Harv. L. Rev. 549, 562-65 (1979)
(noting the inefficiencies of traditional cost-of-service
ratemaking). These pro-consumer initiatives have
yielded significant benefits. One study suggests that
consumers saved an estimated $34billion in
electricity costs between 1989 and 1996 as a result of
Commission policies favoring market-based rates.
See CERA Advisory Services, California Power Crisis
Aftershock: The Potential Modification of Western
Power Contracts, at 5 (Apr. 2007) (“Aftershock”).
Most importantly, the Commission’s balanced,
market-based regime has facilitated investment in
energy infrastructure and broader participation in
energy markets. As of April 1, 2006, the Commission
had granted market-based rate authority to
approximately 1,170 diverse entities, including 390
independent power marketers, 100 power marketers
affiliated with traditional utilities, 180 independent
power producers, 400 power producers affiliated with
traditional utilities, and 30 financial institutions.
See The Electric Energy Market Competition Task
Force, Report to Congress on Competition in
Wholesale and Retail Markets for Electric Energy, at
35 (Apr. 2007) (“Competition Report’).
The emergence of this new and more flexible
power industry, including power marketers and
financial institutions, has “improved the industry’s
ability to address credit issues, increased the ability
of companies to buy and sell energy, and increased
market liquidity.” FERC, Office of Markets
Oversight and Investigations, 2004 State of the
Markets Report, at 64 (June 2005) (“Markets Rep.
A”). The Commission’s balanced, pro-competitive
policies have also facilitated the development of
organized, bid-based markets that have “created
significant savings for electricity buyers.” ISO/RTO
Councel, The Value of Independent Regi Grid
Operators, at 25 (Nov. 2005); see also ISO/RTO
Council, The Progress of Organized Wholesale
Electricity Markets in N. Am., at 11 (Oct. 16, 2007);
Competition Report, at 31; Scott M. Harvey, et al.,
LECG, LLC, Analysis of the Impact of Coordinated
Elec. Mkts. on Consumer Elec. Charges, at 1 (Nov. 20,
2006).
The Ninth Circuit’s decision threatens these
accomplishments. In particular, by failing to
preserve the integrity of contracts, the Ninth
Circuit’s approach leads to the perverse result of
affording less protection to contracts negotiated by
sellers expressly found to lack market power than to
contracts negotiated by presumed monopolists under
a traditional cost-based rate regime. It also
effectively renders the Commission’s market-based
rate authorization “a pointless exercise of no value to
anyone.” Nevada Power Co., 103 FERC 4 61,353, at
427. The market-based regime cannot function
effectively if freely and fairly negotiated contracts
remain open to challenge and revision in costly
litigation. By undercutting the Commission’s
market-based rate regime, the Ninth Circuit has
intruded on the Commission’s prerogatives, violating
the settled rules that the Commission enjoys “wide
discretion” to decide how to ensure rates are just and
reasonable, FERC v. Pennzoil Producing Co., 439
U.S. 508, 518 (1979), and that courts “may not
impose methods of regulation upon the discretion of
the Commission.” Permian, 390 U.S. at 775; see also
M. Gergen, et al., Market-Based Ratemaking and the
Western Energy Crisis of 2000 and 2001, 24 Energy
L.J. 321, 322-31 (2003) (describing the breadth of the
27
Commission’s ratemaking discretion and the legal
basis for its market-based rate approach).
More fundamentally, the Ninth Circuit’s
suggestion that the meaning of statutory language
must change as the underlying regulatory regime
evolves is contrary to elemental principles of
statutory construction. See Bankamerica Corp. v.
United States, 462 U.S. 122, 133 (1983) (new
approaches “must be implemented by Congress, and
not by a crabbed interpretation of the words of a
statute which so many in authority have interpreted
in accordance with its plain meaning for so long”);
United States v. National Broiler Mktg. Ass’n, 550
F.2d 1380, 1390 (11th Cir. 1977), aff'd, 436 U.S. 816
(1978) (notion that a statute “should be brought up to
date to take account of the complex structure of
modern agriculture rests on fundamental
misconceptions ... of the role of the judiciary in a
democratic society”). In particular, the decisions
below rest on the Ninth Circuit’s misguided view
that applying the statutory public-interest standard
in a market-based rate system impairs the
Commission’s ability to ensure that rates are just
and reasonable. See D. Tewksbury & S. Lim,
Applying the Mobile-Sierra Doctrine to Market-Based
Rate Contracts, 26 Energy L.J. 437, 456 (2005)
(“distinctions between market-based rate contracts
and cost-based rate contracts” are largely irrelevant
‘in terms of whether and how one applies the
Mobile-Sierra doctrine”). This view is directly
contrary to this Court’s recognition that a
public-interest standard “in no way impairs the
regulatory powers of the Commission, for
[jurisdictional] contracts remain fully subject to the
paramount power of the Commission to modify them
eR a rer eee mene et tr ee 2 Se I ee ame See Pe eee ee -——
28
when necessary in the public interest.” Mobile, 350
U.S. at 344. And it is inconsistent with a long line of
decisions upholding the Commission’s authority to
rely on “market-based prices in lieu of cost-of-service
regulation[s] to assure a ‘just and reasonable’ result.”
Consumers Energy. Co. v. FERC, 367 F.3d 915,
922-23 (D.C. Cir. 2004) (Roberts, J.); Louisiana
Energy & Power Auth. v. FERC, 141 F.3d 364, 365
(D.C. Cir. 1998).
In fact, as the Commission has_ expressly
recognized, the regulatory evolution toward more
competitive, market-based rate regulation means
that the “[p]reservation of contacts has, if anything,
become even more critical.” Nevada Power Co. v.
Duke Energy Trading, 99 FERC 4 61,047, at 61,190
(2002); see also FERC Br. 18. Today, more than ever,
preserving the integrity of contracts is vital to
promoting capital investment in the energy industry.
In a competitive, market-based regime, “[p]otential
entrants to generation markets must be able to
convince capital markets that generation is a viable
profitable undertaking” and, hence, the “availability
of long-term contracts ... is critical to the ability of
non-utility generators to secure capital for new
investment.” Competition Report, at 4.
3. The Federal Power Act Does Not
Permit An Asymmetrical Standard.
Even as it narrowed its field of application, the
Ninth Circuit transformed Mobile-Sierra into a new
asymmetrical standard that favors buyers who
become dissatisfied with their long-term agreements.
In the Ninth Circuit’s view, the public-interest
standard differs depending on whether it is a seller
or a buyer that is challenging a contract: When
29
relief is sought from a seller’s improvident bargain (a
so-called “low rate” case), the Commission may not
modify the parties’ agreement unless the agreement
imposes an “excessive burden” on consumers; in
contrast, when relief is sought from a buyer’s
improvident bargain (a so-called “high rate” case),
the Commission must abrogate the parties’
agreement whenever “consumers’ electricity bills
have been affected” and the challenged rates fall
outside a “zone of reasonableness” because they
exceed marginal costs and are not “part of a general
trend toward rates that do reflect cost.” Snohomish,
471 F.3d at 1089.
The transformation of an even-handed public
interest standard into a one-way ratchet that makes
buyer’s (but not seller’s) remorse a basis for escaping
contracts finds no support in the statute. As this
Court has recognized, the Federal Power Act
establishes a regulatory regime that, among other
things, “preserve[s}] the ‘integrity’ of private
contractual arrangements.” Memphis, 358 U.S. at
113-14. In enacting the statute, Congress “was not
only expressing its conviction that the public interest
requires the protection of consumers from excessive
prices” but also “manifesting its concern[s] for the
legitimate interests of the ... companies in whose
financial stability the ... consuming public has a vital
stake.” Id. The contract-focused rate-making
process under the Act therefore “involves a balancing
of [] investor and consumer interests.” FPC v. Hope
Natural Gas Co., 320 U.S. 591, 603 (1944); see also
Grand Council of Crees v. FERC, 198 F.3d 950, 956
(D.C. Cir. 2000). Buyers, like sellers, “can make
bargains which in hindsight prove improvident,”
Boston Edison, 856 F.2d at 372—and when they do,
30
“fe]xcept as the exigencies of the public interest”
demand, the Commission is “no more at liberty to
alter the ... contract to the prejudice of the producers
than to do so in their favor.” Public Serv. Comm’n v.
FPC, 543 F.2d 757, 798 (D.C. Cir. 1974).
Contrary to the Ninth Circuit’s assertions,
whether a contract adversely affects the public
interest is an inquiry that does not depend on which
partys private interests would be served by
Commission intervention. See Sierra, 350 U.S. at
354-55; see also San Diego Gas & Elec. Co. v. FERC,
904 F.2d 727, 730 (D.C. Cir. 1990) (Mobile-Sierra
demands “deference to freely arrived at contract
prices”). Nor does the Ninth Circuit’s view of a
reasonable rate—vaguely defined as a rate that
“results from normal market forces and is part of a
general trend toward rates that do reflect cost’—
have any basis in any relevant statute, regulation, or
persuasive precedent. Snohomish, 471 F.3d at 1089.
This made-up test, with its vague references to
indeterminate concepts, such as “normal market
forces” and “general trends,” is patently impractical.
More troublingly, the test overlooks the critical
signaling function played by freely negotiated rates.
Consumers and society as a whole—not just
suppliers—benefit when from time to time prices rise
above or trend away from short-term marginal costs,
precisely because such elevated prices signal scarcity
and provide returns to the providers of fixed capital,
thus creating powerful financial incentives for the
further investment needed to relieve the underlying
condition of scarcity. See Wisconsin, 493 F.3d at
259-60 (upholding Commission’s determination that
a rate with a “fixed cost adder” was “just and
reasonable” because it “is designed to ensure that
31
suppliers earn enough money ... to recover fixed
costs”).
The Ninth Circuit’s short-term focus and blithe
assumption that the public interest is always served
by lower near-term prices violates basic principles of
economics. More importantly, the Ninth Circuit’s
view overlooks Congress’s considered judgment that,
over the longer term, consumers are better off,
enjoying both lower costs and more reliable energy
supplies, under a regime that respects the integrity
of private contracts.
Ill. Reversing The Judgment Below And
Reaffirming Mobile-Sierra Will Further The
Public Interest.
The Ninth Circuit’s foray into judicial
pol:cymaking was not only unwarranted but unwise.
Its extra-statutory decision, if not corrected,
threatens to expose consumers to the very types of
high and volatile prices and frequent supply
shortages the Federal Power Act was designed to
pevent. The Court should reaffirm its Mobile-Sierra
decisions to ensure stability in the Nation’s energy
markets and to protect against arbitrary agency
decisionmaking.
A. Reversing The Judgment Below Will
Restore Certainty To The Nation’s
Wholesale Energy Markets.
It is hard to overstate the importance of
regulatory certainty and contractual integrity to the
efficient working of the energy industry. See, e.g.,
Competition Report, at 74, 76-77; see also Local 926,
Int'l Union of Operating Eng’rs, AFL-CIO v. Jones,
460 U.S. 669, 687 n.4 (1983) (“[t]here can be no doubt
32
that safeguarding the integrity of contractual
relations is an interest of paramount importance in
an economy such as ours”). As commentators have
noted, because power markets are susceptible to
periods of inelastic demand and supply, the industry
often faces large, sudden shifts in price. See
Aftershock, at 5. These price dynamics mean that
cash flows for spot markets are _ cyclical,
unpredictable, and often insufficient to cover the full
cost of power plant investments. At the same time,
the capital requirements of the electric generation
sector are enormous. In the next 15 years, the power
sector must grow by an estimated 35 percent to keep
pace with projected demand. See id. at 14. This
expansion will require at least “$400 billion in
investment in new and existing power plants.” Id. at
15-16.
Against this backdrop, fixed-price, long-term
contracts are essential for encouraging investment in
infrastructure. As this Court has recognized, energy
facilities “may frequently require’ substantial
investments” that would not be made absent
“long-term commitments.” Sierra, 350 U.S. at 344.
Energy suppliers, like other market participants,
“require clear signals regarding national policies and
confidence that those policies will be sustained over
time in order to undertake the _ substantial
investment needed to support expected increases in
consumption.” Statement of Jim Wells, Director
Nat’l Res. & Env’t, GAO, Meeting Energy Demand in
the 21st Century, GAO-05-414T, at 7-8 (Mar. 16,
2005). These important supply signals will be
scrambled if prices are to be set from time to time
according to a heavy and unpredictable regulatory
hand.
33
If the Ninth Circuit’s decision is not reversed,
investors will need to discount the value of long-term
contracts to account for the heightened,
unquantifiable risk that the Commission may later
abrogate contracts when buyers complain that rates
are too high. Concerns about respect for contract
integrity arising out of the decision below will hinder
the ability of independent power producers “to
compete for generation in the future” and will put
“into question attractively priced contracts.” JPPs
seen entering ‘sweet spot’ of power cycle: Calyon,
Electric Power Daily (Aug. 22, 2007). Sophisticated
investors “will not participate in a market in which
disgruntled buyers are allowed to discard their
contracts, at least not without charging a significant
risk premium—a cost that will ultimately be borne
by consumers.” Standard of Review for Proposed
Changes to Market-Based Rate Contracts for
Wholesale Sales of Elec. Energy by Pub. Uitils.,
Proposed Policy Statement, 100 FERC 4 61,145 at
61,545 (2002) (Brownell and Breathitt, Comm’rs,
concurring). Notwithstanding the Ninth Circuit’s
purported concerns for consumer welfare, its
decisions threaten to harm consumers’ by
destabilizing competitive markets and adding
potentially “billions of dollars per year to the costs of
the power vusiness.” Aftershock, at i.
The Ninth Circuit’s short-sighted judicial
policymaking also may hinder conservation efforts.
Although vital to investment in all types of
generation, reliable, enforceable contracts may well
be most essential to ongoing efforts to promote
renewable energy sources. Numerous state-approved
competitive contract solicitations require utilities to
enter long-term contracts obligating them to
34
purchase energy from power plants that rely on
alternative, renewable energy sources. See
Aftershock, at 19. Similiarly, investment
opportunities in conservation and energy-efficient
technologies are especially likely to rely on long-term
contracts. See id.; Markets Report, at 232 (describing
difficulties faced by wind developers in markets
where long-term contracts are unavailable).
Investors will be loath to risk capital on such projects
if the underlying contracts are subject to
modification by the Commission based on buyers’
remorse and market solutions are _ further
jeopardized by unpredictable court-imposed,
command-and-control regulation. In fact, under the
Ninth Circuit’s asymmetrical rules, contracts to buy
power generated from renewable sources are
especially susceptible to abrogation because
“technological advances are likely to dramatically
reduce” the cost of such power, which could well
“push the previous, existing renewable power as well
as conservation and efficiency contracts” out of the
“zone of reasonableness.” Aftershock, at 19.
Finally, if the decision below is not corrected, its
new, asymmetrical rules will likely exacerbate future
crises. Sensible regulatory policies encourage
market participants to hedge against market
fluctuations by negotiating fixed-price, long-term
contracts. Such contracts are especially important
when spot market prices are volatile and
unpredictable. By undermining the stability of long-
term contracts, however, the decision below
encourages market participants to put increased
reliance on the type of volatile spot market
purchases that formed one of the underlying causes
of the California energy crisis. In fact, by requiring
35
the Commission to invalidate contracts whenever
market conditions meet some undefinable standard
of “dysfunction,” the Ninth Circuit has greatly
complicated the negotiation of long-term contracts in
circumstances of spot market volatility—the very
circumstances in which long-term arrangements are
most urgently needed. See id. at 20.
B. The Federal Power Act Imposes A Crucial
Constraint On Agency Decisionmaking.
As the Commission notes in its brief, the Ninth
Circuit improperly failed to give appropriate
deference to the agency’ application of the
“statutory provisions in the particular circumstances
of this case.” FERC Br. 19. But this Court should
also recognize that, contrary to the Commission’s
suggestions, the statutory requirements are not
ambiguous—at least insofar as the Federal Power
Act’s protections for the integrity of privately
negotiated agreements are concerned. As noted
above, the Court’s Mobile-Sierra decisions articulate
a clear and proper interpretation of what
unambiguous statutory language demands. See
National Cable & Telecomms. Ass'n v. Brand X
Internet Servs., 545 U.S. 967, 984-85 (2005); cf.
Louisiana Pub. Serv. Comm’n v. FCC, 476 U.S. 355,
374-75 (1986) (an “agency may not ... expand its
power in the face of a congressional limitation on its
jurisdiction”). Because this Court has determined
the Federal Power Act’s clear meaning, it need not
“reach any issue of deference” to the Commission.
Lechmere, Inc. v. NLRB, 502 U.S. 527, 536 (1992).
The Federal Power Act imposes important and
unambiguous constraints on arbitrary agency
decisionmaking. For decades, the statute has framed
36
the boundaries of permissible Commission action,
ensuring that the public interest is adequately
protected, while imposing carefully prescribed limits
on the Commission’s authority to abrogate privately
negotiated agreements. See, e.g., Public Serv., 543
F.2d at 797. Courts have not hesitated to affirm the
Commission when it has determined that modifying
a contract is required in the public interest,
especially when such modifications are needed to
effectuate broad changes in regulatory policies. See,
e.g., Arizona Corp. Comm’n v. FERC, 397 F.3d 952
(D.C. Cir. 2005); Transmission Access Policy Study
Group v. FERC, 225 F.3d 667, 709-12 (D.C. Cir.
2000); Northeast Utils. Serv. Co. v. FERC, 55 F.3d
686 (ist Cir. 1995). Similarly, until now, courts have
stood ready to affirm the Commission in cases
withholding relief on grounds that contract
modification was not in the public interest. See, e.g.,
Permian, 390 U.S. at 820-22; Wisconsin, 493 F.3d at
273-75; Potomac Elec. Power Co. v. FERC, 210 F.3d
403, 407-12 (D.C. Cir. 2000).
Equally important, however, courts have
traditionally served an essential role in ensuring
that the Commission’s interference with private
contractual arrangements is strictly limited to
circumstances where intervention is necessary to
fulfill its statutory mission. Courts have thus stood
ready to rebuff the Commission’s occasional attempts
to circumvent limits on its authority. See Public
Serv. Comm’n v. FERC, 866 F.2d 487, 488-89 (D.C.
Cir. 1989) (the D.C. Circuit has repeatedly “repelled”
the Commission’s “gambit” to “compromise [the]
limits ... on its power to revise rates”); Atlantic City,
295 F.3d at 10 (citing cases). The importance of this
judicial role should not be _ underestimated.
37
Undoubtedly, the Commission has -its own
institutional interest in being liberated from the
statutory constraints that Mobile-Sierra recognizes.
See, e.g., David B. Spence & Frank Cross, A Public
Choice Case for the Administrative State, 89 Geo. L.J.
97, 113 (2000) (“when an agency must make
decisions about the reach of its own jurisdiction,
self-interest propels the agency toward ever more
expansive interpretations of the law”). Until now
Mobile-Sierra has stood as a bulwark preventing the
Commission from overstepping these statutory
bounds.
Moreover, it is all but inevitable that from time to
time the Commission will be subjected, as it has been
in this case, to political pressure to abrogate private
contracts that, in_ retrospect, have proven
uneconomic and politically controversial. ‘See, e.g.,
Ltr. to FERC Chairman Joseph T. Kelliher from U.S.
Sen Barbara Boxer, FERC Docket No. EL02-60 (Mar.
28, 2007) (urging “FERC to inform the Solicitor
General that it accepts the Ninth Circuit’s decisions”
and advising FERC to “reject any efforts to appeal”).
If empowered or required to look beyond the public
interest to purely private interests, the Commission
will inevitably come under greater pressure to
exercise its power in the service of private agendas
filtered through the political process. The risk that
market participants will be unnecessarily subject to
the whim of some uncertain, politically driven set of
future Commission policies poses an undeniable
further threat to the stability of the Nation’s energy
markets—one that can and should be defused by
reversing the judgments below.
38
CONCLUSION
For the foregoing reasons, the Court should
reverse the judgment of the Court of Appeals.
Respectfully submitted,
NEIL L. LEVY KENNETH W. STARR
ROBERT R. GASAWAY Counsel of Record
ASHLEY C. PARRISH KIRKLAND & ELLIS LLP
DAVID G. TEWKSBURY 777 South Figueroa Street
ScoTT M. ABELES Los Angeles, CA 90017
KIRKLAND & ELLIS LLP (213) 680-8400
655 Fifteenth Street, NW
Washington, DC 20005
(202) 879-5000
Attorneys for the Electric Power Supply Association
November 28, 2007
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.