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

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0539%3A26

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2007

## Text

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0539%3A26. Public record. Not legal advice.