Amicus Curiae Brief — American Electric Power Service Co. Corp. v. Public Utility District No. 1 of Snohomish County, Washington (Nos. 06-1462, 06-1457)

StGTS i

\ NOS. 06-1457, 06-1462

In the Supreme Court of the Anited States

MORGAN STANLEY CAPITAL GROUP INC., Petitioners,

v. PUBLIC UTIL. DIST. NO. 1 OF SNOHOMISH COUNTY, WA,

et al., Respondents.

CALPINE ENERGY SERVICES, L.P., et al., Petitioners,

v. PUBLIC UTIL. DIST. NO. 1 OF SNOHOMISH COUNTY, WA,

et al., Respondents.

On Writ of Certiorari to the United States Court of

Appeals For the Ninth Circuit

BRIEF OF AARP AS AMICUS CURIAE IN SUPPORT OF

RESPONDENTS

STACY CANAN BARBARA JONES

AARP Foundation Counsel of Record

Litigation AARP Foundation Litigation

200 So. Los Robles, Suite 400

MICHAEL SCHUSTER Pasadena, CA 91101

AARP (626) 585-2628

601 E Street, NW WILLIAM JULIAN II

Washington, DC 20049 43556 Almond Lane

(202) 434-2060 Davis, CA 95618

(916) 758-8882

Attorneys for AARP

TABLE OF CONTENTS

Page

ee OI Fe icc cctsvncscnccecccnincesoceenceniaes iv

INTEREST OF AMICUS CURIAE.............00.0000.cc0000s 1

SUMMARY OF ARGUMENT. ......................0.ccceeeeeeeee 2

ARGUMENT

I. THE NINTH CIRCUITS HOLDING

THAT FERC MUST GIVE

PREDOMINANT WEIGHT TO THE

IMPACT OF A CHALLENGED

CONTRACT ON RATES PAID BY

THE CONSUMING PUBLIC MUST

RAEI LS Sorted s CE 5

Il. THE FEDERAL POWER ACT

PROTECTS CONSUMERS BY

REQUIRING THAT ALL RATES

BE JUST AND REASONABLE ............... 10

A. FERC’s “ Public Interest”

Standard violates the FPA.............. 10

B. There is only one legal standard

for lawful rates under the

Federal Power Act — the “just

ITI.

il

and reasonable” standard

contained in section 205(a)...............

C. “Just and reasonable” rates

protect consumers from excessive

demands and charges by

establishing a zone of

reasonableness based on

ESE ae a

THE MOBILE AND SIERRA

DECISIONS APPLY THE “JUST

AND REASONABLE’ STANDARD

TO LIMIT THE PRICE-SETTING

POWERS OF SELLERS, AND

THUS TO PROTECT THE

CONSUMING PUBLIC................c eee

A. The decisions in Mobile/

Sierra do not restrict the

power and responsibility of

FERC to protect the interest

of consumers from unjust

i inetdieictnscsncadsinnsttinkentiveiateses

B. The Sierra “public interest”

language is a specific

application of the statutory

‘just and reasonable”

ESE Ne OS oe ae a se

CONCLUSION

il

Decisions of the federal

appellate courts following

Mobile and Sierra reviewing

proposed increases in contract

rates uphold the interest of

the consuming public under

the just and reasonable

RSIS A ene Rae aaa 25

FERC’s decision below is not

entitled to deference.................... 27

iV

TABLE OF AUTHORITIES

CASES

Arkansas Gas Co. v. Arkansas R.R. Comm'n,

I

Atl. Ref. Co. v. Pub. Serv. Comm'n of N. Y. ,

I is I, Be i ciicevanscccavccsescncees

Boston Edison Co. v. FERC,

233 F.3d 60 (1st Cir. 2000)...

Chevron USA, Inc. v. Natural Resources

Defense Council,

Se SI ID sccissecstonenscensccesciesiosenoonin

City of Oglesby, v. FERC,

610 F.2d 897 (D.C. Cir. 1979)...

Colorado Interstate Gas Co. v. FPC,

EE IIE cininctcsicenintesiavniicindianancess

Duquesne Light Co. v. Barasch,

eT: CIID sccissisnnorsevernsdsscsipsndotsiness

Farmers Union Cent. Exchange v. FERC,

734 F.2d 1486 (D.C. Cir. 1984)..................

FPC v. Conway Corp.,

Re I ID on o:sicinssiasiscipiiscccsstaialianaiamdaaiianialiaan 15

FPC v. Hope Natural Gas Co.,

re Ge cece cicciiscccissscicnsicese 14, 15, 16, 17

FPC v. Memphis Light, Gas and Water Div.,

ey SII cs cctritnistecctnciiicisenctiiiatncdidnemsiniiiaasiatan 14

FPC v. Natural Gas Pipeline Co.,

Be ee SII vsiccitcnnsdscicceusiecsovensainnsiianal 15, 16

FPC v. Sierra Pacific Power Co.,

BP CIID vevicenntesnncedinnnveseniinviecetintl passim

FPC v. Texaco, Inc.,

re ee ID kciceiticsisicmescemernmaann 16, 17, 18

Jersey Central Power & Light Co. v. FERC,

810 F.2d 1168, 1170 (D.C. Cir.1985)..........0000 9

Lockyer v. FERC,

383 F.3d 1006 (9th Cir. 2004) .0.......cccceeeeceeetee ees 6

Maryland People’s Counsel v. FERC,

POD FB FED GI. Gar Wi ncccecccescesesecscscsnasscnsons 2

Mobil Oil Corp. v. FPC,

417 U.S. 283 (1974) .....cccccccescescesssessesccescoseeees 15, 16

vi

NAACP v. FPC,

I i cninteninieentenemnncenscasomsenevin 15

Nantahala Power and Light Co. v .Thornburg,

il iacemctonnanenne 5

Nat'l Cable and Telecomms. Ass'n v. Brand-X

Internet Servs.,

TC NT EE 27

Northeast Utils. Serv. Co. v. FERC,

55 F.3d 686 (ist Cir. 1995) ...............ccccccccceceeeeeess 23

Panhandle Eastern Pipe Line Co. v. FPC,

aaa sc casesesannsinee 15

Papago Tribal Util. Auth. v. FERC,

723 F.2d 950 (D.C. Cir. 1983)............ 20, 23, 25, 26

Permian Basin Area Rate Cases,

Se 15, 16, 17

Pub. Util. Dist. No. 1 of Snohomish

County of Wash. v. FERC,

471 F.3d. 1053 (9th Cir. 2006) ............... 6, 7, 8, 14

Texaco Inc.v. FERC,

148 F.3d 1091 (D.C. Cir. 1998) ..............0000000200 27

Union Dry Goods Co. v. Georgia Pub. Serv. Co.,

EE 14

Vii

United Gas Pipe Line Co. v. Memphis

Light, Gas and Water Div.,

i teil passim

United Gas Pipe Line Co. v. Mobile Gas

Service Corp.,

I i eccinricciaaibdeeelitiidl passim

Verizon Inc. v. FCC,

TEE eae rene 15

AGENCY DECISIONS

Pub. Utils. Comm'n of Cal. v. Sellers of Long-

Term Contracts to the Cal. Dep’t of Water

Res., 101 FERC 4 61,293, (Dec. 17 2002) ........... 11

Pub. Utils. Comm'n v. Sellers of Long-Term

Contracts, 103 FERC 4 61,354 (2003),

review granted and remanded in Pub.

Utils. Comm'n of State of Cal. v. FERC,

474 F.3d 587 (9th Cir. 2006) pet’n for cert.

475 filed, 75 USLW 3610 (May 03, 2007)

ye iertcninsciidisinsemnicisintincnmncsingiainiivaieibibaasbaimminias 11

PaciCorp. v. Reliant Energy Servs. Inc.,

105 FERC 4 61,184 (2003) ..............ccccceeeeeeeeeees 11

Vill

STATUTES

Federal Power Act, 16 U.S.C. §§ 791a-828c

Section 3(22), 16 U.S.C. § 796(22).......cc0.cseesseve0e 12

Section 201(a), 16 U.S.C. § 824(a)................... 1, 12

Section 201e), 16 U.S.C. § 824(e) .........eec-- 12, 19

Section 205, 16 U.S.C. § 824d .....cccesccceeessseees 13, 25

Section 205(a), 16 U.S.C. § 824d(a).............. passim

Section 205(c), 16 U.S.C. § 824d(c) .................00- 19

Section 205(d), 16 U.S.C. § 824d(d) .................... 19

Section 206, 16 U.S.C. § 824e..................... passim

Section 206(a), 16 U.S.C. § 824e(a)......... 19, 22, 24,

Natural Gas Act, 15 U.S.C. §§ 717-717z

Section 2(6), 15 U.S.C. § 717al6) «2.0.0.0... ceeeeee 19

Section 2(7), 15 U.S.C. § 717a7).............ccccceeeees 19

Section 4(a), 15 U.S.C. § 717cfa) ........0.....0:cceee 14

Cal. Water Code

Tree cee oa ae eee eee 5

OTHER AUTHORITIES

STEPHEN G. BREYER, REGULATION AND ITS

REFORM

15-16 (Harv. Univ. Press) (1982) ...................000. 15

FERC Staff Report, Fina/ Report on Price

Manipulation in Western Markets Fact Finding

Investigation of Potential Manipulation of

Electric and Natural Gas Prices (2003)

ix

available at

http://www.ferc.gov/industries/electric/

Re I ssc ccccnccsecesnstecssmenssisseseemen 6, 13

FERC Staff Report, Price Manipulations in

Western Markets, Findings at a Glance

(2003) available at

http//www.ferc.gov/industries/electric/indus-

act/wec/enron/summary findings. pdf.................... 6

Finkelstein, Bob & Shames, Michael, Yes. San

Diegans Understand Need for Electricity

Reforms, SAN DIEGO TRIB., Oct. 12, 2005,

available at

http://www.signonsandiego.com/uniontrib/

2005 1012/news_lzlel2prop80.html...................... 8

Grossi, Mark, No Heat or Food or Funds Many

Seek Relief from Valley Social Agencies,

FRESNO BEE, Feb. 15, 2001, available at

I ON ia slarmreriariinn 7

Horner, Kim, Electricity Discount for Poor

Eliminated: Some Residents Might Have

To Make Choice Between Power, Food,

DALLAS MORNING NEWS, Sept. 1, 2005,

available at

i i ceiiiintennliball 8

Rademacher, Kevin, Utility Bills Burning up

Residents’ Cash, LAS VEGAS SUN, Oct. 16,

2005, available at

http://www.lasvegassun.com/sunbin/stories/

ext/2005/oct/16/5195 15668. html .........0... ee

Scherer, Ron, Cost of Electricity Rising Like

Summer Heat, CHRISTIAN SCI. MONITOR,

July 27, 2005, available at http://www.

csmonitor.com/ 2005/0727/p01s03-usec.htm] .......

~~

l

INTEREST OF AMICUS CURIAE AARP!

AARP is a nonprofit, nonpartisan organization

that helps people over the age of 50 to have

independence, choice and control in ways that are

beneficial to them and society as a whole. AARP has

close to 40 million members nationwide. As the

largest membership organization representing the

interests of Americans aged 50 and older AARP is

greatly concerned about the threats to health and

safety of America’s most vulnerable citizens caused

by the recent sharp rise in energy costs. Because of

regulatory decisions like the one in this case below

many low to middle-income families and older

Americans must now choose between paying their

energy bills for heating and cooling and paying for

other essentials such as food and medicine.

The Federal Energy Regulatory Commission

(FERC) regulates “the business of selling electric

energy for ultimate distribution to the public”? under

the Federal Power Act (FPA). Ali AARP members

are included in the “public,” the retail end-use

electricity consumers whose utility bills are affected

by the activities of wholesale sellers regulated by

' All parties have consented to the filing of this brief. The

parties’ blanket consents have been lodged with the Clerk of

the Court. Pursuant to Rule 37.6, amicus curiae states that no

counsel for a party has written this brief in whole or in part

and that no person or entity other than amicus curiae or their

counsel has made a monetary contribution to the preparation

or submission of this brief.

2 FPA § 201(a), 16 U.S.C. § 824(a) (2005).

2

FERC, like the Petitioners in this case, and their

interest 1s “the public interest” protected by the FPA.

They are, as the DC Circuit has noted, FERC’s

“...prime constituency — the consumers whom the

[statute] was designed to protect against

exploitation....">. As consumers, AARP members

depend upon’ the “...complete, permanent and

effective bond of protection from excessive rates and

charges” afforded them by the FPA when it is

effectively administered by the FERC. That

protection is founded on the bedrock requirement of

the FPA that “all rates and charges made, demanded

or received by public utilities ... shall be just and

reasonable....” FPA § 205(a). FERC’s failure in this

case to modify unlawful rates has had devastating

consequences for consumers. The Ninth Circuit

decision in this case gives them some redress.

SUMMARY OF ARGUMENT

This case is about FERC’s responsibility

under the Federal Power Act to protect consumers.

FERC has refused to find unlawful, or to modify, the

rates contained in the Petitioners’ exorbitantly high

cost contracts. The higher percentage that

consumers pay for electricity as a result of the

contracts that are at issue here translate into serious

family and social problems that affect consumers

either directly or in the form of increased

3° Maryland People’s Counsel v. FERC, 761 F.2d 780, 781 (D.C.

Cir. 1985)

4 Jd. at 777.

3

government expenditures to address those problems.

FERC has substituted the statutory “just and

reasonable” standard established by Congress in the

Federal Power Act (“FPA”) with an arbitrary new

standard which they call a “public interest”

standard. That standard does not in fact benefit the

“public interest” and is derived from an erroneous

reading of this Court’s decisions in United Gas Pipe

Line Co. v. Mobile Gas Service Corp., 350 U.S. 332

(1956) and FPC v. Sierra Pacific Power Co., 350 U.S.

348 (1956) [hereinafter Mobile/Sierra|. Those

decisions are consumer protection decisions, not

contract protection decisions. The “public interest”

discussed in Mobile/Sierra is in fact very different

from the “public interest” standard adopted by

FERC. Both the text of the Federal Power Act and

the decisions of the Supreme Court interpreting the

Federal Power Act, including those in Mobile/Sierra,

fully support the order of the Ninth Circuit.

The FPA protects consumers of electric energy

from exploitation and abuse by the public utility

sellers regulated by the Act. It places the burden of

regulation on sellers — defined as “public utilities”

under the Act. The text of the FPA establishes a

single legal standard — just and reasonable -- for

assessing the lawfulness of wholesale _ rates

demanded or received by utility sellers. That a rate

has been established by contract, rather than a

FERC order, does not confer special status or

insulate it from application of the “just and

reasonable” standard as it has been defined by this

Court.

4

The Mobile! Sierra decisions protect consumers

by resisting sellers’ attempts to unilaterally raise

rates above the previously contracted level; a seller

cannot unilaterally raise its price if its contract does

not permit it. The Court’s conclusions in

Mobile/Sierra rest on both the language and the

structure of the rate-setting provisions of the FPA,

which afford sellers the initiative in proposing rates

and rate changes. Under Mobile/Sierra_ the

circumstances justifying a seller’s unilateral rate

increase above contracted levels (where the seller

has not contractually reserved the power to change

rates) are limited to situations where the contract

rate is below the lower bound of the zone of

reasonableness that defines statutory “just and

reasonable,” thereby jeopardizing service to the

consuming public. This “public interest” standard

applies only to sellers. The Mobile/Sierra decisions

themselves explicitly affirm the authority of FERC

to change rates asserted by consumer

representatives, including wholesale buyers, to be

unlawful because the rates are excessive.

Decisions of the Court and federal appeals

courts that follow Mobile/Sierra do not depart from

these holdings. FERC and Petitioners misinterpret

the language of both the FPA and the very cases on

which they purport to rely.

Under long-settled precedents of this Court,

the “just and reasonable” legal standard requires

FERC to assess the “end result” of the rate

demanded or received relative to a “zone of

reasonableness” based on the costs of suppliers. The

5

contract rate is never the test. Under the decisions

of this Court, in applying the “just and reasonable”

standard FERC must take into account of the

economic context and consumer impacts of rates

charged by statutory public utilities — the interests

of the “public” to whom electric energy is distributed.

The significant departure of the Petitioners’ rate

demands in Spring 2001 from the benchmark

contract rate identified by FERC in December 2000

should have triggered “just and reasonable” rate

review by FERC, as the Ninth Circuit ordered.

ARGUMENT

I. THE NINTH CIRCUITS HOLDING THAT

FERC MUST GIVE PREDOMINANT

WEIGHT TO THE IMPACT OF A

CHALLENGED CONTRACT ON RATES

PAID BY THE CONSUMING PUBLIC MUST

BE UPHELD.

The Ninth Circuit’s holding that FERC did not

properly assess the public interest in any of the

contracts before it is a correct reading of not only the

FPA, but also the Mobile/Sierra decisions. Under

California and other state laws, as well as decisions

of this Court,5 consumers must pay directly for the

cost of these contracts even though they were not

parties to the contracts. See, e.g., Cal. Water Code

§ 80104. The energy crisis in 2000-2001 resulted in

extreme power shortages and price volatility in the

5 Nantahala Power and Light Co. v .Thornburg, 476 U.S. 953

(1986).

6

western states. Pub. Util. Dist. No. 1 of Snohomish

County of Wash. v. FERC, 471 F.3d 1053, 1056 (9th

Cir. 2006). FERC’s failure to address unlawful rates

in this case has had devastating consequences for

consumers. Respondents and retail consumers were

victimized by wholesale sellers including Petitioners

in the Western Energy Crisis. Under the multi-

year contracts at issue in this case, wholesale

contract costs substantially exceeded the benchmark

“reference” price of $74 per megawatt hour identified

by FERC in December 2000 to address concerns

about potential unjust and unreasonable prices.’

Petitioners (and others) succeeded in locking in

unlawful excessive rates’ for many years into the

6 The factual context of the Western Energy Crisis of 2000-01

is outlined in a long series of Ninth Circuit decisions listed in

the decision below. Snohomish, 471 F.3d at 1067; see

particularly Lockyer v. FERC, 383 F.3d 1006 (9th Cir. 2004).

FERC’s Western Energy Crisis archive is found at

http://www .ferc.gov/industries/electric/indus-act/wec.asp.

Particularly important is the Final Report on Price

Manipulation in Western Markets — Fact Finding Investigation

of Potential Manipulation of Electric and Natural Gas Prices,

issued March 2003 by the FERC Staff {hereinafter FERC

STAFF REPORT]. The summary of findings, Staff Report,

Price Manipulations in Western Markets, Findings at a Glance,

is available at http://www.ferc.gov/industries/electric/indus-

act/wec/enron/ summary-findings.pdf. This report is referenced

throughout the Snohomish decision. It details pervasive

manipulation of both electricity and gas supplies and prices

during the Western Energy Crisis.

? Snohomish, 47) F.3d at 1069.

® FERC determined in December 2000 a benchmark price of

$74 per megawatt hour for term contracts like the ones at bar.

Petitioners demanded prices up to triple the FERC-declared

7

future through the device of making unlawful

demands during a brief period of acute crisis in

Spring 2001.

During the energy crisis some consumers

observed that their electric bills “tripled”, others saw

their electric bills exceed $300. Mark Grossi, No

Heat or Food or Funds Many Seek Relief from Valley

Social Agencies, FRESNO BEE, Feb. 15, 2001,

available at 2001 WLNR 1648598. In the midst of

the energy crisis, this article summarized the effects

on California’s most vulnerable citizens: “Indeed, for

jobless, working poor, elderly and other people on

fixed incomes, the biggest decision during the state’s

energy crisis boils down to this: Pay the utility bill

and run out of food money; or buy food and run the

risk of having the power turned off.” /d.

In one month, electricity prices rose 9% after

the California Public Utilities Commission approved

the increase to help the state’s major utilities cover

“part of spiking whole sale prices” and unfortunately

energy assistance for low-income consumers was

limited and exhausted before all who needed help

received the help they needed. Jd. Several years

after the energy crisis was supposedly over,

consumers still feel the “economic pain and personal

traumas” that the contracts that are the subject of

this action caused: “Consumers, particularly those

on fixed incomes, couldn’t pay electric bills that kept

going up by leaps and bounds, even as they turned

benchmark, and received prices 40 percent to 120 percent

higher. Snohomish, 471 F.3d at 1069-72.

8

off every light and cut back air conditioning to the

bare minimum. A 65-year-old summed it up; I

thought I was working so that I could retire; now I’m

working to pay the electric bill.” Bob Finkelstein &

Michael Shames, Yes. San Diegans Understand

Need for Electricity Reforms, SAN DIEGO TRIB., Oct.

12, 2005 available at http://www.signonsandiego.

com/uniontrib/20051012/ news_lzle12prop80.html.

Californians are not the only consumers to

feel the effects of the contracts at issue here. “In

2000 the average Nevada Power Co. residential

customer...was paying $84.29 a month” by 2005 that

rate had increased to $127.88, an increase of almost

52 percent.” Kevin Rademacher, Utility Bills

Burning up Residents’ Cash, LAS VEGAS SUN, Oct.

16,2005, available at http://www.lasvegassun.com/

sunbin/stories/text/2005/oct/16/5195 15668. html.

Nevada energy experts explained the effect of rising

energy prices and on consumers. “{E]ven small

increases in monthly expenses can have disastrous

implications for consumers on the brink of poverty.”

Id. Given Nevada’s extreme temperatures, it’s no

wonder that thousands of Nevadans sometimes

struggle to pay their utility bills.

Unfortunately, nationwide electricity discounts

for the poor are often reduced or “eliminated” due to

state or local budget deficits. See, e.g., Kim Horner,

Electricity Discount for Poor Eliminated: Some

Residents Might Have To Make Choice Between

Power, Food, DALLAS MORNING NEWS, Sept. 1, 2005,

available at 2005 WLNR 24675874 (noting that the

Texas stopped giving the 10 percent break on

9

electricity costs “to 391,000 low-income households .

through the LITE-UP Texas program” and opted

instead to “use the money...to help balance the state

budget.”). Consumer electricity costs during spot

markets similar to those at issue here have doubled

in some locations. Ron Scherer, Cost of Electricity

Rising Like Summer Heat, CHRISTIAN SCI. MONITOR,

July 27, 2005, available at http://)www.csmonitor

.com/ 2005/0727/p01s03-usec. html.

The higher percentage that consumers pay for

electricity as a result of the contracts that are at

issue here translate into serious family and social

problems that affect consumers either directly or in

the form of increased government expenditures to

address those problems. Because retirees live on

fixed incomes even small increases in expenses

create financial hardship and emotional distress.

The Federal Power Act was designed to provide

consumers a “complete, effective and permanent and

effective bond of protection from excessive rates.”

Atl. Ref. Co. v. Pub. Serv. Comm'n of N.Y. , 360 U.S.

378, 388 (1959).

The FERC Commissioners’ fundamental error

is hiding behind the contract status of the rates to

avoid making the judgments they were appointed to

make. An examination of the statutes and court

precedents they relied on has demonstrated that

there is no basis for their posture.? Under these

9 Compare, Jersey Central Power & Light Co. v. FERC, 810

F.2d 1168, 1170 (D.C. Cir. 1985) (“...The explanation for what

has taken place in these convoluted proceedings appears to be

that the Commission resists ‘end result’ examination at the

10

precedents, the sharp departure of the contract

prices demanded and received by Petitioners from

FERC’s December 2000 $74/mwh benchmark could

and should have been reviewed by FERC on its own

under FPA § 206, without resort to a complaint. The

Ninth Circuit in this case has done no more than

address FERC’s refusal to perform its basic

responsibility to assess whether the rates at issue

were just and reasonable based on the cost-based

zone of reasonableness.

Il. THE FEDERAL POWER ACT PROTECTS

CONSUMERS BY REQUIRING THAT ALL

RATES BE JUST AND REASONABLE.

A. FERC’s “public interest” standard

violates the FPA.

FERC concedes in their Opening Brief that

the Ninth Circuit was correct in its holding that

“there is but one statutory standard addressing the

lawfulness of wholesale electricity rates,” and “[t]hat

stanlard requires that a// rates be ‘just and

reasonable’.” FERC Br. On Writ of Cert., p. 21.

However as the record reflects in this case, the FPA’s

statutory “just and reasonable” standard has been

improperly modified by FERC and replaced with

FERC’s so-called (and misnamed) “public interest”

standard. FERC’s “public interest” standard bears

little resemblance to the public interest criteria

discussed by this Court in Mobile/Sierra.

agency level, and is deeply antagonistic to court review of

ratemaking under the guidelines laid down by Hope.”).

An example and clarification of FERC’s own

public interest standard is discussed in Pub. Utils.

Comm'n of Cal. v. Sellers of Long-Term Contracts to

the Cal. Dep't of Water Res.,101 FERC 4 61,293, 62,

175 (Dec. 17 2002). In that case FERC specifically

holds that unjust and unreasonable contracts can

pass their public interest test:

...the burden of showing that a contract

is contrary to the public interest is a

higher burden than showing that a

contract is not just and reasonable...The

fact that a contract may be found to be

unjust and unreasonable under Sections

205 or 206 of the Federal Power Act

does not in and of itself demonstrate

that the contract is contrary to the

public interest under the Supreme

Court cases....

Id. See also, PaciCorp. v. Reliant Energy Servs. Inc.

105 FERC 4 61,184 (2003) (“...if rates subsequently

become unjust and unreasonable and the contract at

issue is subject to a Mobile-Sierra standard of

review, the Commission under court precedent may

not change a contract simply because it is no longer

just and reasonable.”) /d. at ¢ 31. FERC’s “public

© Cited with approval in Pub. Utils. Comm'n v. Sellers of Long

Term Contracts, 103 FERC 4 61,354 (2003), review granted

and remanded in Pub. Utils. Comm'n of State of Cal. v. FERC,

474 F.3d 587 (9th Cir. 2006) pet'n for cert. filed, 75 USLW 3610

(May 03, 2007) (06-1454).

12

interest standard” which permits high rate, unjust

and unreasonable contracts clearly violates the FPA.

B. There is only one legal standard for

lawful rates under the Federal Power

Act — the “just and reasonable”

standard contained in section 205(a).

The FPA places the burden of regulation

directly on sellers. The activity regulated by

Congress is the business of selling electricity for

ultimate distribution to the public.'! It applies price

restraint -- the “just and reasonable” requirement

found in FPA § 205(a) -- to all rates and charges

demanded and received by public utilities subject to

the jurisdiction of the FERC:

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

'' FPA § 201(a) declares that “[T)he business of transmitting

and selling electric energy for ultimate distribution to the

public is affected with a public interest, and that Federal

regulation of ... that part of such business which consists of the

transmission of electric energy in interstate commerce and the

sale of such energy at wholesale in interstate commerce is

necessary in the public interest,...” 16 U.S.C. § 824(a). “Public

utilities” are entities that own or control facilities for engaging

in sales under FPA § 201(e), 16 US.C. § 824{e). Electric

utilities are defined as sellers of electricity by FPA § 3(22), 16

U.S.C. § 796(22).

13

be just and reasonable, and any such

rate or charge that is not just and

reasonable is hereby declared to be

unlawful.

FPA § 205(a), 16 U.S.C. § 824d(a) (emphasis added).

The statute makes no reference to the manner

in which rates have been established, demanded or

received. It makes no distinction between rates and

charges initially established by contract or by FERC

order. It covers al] “demands” such as bids or offers

that invoke sophisticated strategies for raising prices

such as the economic withholding described in the

FERC STAFF REPORT, supra note 6.'2 As the

Supreme Court noted in Mobile, ratemaking under

the identical provisions of the Federal Power Act and

the Natural Gas Act involves a “...single statutory

scheme under which all rates are established

initially by the [sellers], by contract or otherwise,

and all rates are subject to being modified by the

Commission upon a finding they are unlawful.”

Mobile, 350 U.S. at 341; accord, United Gas Pipe

Line Co. v. Memphis Light, Gas and Water Div., 358

U.S. 103, 113 (1958).

The Mobile Court’s use of the precise term

“unlawful”, where the word has been given the

specific meaning of “not just and reasonable” by

12 FERC STAFF REPORT, supra note 6, at pp. V1-45 et seq.

contains a description and discussion of economic and physical

withholding of electricity supply during the Energy Crisis.

14

§ 205(a),!3 refutes any inference that the Mobile

Court was creating a different standard than the one

found in the statute for rates established by contract.

There is no textual support in the Federal Power Act

for creating a different and higher standard for

review of rates established by contract.'4

C. “Just and reasonable” rates protect

consumers from excessive demands and

charges by establishing a zone of

reasonableness based on suppliers’

costs.

The “just and reasonable” standard has from

the very earliest decisions of the Supreme Court

been understood to restrain the ability of utilities to

exploit and abuse the public through excessive

rates.!5 FPC v. Hope Natural Gas Co., 320 U.S. 591,

610 (1944); FPC v. Memphis Light, Gas and Water

'3 The counterpart provision of the Natural Gas Act, § 4(a), 15

U.S.C. § 717c(a) is identical to FPA § 205(a).

'4 Snohomish, 471 F.3d at 1058-60; accord, Boston Edison Co.

v. FERC, 233 F.3d 60, 65 (ist Cir. 2000). This is one of several

reasons for asserting that there is no conflict between the

Ninth Circuit and First Circuit.

'5 Indeed, the “public interest” considerations in electric and

gas ratemaking were understood to refer to impacts on the

consuming public prior to the enactment of the Federal Power

Act and the Natural Gas Act. Union Dry Goods Co. v. Georgia

Pub. Serv. Co., 248 U.S. 372 (1919); Cf, Arkansas Gas Co. v.

Arkansas R.R. Comm'n, 261 U.S. 379 (1923) (cited approvingly

in Sierra, 350 U.S. 348 at 355).

15

Div., 411 U.S. 458, 465 (1973); NAACP v. FPC, 425

U.S. 662, 670 (1976). See also, Verizon Inc. v. FCC,

535 U.S. 467, 481 (2002); STEPHEN G. BREYER

REGULATION AND ITS REFORM, 15-16 (Harv. Univ.

Press) (1982).

It is settled law that the essence of just and

reasonable ratemaking under the Federal Power Act

involves considering the “results” of a rate, the

impact of the rate on the consuming public and on

the regulated utility. Hope, 320 U.S. at 602;

Duquesne Light Co. v. Barasch, 488 U.S. 299, 315-

316 (1989). In practice this means establishing a

zone of reasonableness, defined by cost-based upper

and lower bounds. Mobil Oil Corp. v. FPC, 417 U.S.

283, 305-06 (1974); FPC v. Natural Gas Pipeline Co.,

315 U.S. 575, 585 (1945); Permian Basin Area Rate

Cases, 390 U.S. 747, 767 (1968).

The zone of reasonableness has consistently

been established with reference to the utilities’ cost

of providing the service subject to regulation, Hope,

320 U.S. at 602-03; Permian Basin, supra. FERC

must also take non-cost factors and impacts into

account when important consumer protection

policies are implicated in rates demanded or charged

by utilities. FPC v. Conway Corp., 426 U.S. 271

(1976); Colorado Interstate Gas Co. v. FPC, 324 U.S.

581 (1924); Panhandle Eastern Pipe Line Co. v. FPC,

324 U.S. 635 (1945). However, when it departs from

producers’ costs in setting rates “...each deviation

from cost-based pricing [must be] found not to be

unreasonable and to be consistent with the

Commission's [statutory] responsibility.” Mobil Oil

16

Corp., 417 U.S. at 308, quoted in Farmers Union

Cent. Exchange v. FERC, 734 F.2d 1486, 1502 (D.C.

Cir. 1984).

The consumer protection objective is the basis

for price ceilings in systems that depart from strict

cost-of-service pricing. Permian Basin, 390 US. at

793-95, 822; FPC v. Texaco, Inc., 417 U.S. 380, 399

(1974). Under those cases even price ceilings — the

upper end of the zone of reasonableness -- must have

some demonstrable relationship to the costs of the

utilities demanding or receiving the rate for the

regulated service.

The statutory “just and reasonable” standard

also establishes a lower bound for rates. Hope, 320

U.S. at 603; Natural Gas Pipeline Co., 315 U.S. at

585. Rates below the lower bound must be raised.

The purpose for the lower bound is to preserve the

financial integrity of the seller's enterprise, so that

continued service to the public is not jeopardized.

Hope, supra; Memphis, supra. The purpose is not to

afford sellers opportunities for speculative profit or

to guarantee them any profit at all but rather to

establish a “most favored customer test.” Cf

Colorado Interstate, 324 U.S. at 612 (Jackson, J.,

concurring) (“most favored customer test”). As this

Court noted in Duquesne Light Co., 488 U.S. at 310,

quoting Hope, 320 U.S. at 605: “Rates which enable

la] company to operate successfully, to maintain its

financial integrity, to attract capital, and to

compensate its investors for the risk assumed

certainly cannot be condemned as invalid, even

though they might produce only a meager return on

17

”

the so called ‘fair value’ rate base.” This expresses

the notion that the consuming public has a stake in

the financial viability of the regulated seller. Cf,

Memphis, 358 U.S. at 113. It is the consuming

public’s interest that defines the lower bound for the

statutory “just and reasonable” determination. The

public’s interest in receiving service at just and

reasonable rates — the public interest -- includes a

reciprocal interest in the seller's financial viability

but does not encompass profit-maximizing seller

behavior.

The determination of the upper and lower

bounds within which the just and reasonable rate

may fall is the crucial task of the FERC in making

rates. It is in this way that the well-known

“balancing” of investor and consumer interests

occurs. Hope, supra; Permian Basin, 390 U.S. at

792. While the methods for relating the zone of

reasonableness to supplier costs may vary widely in

practice, the fundamental requirement of a

grounding of rates in costs has been absolutely

consistent and has been unchanged by Congress.

The Supreme Court has consistently rejected

attempts by the FERC and its predecessor Federal

Power Commission to equate statutory “just and

reasonable” with rates established simply by

reference to the “market.” Texaco, 417 U.S. at 394-

97. In Texaco, this Court held that:

..[T]he prevailing price in the

marketplace cannot be _ the final

measure of "just and reasonable” rates

mandated by the Act.... In subjecting

18

producers to regulation because of anti-

competitive conditions in the industry,

Congress could not have assumed that

"just and reasonable" rates could

conclusively be determined by reference

to market price...

Id. at 397-399.

Ill. THE MOBILE AND SIERRA DECISIONS

APPLY THE “JUST AND REASONABLE”

STANDARD TO LIMIT THE PRICE-

SETTING POWERS OF SELLERS, AND

THUS TO PROTECT THE CONSUMING

PUBLIC.

FERC’s refusal to invoke the “just and

reasonable” standard in this case leads directly to a

failure of that “permanent bond of protection” for

consumers that this Court has placed at the core of

the Federal Power Act. FERC’s refusal is not

supported by an _ accurate reading of the

Mobile/Sierra decisions, which uphold the consumer

protection objective of the FPA against unilateral

seller-initiated rate increases.

A. The decisions in Mobile! Sierra do not

restrict the power and responsibility of

FERC to protect the interest of

consumers from unjust contracts.

19

Mobile involved an attempt by a natural gas

company, by statutory definition a_ seller,'®

unilaterally to increase a specific rate set by a

contract with a gas distributor. Sierra involved an

attempt by a public utility!” seller unilaterally to

increase a rate set by a contract with a purchaser for

resale, using both the unilateral “filing and notice”

procedure of FPA §§ 205(c) and 205(d) and the

complaint procedure under FPA § 206.8 The

essential holding in Mobile was simply that: “the

Natural Gas Act does not give natural gas companies

the right to change their rate contracts by their own

unilateral action. “ Mobile, 350 U.S. at 337.

‘6 The term “natural gas company” is defined by the Natural

Gas Act (NGA) and refers to sellers in interstate commerce,

NGA § 2(6), as that term is defined in the NGA, NGA § 2(7), 15

U.S.C. §§ 717a(6) and 717a(7). It does not refer to any business

involved in a gas transaction as buyer.

‘7 Defined by FPA§ 201(e), 16 U.S.C. § 824(e), as an entity that

owns facilities subject to the jurisdiction of the Commission,

which in turn is limited to facilities for wholesale sales in

interstate commerce and for transmission in _ interstate

commerce.

8 16 U.S.C. § 824e(a) provides in pertinent part: “Whenever

the Commission, after a hearing held upon its own motion or

upon complaint, shall find that any rate... demanded, ...

charged, or collected by any public utility for any ... sale subject

to the jurisdiction of the Commission, or that any ... practice, or

contract affecting such rate, charge, or classification is unjust,

unreasonable, unduly discriminatory or preferential, the

Commission shall determine the just and reasonable rate,

charge, ... practice, or contract to be thereafter observed and in

force, and shall fix the same by order.”

20

Although utility companies set the rates

initially, the Commission assures that the rates are

lawful through active supervision of the outcomes.

The basic power of the Commission is

that given it by [statute] to set aside and

modify any rate or contract which it

determines, after hearing, to be “unjust,

unreasonable, unduly discriminatory, or

preferential." This is neither a "“rate-

making” nor a "rate-changing” procedure.

It is simply the power to review rates and

contracts made in the first instance by

natural gas companies and, if they are

determined to be unlawful, to remedy

them. [The statute] would of its own

force apply to all the rates of a natural

gas company, whether long-established or

newly changed.

Mobile, 350 U.S. at 341 (emphasis added).

This language makes it clear that Mobile did

not elevate rates set by “contract” to a higher status

than other rates or preclude the modification of

unjust and unreasonable contracts. All contracts are

subject to the paramount authority of the

Commission to assure that rates are lawful, which

cannot be waived or compromised by contract.

Papago Tribal Util. Auth. v. FERC, 723 F.2d 950,

954 (D.C. Cir.1983) [hereinafter Papago Ii. This

Court did not reject the Commission’s ability to

modify excessive and unjust rates set created in

contracts. Specifically, this Court declared that:

21

[DJenying to natural gas companies the

power unilaterally to change their

contracts in no way impairs the

regulatory powers of the Commission,

for the contracts remain fully subjec’ to

the paramount power of _ the

Commission to modify them when

necessary in the public interest. The Act

thus affords a 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 (emphasis added).

The importance of contract stability is here

explicitly described with reference to the interest of

the consuming public, who are the end-use

customers of the wholesale buyers. Cf, Memphis,

358 U.S. at 113. Because the regulated utility seller

has the initiative in demanding and setting rates, its

business judgment -— including making = an

“improvident bargain” -- stands as it would absent

the existence of regulation. However, all contracts

remain fully subject to the paramount power of the

Commission to protect the consuming public from

unlawful rates. Contract stability is merely one

element — an important element but not a superior

element -- in the regulatory scheme whose purpose is

to protect the consuming public. Contract stability

must be balanced against other concerns of public

regulation such as protection from excessive rates.

22

B. The Sierra “public interest” language is

a specific application of the statutory

“just and reasonable” standard.

Sierra addresses precisely the seller’s resort to

the remedial powers of the Commission to raise its

contract rate under FPA § 206. In Sierra, this Court

rejected an attempt by the seller to end-run the

Mobile decision barring a unilateral seller rate

increase. This Court defined the purpose of the

Commission in protecting the public interest.

Specifically, this Court declared:

That the purpose of the power given the

Commission by 206 (a) is the protection

of the public interest, as distinguished

from the private interests of the

utilities, is evidenced by the recital in

201 of the Act that the scheme of

regulation imposed "is necessary in the

public interest." When 206 (a) is read in

the light of this purpose, it is clear that

a contract may not be said to be either

"unjust" or “unreasonable” simply

because it is unprofitable to the public

utility.

Sierra, 350 U.S. at 355.

The Sierra decision does not hold that a

contract creates a presumption that its pricing is

“just and reasonable.” It does not hold that a

contract waives resort to FERC’s remedial powers

under FPA § 206. Rather, Sierra holds that the rate

23

the seller demands and receives pursuant to contract

is the lawful rate unless the contract rate is so low

that service to the public is threatened, i.e. is not

just and reasonable. Otherwise, the business

decision of the utility seller — however “improvident”

-- will stand. The D.C. Circuit has previously noted

that this “public interest” standard is a difficult

standard for a seller to meet,!® because the interest

served is truly that of the public in affordable

service, not that of the seller in maximizing profit.

As the First Circuit has noted, the language

connecting a seller's rate increase request to the

“public interest” language is only in reference to

rates asserted by the seller to be too low.” It arises

only in the rate increase context. It is important to

note that the Sierra Court’s reluctance to improve

the seller’s “unprofitable” contract carries no

reluctance to relieve buyers and the public from an

unlawfu

This Court further confirmed the approach of

restricting sellers to their contracted obligations in

Memphis. In that case, the seller's contract

permitied it to charge its going rate “under Seller's

Rate Schedule [the appropriate rate schedule

designation is inserted here], or any effective

superseding rate schedules, on file with the Federal

Power Commission.” Memphis, 358 U.S. at 105.

19 Papago II, 723 F.2d at 954.

20 Northeast Utils. Serv. Co. v. FERC, 55 F.3d 686, 690 (1st Cir.

1995).

24

Upholding a change filed with the FPC and approved

by it, this Court noted that:

It seems plain that Congress, in so

drafting the statute, was not only

expressing its conviction that the public

interest requires the protection of

consumers from excessive prices for

natural gas, but was also manifesting

its concern for the legitimate interests

of natural gas companies in whose

financial stability the gas-consuming

public has a vital stake.

Id. at 113.

Significantly, this Court did not intimate any

limitation on the ability of buyers and other

representatives of the public interest to resort to a

§ 2 proceeding to determine lawfulness. Buyers

for resale and the consuming public who depend on

the receipt of regulated service do not have the

power enjoyed by sellers under the NGA and FPA,

and affirmed by Mobile and Sierra, unilaterally to

change rates in the absence of contract terms. They

must resort to complaint under FFA § 206(a). The

Ninth Circuit holding in this case that FERC has

applied the wrong standard to review of rates

asserted by the public to be excessive under

§ (206)(a) is mandated not only by the clear and

unambiguous statutory “just and _ reasonable”

language of the Federal Power Act but also by the

Mobile/Sierra opinions.

25

C. Decisions of the federal appellate courts

following Mobile and Sierra reviewing

proposed increases in contract rates

uphold the interest of the consuming

public under the just and reasonable

standard.

Sellers initiate rate changes under the

Federal Power Act. Accordingly the vast majority of

cases invoking the rule of Mobile/Sierra to protect

consumers from seller-initiated rate increases arise

in rate increase filings under FPA § 205. Under the

influence of Judge Scalia’s opinion in Papago II, 723

F.2d 950, these cases emphasize the continuing

viability of the concerns that animate traditional

“just and reasonable” ratemaking. The rationale has

been to protect the consuming public from

exploitation and abuse, not contract preservation at

all cost. Judge Scalia noted first that the right of a

party to bring to the FERC’s attention rates not in

the public interest could not be waived or eliminated

by contract. Specifically, he noted that:

The limitation ... cannot abridge the

right of the parties to bring to the

attention of the Commission ... rates

not in the public interest. The

Commission's obligation to insure that

rates do not violate that prescription is

imposed for the benefit of the public at

large... it therefore cannot be waived or

eliminated by agreement of the latter.

Even agreement not to bring a rate

contrary to the public interest to the

26

Commission's attention would be akin

to a contract to suppress evidence and

therefore void. [citation omitted].

Papago II, 723 F.2d at 954. Next he noted that

reservation of a power to bring a § 206 action

necessarily implied application of the “just and

reasonable standard.” He then proceeded to apply

just and reasonable ratemaking principles, including

noting that the rates being modified were below the

“zone of reasonableness” as a justification for the

rate increase.

The basic rule in the D.C. Circuit involving rate

increase filings has been:

The ability of contracting parties to

determine for themselves whether and

under what conditions rates may be

altered — subject, of course, to the

overriding regulatory power of the

Commission to adjust rates in the public

interest — has been delineated in three

decisions of the Supreme Court....[IJn

resolution of the rate increase disputes,

the Mobile-Sierra-Memphis _ trilogy

assigns the pre-eminent role to the

intent of the contracting parties.

City of Oglesby v. FERC, 610 F.2d 897, 902-03 (D.C.

Cir. 1979) (emphasis added). The D.C Circuit has

consistently applied this rule to prevent seller rate

27

increases. This approach is entirely consistent with

Mobile/Sierra.”)

D. FERC’s decision below is not entitled to

deference.

FERC’s so-called “public interest” standard

undermines the Act’s consumer protection objective.

The unambiguous text of § 205(a) that all rates be

“just and reasonable” is not ambiguous. FERC’s

current anti-consumer position is not a reasonable

interpretation of the Federal Power Act. Further,

since FERC’s’ anti-consumer “public interest”

contract rate standard rests on its reading of this

Court’s decisions in Mobile/Sierra, the rule of

deference to agency statutory interpretation

contained in Chevron USA, Inc. v. Natural

Resources Defense Council, 467 U.S. 837 (1984) and

its progeny does not come into play. FERC is not

free to disregard this Court’s interpretations of any

statute. Nat’? Cable and Telecomms. Ass’n v. Brand-

X Internet Servs., 545 U.S. 967 (2005) ( Stevens, J.,

concurring).

2! Unsupported dictum in 7exaco, Inc. v. FERC, 148 F.3d 1091,

1096 (D.C. Cir. 1998), to the effect that “[t]he [Papago II} Court

did not suggest that the parties’ failure to explicitly foreclose

the Commission's authority to replace rates would leave it

intact” misses the point. FERC’s authority derives from the

statute and cannot be waived by private agreement. Even in

the Texaco case, however, the Court looked to the substance of

the consumer protection objective of FPA § 206, and found a

“public interest” justification for a rate change initiated by

FERC in a gas pipeline case. /d. at 1097.

28

CONCLUSION

The decision of the Ninth Circuit fully

comports with the text of the Federal Power Act and

its purpose to protect the consuming public. It is

consistent with the leading Supreme Court

precedents interpreting the requirement that all

rates charged by public utilities be just and

reasonable. FERC’s reliance on Mobile and Sierra to

avoid reviewing the contracts at issue here under the

“just and reasonable” legal standard is erroneous.

The judgment of the court of appeals should be

affirmed.

January 14, 2008 Respectfully Submitted,

BARBARA JONES

Counsel of Record

AARP Foundation Litigation

200 So. Los Robles,

Suite 400

Pasadena, CA 91101

(626) 585-2628

STACY CANAN

AARP Foundation Litigation

MICHAEL SCHUSTER

AARP

601 E Street, NW

Washington, DC 20049

(202) 434-2060

29

WILLIAM JULIAN II

43556 Almond Lane

Davis, CA 95618

(916) 758-8882

Attorneys for AARP