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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5607 D
SCP? Nos, 06-1457 and 06-1462
IN THE
Supreme Court of the United States
MORGAN STANLEY CAPITAL GROUP INC., ET AL.,
PETITIONERS,
Vv.
PUBLIC UTILITY DISTRICT NO. 1
OF SNOHOMISH COUNTY, WASHINGTON, ET AL.,
RESPONDENTS.
CALPINE ENERGY SERVICES, L.P., ET AL.,
PETITIONERS,
Vv.
PUBLIC UTILITY DISTRICT NO. 1
OF SNOHOMISH COUNTY, WASHINGTON, ET AL.,
RESPONDENTS.
On Writ of Certiorari to the United States Court
of Appeals for the Ninth Circuit
BRIEF OF AMICI CURIAE AMERICAN PUBLIC POWER
ASSOCIATION AND NATIONAL RURAL ELECTRIC
COOPERATIVE ASSOCIATION
IN SUPPORT OF RESPONDENTS
Scott H. STRAUSS
Counsel of Record
SPIEGEL & MCDIARMID LLP
1333 New Hampshire Avenue, NW
Washington, DC 20036
(202) 879-4000
(Additional counsel] listed on inside front cover)
ns sss
Wii SON-EPES PRINTING Co., INC. ~ (202) 789-0096 — WASHINGTON, D.C. 20002
MARK S. HEGEDUS
JEFFREY A. SCHWARZ
SPIEGEL & MCDIARMID LLP
1333 New Hampshire Avenue, NW
Washington, DC 20036
(202) 879-4000
SUSAN N. KELLY
Vice President of Policy Analysis and General
Counsel
AMERICAN PUBLIC POWER ASSOCIATION
1875 Connecticut Avenue, N.W., Suite 1200
Washington, D.C. 20009-5715
(202) 467-2933
WALLACE F. TILLMAN
General Counsel
RICHARD MEYER
Senior Regulatory Counsel
NATIONAL RURAL ELECTRIC COOPERATIVE ~
ASSOCIATION
4301 Wilson Boulevard
Arlington, VA 22203-1860
(703) 907-5811
Counsel for Amici Curiae
American Public Power Association and
National Rural Electric Cooperative Association
TABLE OF CONTENTS
TABLE OF AUTHORITIEG.....................cssccsseseees ill
INTEREST OF AMICI ubiidenbabeananeinnniiniiammannbeiannsin l
STATEMENT OF THE CASE ....0............:ccscseoeeees 2
SUMMARY OF ARGUMENT... eee eeeeseeees 8
I cntetinteineeinncticitaninininpmimeoniemcnnmepseens 12
I. SECTION 206 CONTAINS ONLY
ONE STANDARD: THE JUST-AND-
REASONABLE STANDARD.............0ccecce00e0: 12
Il. CONTRACT RATES MAY BE
UNJUST AND UNREASONABLE
TO CONTRACTING PARTIES —
OR TO THE CONSUMING PUBLIC............ 17
A. Contracts Are Not Per Se Reasonable
soins cnistvaiinviiieianieientabiiiintnianiees 18
B. MBR Authority Does Not Foreclose
Review of Contract Reasonableness ........ 27
C. Petitioners and FERC Wouid
Unduly Limit FERC’s Ability
to Protect the Public Interest .................. 32
il
1. FERC Must Protect More Than
“Unequivocal Public Necessity” ......... 32
2. The Ninth Circuit Correctly
Interpreted Section 206 il 36
D. MBR Agreements Represent One
of Many Contexts in Which
Mobile-Sierra is Invoked ..............:0:0s0000 38
Il]. FERC MAY NOT ACCEPT ©
UNREASONABLE CONTRACTS TO
PROMOTE FUTURE CONTRACTING........42
aN in iniccincnricsnteunscvennnninntetniiedetunbnaniainis 43
Farmers Union Cent. Exch. Inc. v. FERC,
734 F.2d 1486
ky eee 19-20, 22-23
FCC v. RCA Commce'ns, Inc.,
fs EEE en anna EE 35
FPC v. Conway Corp.,
a i tall 37
FPC v. Hope Natural Gas Co.,
I ical asinine 19
FPC v. Sierra Pac. Power Co.,
350 U.S. 348 (1966) .............0cccc00000 passim
FPC v. Sunray DX Oil Co.,
Be ee I cincicntccecenssccsvnctenednevns 21-22
FPC v. Tenn. Gas Transmission Co.,
371 U.S. 145 (1962) ....... AOE Eee 20
FPC v. Texaco, Inc.,
417 US. 380 (1974) ....14, 17-18, 21-22, 43
Interstate Natural Gas Ass’n of Am. v. FERC,
285 F.3d 18 (D.C. Cir. 2002) ...... 19, 23, 28
Jersey Cent. Power & Light Co. v. FPC,
EE te UE sehhinsctnessstiivinteinctenbintonanes 19
iV
TABLE OF AUTHORITIES
CASES Page(s)
Arkansas Louisiana Gas Co. v. Hall,
GB TET. BFE Ci cicntcabetciinstiseececied 33-35
Atlantic City Elec. Co. v. FERC,
295 F.3d 1 (D.C. Cir. 2002) .............. 13, 24
Atlantic Refining Co. v. Pub. Serv. Comm'n,
360 U.S. 378 (1959) ................. 9-10, 19-20
Boston Edison Co. v. FERC,
856 F.2d 361 (1st Cir. 1988)................... 37
Boston Edison Co. v. FERC,
233 F.3d 60 (1st Cir. 2000)..............00..... 13
California ex rel. Lockyer v. FERC,
383 F.3d 1006 (9th Cir. 2004) ...... 4, 22, 28
Consumers Energy Co. v. FERC,
367 F.3d 915 (D.C. Cir. 2004) .......00.000... 22
Electrical Dist. No. 1 v. FERC,
774 F.2d 490 (D.C. Cir. 1985) ..........00.... 28
Elizabethtown Gas Co. v. FERC,
10 F.3d 866 (D.C. Cir. 1993) .......00... 22
Louisiana. Energy & Power Auth. v. FERC,
141 F.3d 364 (D.C. Cir. 1998) ................ 22
Maine Pub. Utils. Comm'n v. FERC,
454 F.3d 278 (D.C. Cir. 2006)...... 35, 40-41
NAACP v. FPC,
os scnsdeosasonsce 35
Northeast Utils. Serv. Co. v. FERC,
55 F.3d 686 (1st Cir. 1995)............... 13, 35
NSTAR Elec. & Gas Corp. v. FERC,
481 F.3d 794 (D.C. Cir. 2007)................. 39
Papago Tribal Util. Auth. v. FERC,
723 F.2d 950 (D.C. Cir. 1983)................. 13
Pennsylvania Elec. Co. v. FERC,
11 F.3d 207 (D.C. Cir. 1993)................... 15
Pennsylvania Water & Power Co. v. FPC,
343 U.S. 414 (1952) .............cccccseseeees 20, 35
Permian Basin Area Rate Cases,
390 U.S. 747 (1968) ...... 8, 14, 33-34, 42-43
Public Util. Dist. No. 1 of Snohomish County
vu. FERC, 471 F.3d 1053 (9th Cir. 2006)
Te cr 7
vi
Public Utils. Comm'n of Caf. v. FERC,
462 F.3d 1027 (9th Cir. 2006)................... 3
Tejas Power Corp. v. FERC, -
908 F.2d 998 (D.C. Cir. 1990) ........... 20-22
Town of Norwood, Mass. v. FERC,
587 F.2d 1306 (D.C. Cir. 1978) ......... 24-25
United Gas Pipe Line Co. v. Mobile Gas
Serv. Corp., 350 U.S. 332 (1956) .... passim
AGENCY DECISIONS
Bridgeport Energy, LLC,
118 F.E.R.C. 4 61,243 (2007)....... 36, 39-40
California ex rel. Lockyer v. B.C.
Power Exch. Corp.,
99 F.E.R.C. 4 61,247 (2002) ............. 22, 28
Californians for Renewable Energy, Inc.
v. Cal. Pub. Utils. Comm’n,
119 F.E.R.C. 4 61,058 (2007) ................... 3
Florida Power & Light Co.,
67 F.E.R.C. 4 61,141 (1994).................... 36
Vil
GWF Energy LLC,
98 F.E.R.C. J 61,330 (2002) ................... 29
Milford Power, LLC,
119 F.E.R.C. 4 61,167, reh’g denied,
121 F.E.R.C. 4 61,042, appeal
dismissed sub nom. Blumenthal v.
FERC, No. 07-1270 (D.C. Cir. Oct.
Morgan Stanley Capital Group, Inc.,
69 F.E.R.C. 4 61,175 (1994), reh’g
granted in other part, 72 F.E.R.C.
SU IITUIIIIIID.. ° siiscnnseepeniinibehinahasiealenel 28-29
Nevada Power Co. v. Duke Energy Trading
& Mktg., LLC, 100 F.E.R.C. 4 61,273
| ES) | ee 7, 15, 26
Nevada Power Co. v. Enron Power Mktg., Inc.,
103 F.E.R.C. 4 61,353 (2003)
SRI: ST a siensincntietetncietpaaticeimansainemeeis passim
105 F.E.R.C. § 61,185 (2003)
I a 16
Vill
Promoting Wholesale Competition Through
Open Access Non-Discriminatory
Transmission Services by Public
Utilities; Recovery of Stranded Costs
by Public Utilities and Transmitting
Utilities, Order No. 888-A, 62 Fed. Reg.
12,274 (Mar. 14, 1997), [1996-2000
Regs. Preambles] F.E.R.C. Stat. & Regs.
4 31,048, on reh’g, Order No. 888-B, 62
Fed. Reg. 64,688 (Dec. 9, 1997), 81
F.E.R.C. § 61,248 (1997), on reh’g, Order
No. 888-C, 82 F.E.R.C. 4 61,046 (1998),
affd in part and remanded in part sub
nom. Transmission Access Policy Study
Group v. FERC, 225 F.3d 667 (D.C. Cir.
2000), affd sub nom. New York v. FERC,
I te tin incinceiceicinianenndl 25
Public Utils. Comm’n of Cal. v. Sellers of Long
Term Contracts:
101 F.E.R.C. 4 61,293 (2002)
EER TENSE ee ce 13, 15
103 F.E.R.C. 4 61,354 (2003)
| FREESE eee nen 4
105 F.E.R.C. 4 61,182 (2003)
2 eee 3, 16-18
Reliant Energy Servs., Inc., |
102 F.E.R.C. 4 61,315 (2003) .........0....... 22
ix
San Diego Gas. & Elec. Co. v. Sellers of
Energy:
92 F.E.R.C. 4 61,172 (2000)
| K——_ SREEREACEEEEDS rs eo eee EE 4
93 F.E.R.C. 4 61,294 (2000)
Een passim
95 F.E.R.C. 4 61,418 (2001)
Rs IE hetennpncntizanercnrsinennninsnsermnesannatee 4
97 F.E.R.C. 4 61,275 (2001)
i cat iiinttaned ...4, 6, 31
Wabash Valley Power Ass'n,
107 F.E.R.C. 4 61,327 (2004).................. 36
STATUTES
Federal Power Act, 16 U.S.C.
Snr ET aiichinisiieinetbiapenpeecentetennint passim
S BOL, 16 UBS. © GBR) .nccccccccccccecccccsees 14
§ 205, 16 U.S.C. § 824d.......... 15, 23, 36-37
§ 205(a), 16 U.S.C. § 824d(a) ............0... 14
§ 205(c), 16 U.S.C. § 824d(c) ........... ee. 27
§ 206, 16 U.S.C. § 824e................... passim
§ 206(a), 16 U.S.C. § 824e(a) ...... 12, 20, 33
Natural Gas Act, 15 U.S.C.
ae) | aD 10, 20, 33-34, 43
BE, 2G WEG. © FIGS cvcecccsecescospiecccecnscesens 23
OTHER AUTHORITIES
Stephen Breyer, Regulation and Its Reform
IED ciicstoupncnnbieiinbemedneiecapinns sheeseneneensenenes 20
Federal Energy Regulatory Commission,
Final Report on Price Manipulation
. in Western Markets: Fact Finding
Investigation of Potential Manipulation
of Electrical and Natural Gas Prices,
Docket No. PA02-2-000 (2003)
SEs Ie Ge icidinietaianciibiedncsencsenendtenieiooane 4
S. Rep. No. 74-621 (1935)...............ssssssscessssereees 19
BRIEF OF AMICI CURIAE AMERICAN
PUBLIC POWER ASSOCIATION AND
NATIONAL RURAL ELECTRIC
COOPERATIVE ASSOCIATION IN SUPPORT
OF RESPONDENTS
INTEREST OF AMICI!
American Public Power Association (“APPA”)
represents the Nation’s more than 2,000 not-for-
profit, publicly-owned electric utilities, which do
business in every state except Hawaii and provide
over 15 percent of all kilowatt-hours of electricity
sold to ultimate customers. Public power systems
own about 10 percent of the nation’s electric
generating capacity, but purchase nearly 70
percent of the power they use to serve their
customers. Half of all public power systems have
fewer than 2,000 customers. Respondent Public
Utility District No.1 of Snohomish County,
Washington (“Snohomish”), is an APPA member.
National Rural Electric Cooperative Association
(“NRECA”) represents the Nation’s 930 not-for-
' All parties have consented to the filing of this brief. No
counsel for a party authored this brief in whole or in part. No
person other than amici curiae, their members, or their
counsel made a monetary contribution to its preparation or
submission.
profit, customer-owned rural electric cooperatives
serving more than 40 million end users in 47
states. Of those 930 cooperatives, 64 are
generation and transmission cooperatives that are
owned by and sell power to their member
distribution cooperatives.
Both associations’ members participate in
wholesale power markets as buyers and sellers
and, accordingly, seek to ensure that: (a) well-
functioning, transparent wholesale electricity
markets produce just and reasonable rates, terms,
and conditions; (b) the Federal Energy Regulatory
Commission (“FERC”) does not allow consumers
and markets to be harmed by unreasonable
contracts formed under uncompetitive conditions;
and (c) FERC ensures that contract rates are just
and reasonable to non-contracting parties,
including the public.
STATEMENT OF THE CASE
This case presents the question whether this
Court’s Mobile? and Sierra® decisions (collectively,
“Mobile-Sierra”) preclude FERC from examining
the justness and reasonableness of “market-based
rate” (“MBR”) agreements formed during the “worst
2 United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350
U.S. 332 (1956) (“Mobile’).
3 FPC v. Sierra Pac. Power Co., 350 U.S. 348 (1956)
(“Sierra”).
electricity-market crisis in American history,”4
amidst “unprecedented” market dysfunction
produced by “flawed market rules” and extensive
“market manipulation,” FERC Opp. Cert. at 13,
22-23 (quoting Californians for Renewable Energy,
Inc. v. Cal. Pub. Utils. Comm’n, 119 F.E.R.C.
4] 61,058, P 30 (2007) (““CARE’)).
By the summer of 2000, California electricity
markets no longer worked “as intended,” id. at 6.
Short-term prices skyrocketed above “preexisting
competitive levels,” id. at 7. The California spot
market peaked at $1,099 per megawatt-hour
(“MWh”)—“a __sfifteen-fold increase over’ the
historical average.” Brief for Petitioner Morgan
Stanley Capital Group (“MS Br.”) at 11. Pacific
Northwest spot prices “reached an unprecedented
$3,300/MWh.” Jd.5
Load-serving utilities incurred billions in debt,
FERC Opp. Cert. at 6, and, in some cases, went
bankrupt, J.A. 1533a. The system operator
declared system emergencies and _ rolling
blackouts.® | The “market meltdown,” J.A. 626a,
4 Brief for the FERC in Opposition (“FERC Opp. Cert.”) at 12.
5 See also Brief of Respondents Snohomish et al. (“Snohomish
Br.”) at 12 (noting price spikes to $3,500/MWh compared to
historical averages of approximately $24/MWh).
6 See Brief of Respondents Pub. Utils. Comm'n of Cal. et ai.
(“PUC Br.”) at 9; see also Pub. Utils. Comm'n of Cal. v. FERC,
462 F.3d 1027, 1040 (9th Cir. 2006) (discussing blackouts,
engulfed not just California but the entire West.
FERC Opp. Cert. at 23.
Non-compliance with FERC’s MBR reporting
requirements, imposed to allow FERC to remedy
unreasonable rates, was “rampant,” California ex
rel. Lockyer v. FERC, 383 F.3d 1006, 1014 (9th Cir.
2004); Brief for the Federal Energy Regulatory
Commission (“FERC Br.”) at 9. So were schemes to
manipulate electricity markets, natural gas
markets (the operation of which impact electricity
prices), and published electricity or natural-gas
price indices. Supp. J.A. 17sa-19sa.
Then-existing rules exacerbated market flaws
by relying on the “wildly dysfunctional” spot
market, see J.A. 1462a. As Commissioner Massey
explained, during high demand in California
“generator bid prices [were] virtually unrestrained
by the forces that would apply in competitive
markets.” Id. 459a. On investigation, FERC found
that California spot market prices were unjust and
unreasonable, id. 687a, attempted several times to
stabilize the market, and undertook an extensive
proceeding to consider refunds of unreasonable spot
prices charged between October 2, 2000 and
June 19, 2001, see id. 779a-80a.’
emergencies, and claims of economic and physical
withholding).
7 See also J.A. 709a (discussing “deficient market
On December 15, 2000, as California foundered
“In a state of economic emergency,” J.A. 520a,
FERC acted to “stop the ... hemorrhaging,”
id. 48la, by encouraging load-serving utilities to
enter into long-term power supply contracts,
id. 538a; FERC Br. at 9. Load-serving utilities
feared, however, that suddenly moving massive
demand into forward markets would produce
unreasonable prices in those markets. J.A. 522a.
In response, FERC promised to:
monitor prices in those markets and
also adopt a benchmark that we will
use as a reference point in addressing
any complaints regarding the pricing
of long-term contracts negotiated over
the next year, after which time the
sudden increase in forward demand
will have subsided.
Id. FERC adopted a $74/MWh benchmark for five-
year, around-the-clock power contracts, id. 522a-
23a, to “assist buyers and sellers over the next year
when so many MWs will be entering the forward
market at one time,” id. 523a-24a. FERC said that
it would use the benchmark “to assess potential
complaints regarding long-term contracts,” but
mechanisms initially established by California, and approved
by the Commission, that have resulted in a dysfunctional
marketplace both in California and the remainder of the
West”).
cautioned that it should not be interpreted as “a
price floor on forward contracts.” Id.
FERC’s December 15 action failed to stem the
crisis. By January 4, 2001, “(t]he Western energy
shortage [had] metastasized into a financial crisis
of major proportions as well as a crisis of consumer
confidence.” J.A. 62la (Chairman Hoecker,
concurring). Although he believed’ that
“[clompetition is the solution, not the problem,”
Chairman Hoecker observed that “it was not well-
conceived or well-executed in California,” resulting
in a “failed market structure.” Id. 628a-30a. Two
weeks later, as the crisis “deepen[ed],” Chairman
Hoecker spoke to the “palpable” sense of
“desperation.” Id. 641a, 647a.
Petitioners and Respondents negotiated their
contracts within this extraordinary environment,
executing them between November 2000 and June
2001. J.A.123la. Prices in spot “and forward”
markets did not “{fall] back to preexisting
competitive levels” until summer 2001. FERC Opp.
Cert. at 7. FERC denied rehearing regarding the
$74/MWh benchmark in December 2001. J.A.
970a-7la. Respondents filed their complaints
between December 2001 and February 2002.
Id. J.A. 1232a-33a.
FERC found that Respondents established a —
prima facie case that “dysfunctional” spot markets
“adversely affected the long-term bilateral contract
prices so as to render them unjust and
unreasonable or contrary to public interest.” J.A.
1173a. FERC denied relief, however, because it
believed that Mobile-Sierra precluded consideration
of contract reasonableness unless the contracts
expressly permitted such review. FERC instead
applied a “public-interest standard” under which it
was “not enough to show that forward prices
became unjust and unreasonable due to the impact
of spot market dysfunctions; it must be shown that
the rates, terms, and conditions are contrary to the
public interest.” J.A. 1275a-76a. FERC dismissed
the complaints, finding that the public interest did
not require contract modification.
The Ninth Circuit vacated and remanded
FERC’s orders, explaining that “there is but one
s.atutory standard addressing the lawfulness of
wholesale electricity rates[:] ... that all rates be
‘just and reasonable.” Pet. App. 35a. The court
elaborated that FERC may not presume contract
reasonableness without regard to the “context in
which the contracts were initially formed” and
whether that context “provide[s] a sound basis to
believe that the resulting rates are just and
reasonable.” IJd.38a. The court remanded for
FERC’s “review [of] these complaints in the first
instance” under the correct statutory standard.
Id. 4a. These proceedings followed.
SUMMARY OF ARGUMENT
Faced with contracts negotiated at its urging
amid promises of “vigilant ... monitoring,”
J.A. 520a, FERC. abruptly reversed course and held
that the Federal] Power Act (“FPA”), 16 U.S.C.
§§ 79la-825r, and Mobile-Sierra precluded just-
and-reasonable review of contract rates above
FERC’s own “benchmark,” J.A. 484a. FERC
instead applied a much stricter “public-interest
standard,” under which it deemed irrelevant
evidence that the spot market meltdown produced
forward contract prices outside the zone of
reasonableness. FERC here admits _ that
“dysfunction in the spot market had an effect on
the prices available in the forward market.” Br. at
44.
Unlike the orders below, Petitioners and FERC
now concede that there is only one statutory
standard, MS Br. at 7 n.4; FERC Br. at 21,
effectively admitting that the agency applied the
wrong standard and that a remand was required.
They nonetheless argue for reversal, claiming that
FERC reached the correct outcome by rejecting
contract modification. They contend that contracts
are per se reasonable to the contracting parties and
are just and reasonable even to non-parties and the
consuming public except in “extraordinary
circumstances” of “unequivocal public necessity.”
FERC Br. at 17 (quoting Permian Basin Area Rate
Cases, 390 U.S. 747, 822 (1968)); MS Br. at 6.
That position is twice flawed. First, FERC
cannot be sustained on reasoning different from
that in its order. Second, neither the FPA nor
Mobile-Sierra allows FERC to presume contract
reasonableness despite evidence that the contracts
were tainted by the exercise of market power,
market manipulation, or other uncompetitive
conditions.
Grants of MBR authority do not allow FERC to
treat MBR contracts as conclusively reasonable.
Orders granting that authority are based on then-
existing conditions and FERC’s predictions of
future market competitiveness. But FERC’s
predictions are fallible, as this case starkly
illustrates. See also FERC Br. at 34-35.
Reasonable predictions may justify waiving notice-
and-filing requirements, but cannot
“predetermin{[e]” that subsequent MBR
transactions—including those occurring in markets
substantially less competitive than FERC
predicted—are just, reasonable, and immune from
review.
A contrary holding would require electric
consumers to bear the risks of FERC’s predictive
errors and of market participants’ anticompetitive
conduct, undermining Congress's intent to “afford
consumers a complete, permanent and effective
bond of protection from excessive rates and
charges,” Atl. Ref. Co. v. Pub. Serv. Comm'n, 360
10
U.S. 378, 388 (1959).° Such a holding also would be
inconsistent with FERC’s willingness to remedy
short-term transactions occurring during the same
period, under similar market conditions, and
entered into pursuant to the same MBR authority.
Neither FERC nor Petitioners cite any precedent
that Mobile-Sierra’s applicability turns. on
transaction duration.
Importantly, the Ninth Circuit did not order
FERC to set these long-term contracts aside. The
absence of a presumption of reasonableness does
not lead inexorably to contract reform. It leads to
contract review without any presumption. The
Ninth Circuit correctly remanded for FERC to
determine, without any presumption, whether the
contracts were just and reasonable to Respondents.
The Ninth Circuit also understood that FERC
failed to consider adequately the contracts’ effects
on the _ public. Petitioners would (further
circumscribe that protection, arguing that FERC
lacks authority to set aside contracts, even to
protect non-parties and the public, except in cases
of “[u]nequivocal [p]ublic [njecessity.” E.g., MS Br.
at 26. That constriction of FERC’s authority not
only would produce unjust outcomes here; but
would eviscerate FERC’s ability to protect the
8 Atlantic Refining involved the Natural Gas Act (“NGA”),
but this Court has interpreted that Act and the FPA in pari
materia. See Sierra, 350 U.S. at 353.
1]
public in other contexts, including cases where the
contracting parties’ interests are less aligned with
the public interest than are Respondents’ interests
here. In other contexts, contracting parties jointly
invoke Mobile-Sierra to insulate their contracts
against challenge by affected non-parties. Even if
contracts are (or are deemed to be), reasonable to
their signatories, however, there is no ‘asis for
presuming reasonableness to non-parties and the
public. The Court should clarify that the FPA does
not permit contracting parties to curtail non-
parties’ statutory rights, and does not limit FERC
to protecting only against “[e]xtensive [d)amage” to
the public, MS Br. at 45.
Finally, Petitioners claim that the need to
maintain “sanctity of contract” and to avoid
deterring sellers from contracting during future
crises justified FERC’s decisions. But Congress
struck a balance by permitting public utilities to set
rates by contract subject to FERC review. The FPA
does not allow FERC to sanctify contracts tainted
by the exercise of market power, market
manipulation, or uncompetitive conditions. Nor
may FERC tolerate unjust rates now in order to
spur future contracting. In any event, efficient
ecenomic outcomes require only that MBR
contracts entered under competitive conditions be
enforced. The FPA neither requires nor permits
FERC to refrain from just-and-reasonable review of
12
MBR contracts entered under uncompetitive
conditions.
ARGUMENT
I. SECTION 206 CONTAINS ONLY
ONE STANDARD: THE JUST-
AND-REASONABLE STANDARD.
Petitioners asked FERC to reform their
contracts under FPA Section 206, 16 U.S.C. § 824e.
That provision commands FERC to modify an
existing rate “[w]henever” it finds that any such
rate or “any ... contract affecting such rate” is
“unjust, unreasonable, unduly discriminatory or
preferential.” Id. § 824e(a). Upon such finding,
FERC must “determine the just and reasonable
rate ... or contract to be thereafter observed....” Id.
In Sierra, the public utility agreed to low rates
to stave off competition and then “sought to raise
rates [once] the competitive threat had
diminished,” MS Br. at 32. This Court held that
FERC’s predecessor could not find the rates
unreasonable “solely” or “simply” because they had
become “unprofitable to the public utility.” 350
U.S. at 355. While the Commission could not
impose such rates, the public utility could agree to
them and would not be “entitled to be relieved of its
improvident bargain.” Jd. The Commission’s sole
concern then “would seem to be whether the rate is
-.
so low as to adversely affect the public interest.”
Id.
Attempts to generalize Sierra’s rule to the
California meitdown require an unwarranted leap.
That a contract rate prompted by a competitive
threat is reasonable (and remains so when the
threat abates) does not mean that a contract rate
extracted under uncompetitive conditions is also
reasonable.
Misinterpretation of Sierra has led to the notion
that the FPA contains two standards for evaluation
of contract rates: a just-and-reasonable standard
and a “higher,” J.A. 1198a, or “much more
restrictive,”? “public-interest standard.” Which
standard applies or which “version” of the “public-
interest standard” applies has generated extensive
controversy.!° The Ninth Circuit correctly returned
to the FPA’s roots by recognizing, as Petitioners
and FERC now concede, that the just-and-
reasonable standard is the only standard. FERC
Br. at 21; MS Br. at 7 n.4.
9 FERC Br. at 38 (quoting Atl. City Elec. Co. v. FERC, 295
F.3d 1, 14 (D.C. Cir. 2002)).
10 See Boston Edison Co. v. FERC, 233 F.3d 60, 68 (ist Cir.
2000) (discussing confusion); compare Papago Tribal Util.
Auth. v. FERC, 723 F.2d 950, 954 (D.C. Cir. 1983) with Ne.
Utils. Serv. Co. v. FERC, 55 F.3d 686, 691 (1st Cir. 1995).
14
The FPA commands that “[aJ/l rates ... shall be
just and reasonable,” and declares that “any ... rate
... that is not just and reasonable is ... unlawful.”
16 U.S.C. § 824d(a) (emphasis added). The FPA
imposes these requirements because “the business
of ... selling electric energy for ultimate
distribution to the public is affected with a public
interest.” 16 U.S.C. § 824(a). Thus, unjust and
unreasonable rates are contrary to the public
interest, and rates that “contravene the relevant
public interests,” Permian Basin, 390 U.S. at 784,
are unjust and unreasonable.
The Act does not establish a higher public-
interest standard for reviewing contract rates and a
lower just-and-reasonable standard for reviewing
other rates. Even if only a “small dent in the
consumer's pocket” would result, “the Act makes
wnlawful all rates which are not just and
reasonable, and does not say a little unlawfulness
is permitted.” FPC v. Texaco, Inc., 417 U.S. 380,
399 (1974). While FERC has “great discretion as to
how to insure just and reasonable rates,” the FPA
“does not empower it to” abandon that standard.
Id. at 394.
Despite FERC’s clear statutory obligation, it did
not determine here whether the contract rates were
just and reasonable.'! Rather, FERC set for
11 FERC contradicts itself when it says the “statute confers
broad discretion,” which it exercised by determining that it
15
hearing “whether the complainants must ... show[]
that a challenged contract is contrary to the public
interest, or whether they ... [must] show[] that the
contract is not just and reasonable.” J.A. 1170a
(emphasis added). FERC concluded that the
public-interest standard applied, and therefore
deemed irrelevant evidence that the contracts were
unjust and unreasonable. J.A. 1275a (“[A] finding
that the unjust and unreasonable spot market
prices caused forward bilateral prices to be unjust
and unreasonable would be relevant to contract
modification only where there is a ‘just and
reasonable’ standard of review.”); id. 1198a (“[T]hat
a contract may be found ... unjust and
unreasonable under sections 205 or 206 ... does not
in and of itself demonstrate that the contract is
contrary to the public interest ....”) FERC’s
admission that the just-and-reasonable standard is
the only standard (Br. at 21) itself justifies a
remand so that the agency may apply the correct
standard in the first instance.}?
lacked discretion tc modify contracts except in cases of
“unequivocal public necessity.” FERC Br. at 17.
12 FERC and Petitioners emphasize the transactions’
supposed “voluntariness” and Respondents’ attempts to
bargain for the best available rates. But “[w]hether a rate [is
just and reasonable} is to be determined by FERC, not the
parties to an agreement, however voluntary their agreement
may be.” Pa. Elec. Co. v. FERC, 11 F.3d 207, 210 (D.C. Cir.
1993). Moreover, if market “options” were constricted by
uncompetitive factors, as FERC concedes (Br. at 44), then
16
Below, Petitioners asked FERC to clarify that
the public-interest standard “[did] not authorize
unjust and unreasonable rates.” J.A. 1567a. FERC
responded that rates “initially” must be just and
reasonable and that its grant of MBR authority
satisfied that requirement. Jd. But that was no
answer. FERC never explained why rates must be
reasonable only “initially,” when the FPA contains
no such limitation. Nor did FERC ever examine
the reasonableness of these contracts, even
“Initially.” Rather it concluded (wrongly, as
explained below) that §MBR authority
predetermines reasonableness regardless of the
circumstances under which MBR contracts are
negotiated. FERC never explained why MBR
authority predetermines the reasonableness of
subsequent long-term contracts but not short-term
transactions.!3 The Ninth Circuit therefore
correctly remanded the case.
Respondents’ “choice” among unreasonable “options” hardly
renders the resulting rates just and reasonable. FERC
refused to consider claims that “available alternatives ‘were
not those that would have been presented in the absence of
spot market dysfunction,” because it deemed that contention
“not pertinent” to a public-interest inquiry but relevant only
to a just-and-reasonable review. J.A. 1527a, quoting Request
for Rehearing of the California Electricity Oversight Board
and the California Public Utilities Commission at 21, No.
EL02-60 et al. (July 28, 2003).
13 FERC’s attempt to reconcile its treatment of long-term and
short-term transactions was circular. FERC asserted that
17
Il. CONTRACT RATES MAY BE
UNJUST AND UNREASONABLE
TO CONTRACTING PARTIES OR
TO THE CONSUMING PUBLIC.
Conceding that only one standard exists, FERC
and Petitioners argue that contracts meet that
standard except in cases of “unequivocal public
necessity.” But while FERC may presume that
unchallenged contracts are reasonable to the
contracting parties, FERC may not ignore claims
that market power, market manipulation, or other
uncompetitive’ conditions tainted contract
formacion and led to unreasonable rates. Treating
contract rates as reasonable per se would make
markets the “final measure” of justness and
reasonableness, which the FPA does not permit.
Texaco, 417 U.S. at 397.
“spot market sales are not subject to ... the Mobile-Sierra
doctrine, while the long-term forward contracts ... here are.”
J.A. 1540a. FERC reasoned that long-term buyers can
negotiate for provisions “retain{ing] their rights to
unilaterally file for rate changes.” Id. But that assumed a
functional market—an assumption that FERC viewed Mobile-
Sierra as preventing it from examining. Moreover, even if
Respondents could have obtained such provisions, the FPA
does not require customers to bargain and pay for the
statutory, just-and-reasonable review of rates they claim were
extracted by exercise of market power, manipulation, or
uncompetitive circumstances.
18
The FPA also prohibits FERC from “narrow/ly]”
“limit[ing]” its review of contracts’ effects on third
parties and the public, MS Br. at 45, as there is
often no reason to presume reasonableness to
ultimate consumers oor other interests
unrepresented by the contracting parties. The FPA
does not limit FERC to protecting only against
“extensive” damage, id., to the public. See Texaco,
417 US. at 399 (FPA forbids even “a little
unlawfulness”). Binding FERC’s hands except in
“extraordinary circumstances” of “unequivocal
public necessity” would rewrite the FPA and
eviscerate FERC’s ability to fulfill its statutory role.
A. Contracts Are Not Per Se
Reasonable to Signatories.
FERC held that it lacks authority to examine a
contract’s reasonableness to the contracting parties
absent fraud, J.A. 1507a, “bad faith, unfairness or
duress,” id. 1536a. But relegating consumers to
traditional contract-law arguments—available
without the FPA—ignores the reasons why
Congress subjected public utilities to rate
regulation in the first place. The FPA does not
require FERC to treat contracts as reasonable
despite the “potential effects of market dysfunction”
or the absence of “effective [market] oversight,”
FERC Br. at 18.
Opposing certiorari, FERC argued that the
Ninth Circuit’s decision stood for “the narrow
19
proposition that, if there is a credible claim that
severe market dysfunction has affected the
formation of a market-based contract, the
Commission must take that fact into account” in
determining whether the contract rate is
reasonable. FERC Opp. Cert. at 12. Below, FERC
refused to undertake that FPA-mandated inquiry
because it misunderstood Mobile-Sierra.
In 1935, Congress concluded that “federal
regulation of the wholesale energy market was
necessary’ because the industry was increasingly
“dominated by ‘giant’ vertically integrated holding
companies,” MS Br. at 4 (quoting S. Rep. No. 74-
621 (1935) (Senate Report to the Public Utility Act
of 1935)), which could not be regulated effectively
or constitutionally by the States.'4 Congress was
concerned that “without regulation [public
utilities’] rates ... would exceed competitive rates,
i.e., Ones approximating cost.” Interstate Natural
Gas Ass’n, 285 F.3d 18, 30 (D.C. Cir. 2002); see also
Farmers Union Cent. Exch., Inc. v. FERC, 734 F.2d
1486, 1508-09 (1984). Thus, while electric rates
may be established initially by contract, Congress
subjected those rates to regulatory review “to
protect consumers against exploitation,” Hope, 320
U.S. at 610, and “to afford consumers a complete,
permanent and effective bond of protection from
4 Jersey Cent. Power & Light Co. v. FPC, 319 U.S. 61, 67-68
& n.7 (1943); FPC v. Hope Natural Gas Co., 320 U.S. 591, 610
(1944).
20
excessive rates and charges,” Atl. Ref. Co., 360 U.S.
at 388.15
The FPA does not exempt contract rates from
review. 16 U.S.C. § 824e(a) (requiring FERC to
reform “any” unreasonable contract). While
contracts may result from negotiations between
entities with equal bargaining power (although,
even then, contracting parties may not adequately
protect the interests of the consuming public or
other non-parties), contracts also may result from
uncompetitive conditions involving the exercise of
market power, market manipulation, or other
market failure. Indeed, contracts securing the
fruits of those conditions, and limiting the relief
available to disadvantaged parties,'® are most
1S See also FPC v. Tenn. Gas Transmission Co., 371 U.S. 145,
154 (1962) (Natural Gas Act “protect[s] consumers against
exploitation’ ... and ‘...underwrite[s] just and reasonable rates
to the consumers of natural gas...””) (citations omitted); Pa.
Water & Power Co. v. FPC, 343 U.S. 414, 418 (1952) (“A major
purpose of the [Power] Act is to protect power consumers
against excessive prices”); Farmers Union, 734 F.2d at 1508
(“[Mjarket failure and the control of monopoly power are
central rationales for the imposition of rate regulation.”)
(citing Stephen Breyer, Regulation and Its Reform 15-16
(1982)). :
16 Cf. Tejas Power Corp. v. FERC, 908 F.2d 998, 1004 (D.C.
Cir. 1990) (“[I]f the [seller] has significant market power with
which to extract an agreement unfavorable to its
customers, then it would not require much imagination for
the [seller] also to require that they support the agreement
fully before the Commission.”).
21
likely when wholesale buyers’ needs are greatest
and their choices fewest. As the D.C. Circuit put it,
“relying upon the [customers’] agreement begs the
question whether the agreement is the product of
the pipeline’s exercise of significant market power.”
Tejas, 908 F.2d at 1005.
Thus, FERC is not “free under the Act to equate
just and reasonable rates with the prices
... prevailing in the market place.” Texaco, 417
U.S. at 396. As this Court has explained:
It is abundantly clear from the history
of the Act and from the events that
prompted its adoption that Congress
considered that the natural gas
industry was heavily concentrated and
that monopolistic forces were
distorting the market price for natural
gas. Hence, the _ necessity for
regulation and hence the statement in
Sunray DX that if contract prices for
gas were set at the market price, this
would necessarily be based on a belief
that the current contract prices in an
area approximate closely the “true”
market price[,] the just and reasonable
rate[,] [which] ... would contradict the
basic assumption that has caused
natural gas production to be subjected
to regulation... .
22
Id. at 397-98 (quoting FPC v. Sunray DX Oil Co.,
391 U.S. 9, 25 (1968)). Having “subject{ed]
producers to regulation because of anticompetitive
conditions in the industry,” Congress did not allow
FERC to determine just and reasonable rates
“conclusively ... by reference to market price.” Id.
at 399.
Following Texaco, lower courts limited FERC’s
reliance on markets to set just-and-reasonable
rates to cases where the market is “competitive,”!”
and have required ongoing monitoring and
assurances of remedies that check unreasonable
rates.18 As the D.C. Circuit explained, “regulation”
17 Consumers Energy Co. v. FERC, 367 F.3d 915, 922-923
(D.C. Cir. 2004); Elizabethtown Gas Co. v. FERC, 10 F.3d 866;
870 (D.C. Cir. 1993) (“[W]hen there is a competitive market the
FERC may rely upon market-based prices in lieu of cost-of-
service regulation to assure a ‘just and reasonable’ result.”)
(emphasis added); Lockyer, 383 F.3d at 1013; Tejas Power
Corp., 908 F.2d at 1004; La. Energy & Power Auth. v. FERC,
141 F.3d 364, 365- 366 (D.C. Cir. 1998); Farmers Union, 734
F.2d at 1510. FERC itself has emphasized that “authority to
sel} nower at market-based rates, as opposed to at cost-based
rates, depends on a functioning, competitive market for
wholesale power unimpaired by market manipulation.”
Reliant Energy Servs., Inc., 102 F.E.R.C. 461,315, P 12
(2003).
18 Cal. ex rel. Lockyer v. B.C. Power Exch. Corp., 99 F.E.R.C.
4 61,247, at 62,064 (2002) (“When the Commission moves to a
market-based rate system, it ‘must retain some general
oversight over the system, to see if competition in fact drives
rates into the zone of reasonableness ‘or to check rates if it
23
that simply equates market prices with just and
reasonable rates “is worse than an exemption
simpliciter” because it “retains the false illusion
that a government agency is keeping watch over
rates, pursuant to the statute’s mandate, when it is
in fact doing no such thing.” Farmers Union, 734
F.2d at 1510.
Contrary to Petitioners’ claims (MS Br. at 3-4),
neither Mobile nor Sierra forbids FERC from
inquiring whether uncompetitive market conditions
unduly limited a contracting party’s options and
rendered the resulting contract unreasonable.
Mobile held that NGA Section 4, which corresponds
to FPA Section 205, does not create new rate-
change rights.’ That holding is irrelevant to cases
arising, as these do, under FPA Section 206.
does not.’ , quoting /nterstate Natural Gas Ass'n, 285 F.3d at
31). According to FERC, those requirements are met by
“monitoring and FPA § 206 complaint procedures.” Id. at
62,062 (emphasis added); see also 285 F.3d at 34 (discussing
“monitoring and assurance of remedies in the event of
insufficient | competition,” including “entertain{[ing]}
complaints ...to respond to specific allegations of market
power ...”).
'8 Mobile explained that NGA Section 4 requires public
utilities to provide notice of rate changes but does not
independently authorize them. Thus, if a public utility lacks
rate-change authority (because it limited its rights by
contract or otherwise), Section 205 does not expand that
authority. 350 U.S. at 339.
24
Sierra construed FERC’s authority to set aside a
rate under Section 206. There, Pacific Gas and
Electric Company (“PG&E”) sold power to Sierra
Pacific Power Company at unusually low rates “to
forestall potential competition” from available low-
cost hydropower. 350 U.S. at 352. “A few years
into the agreement, ‘when power from Shasta Dam
was no longer available to Sierra,” and the
“competitive threat had diminished,” MS Br. at 29,
32 (quoting Sierra at 352), PG&E asked FERC to
increase its rates. FERC found that the contract
rates (to which competitive pressures had prompted
PG&E to agree) were no longer just and reasonable.
This Court rejected FERC’s analysis, explaining
that a contract rate “may not be said to be either
‘unjust’ or ‘unreasonable’ simply because it is
unprofitable to the public utility.” 350 U.S. at 355.
Sierra’s holding, that a contract prompted by
competition does not become unjust and
unreasonable simply because it seems insufficiently
profitable once the “competitive threat...
diminishe[s],” MS. Br. at 32, does not allow FERC
to sidestep claims that contracts formed under
uncompetitive conditions were unjust and
unreasonable ab initio. Mobile-Sierra requires
contracting parties to live with their bargain
“assuming that there was no reason to question
what transpired at the contract formation stage.”
Atl. City Elec. Co. v. FERC, 295 F.3d 1, 14 (D.C.
Cir. 2002) (emphasis added); Town of Norwood,
25
Mass. v. FERC, 587 F.2d 1306, 1313-14 (D.C. Cir.
1978). Notably, in other cases, FERC has
entertained (and even’ invited) contract
modification because agreements were negotiated
under uncompetitive conditions.”°
While Petitioners accuse Respondents of buyers’
remorse and complain that FERC may not relieve
buyers of “improvident bargains,” they fail to
acknowledge the extraordinary circumstances
surrounding formation of the contracts at issue
here. The challenged contracts were negotiated
amid the “worst electricity-market crisis in
American history,” FERC Opp. Cert. at 12,
produced in part by “flawed market rules” and
extensive “market manipulation,” id. at 22-23
(quotations omitted), in which California’s market
structure “failed,” J.A. 630a, “desperation” was
20 Promoting Wholesale Competition Through Open Access
Non-Discriminatory Transmission Services by Public
Utilities; Recovery of Stranded Costs by Public Utilities and
Transmitting Utilities, Order No. 888-A, 62 Fed. Reg. 12,274,
12,285-86 (Mar. 14, 1997), [1996-2000 Regs. Preambles]
F.E.R.C. Stat. & Regs. J 31,048, at 30,193-94 (entertaining
modification of requirements contracts on grounds that,
before open access, customers were captive to monopolist
transmission providers), on reh’g, Order No. 888-B, 62 Fed.
Reg. 64,688 (Dec. 9, 1997), 81 F.E.R.C. 4 61,248 (1997), on
reh’g, Order No. 888-C, 82 F.E.R.C. 4 61,046 (1998), affd in
part and remanded in. part sub nom. Transmission Access
Policy Study Group v. FERC, 225 F.3d 667 (D.C. Cir. 2000),
aff'd sub nom. New York v. FERC, 535 U.S. 1 (2002).
a
26
“palpable,” id. 647a, and “dysfunction in the spot
market had an effect on the prices available in the
forward market,” FERC Br. at 44.
FERC itself urged load-serving utilities to enter
forward contracts, promised to “monitor prices” in
forward markets, and adopted a benchmark for use
“as a reference point in addressing any complaints
regarding the pricing of long-term contracts
negotiated over the next year.” J.A. 522a. When
purchasers filed complaints, FERC found that they
established a prima facie case that “dysfunctional!”
spot markets “adversely affected the long-term
bilateral contract prices so as to render them unjust
and unreasonable or contrary to public interest.”
J.A. 1173a.
These are hardly pedestrian cases of buyers’
remorse over “improvident bargains” struck in
functional, competitive markets. FERC’s denial of
relief on grouiuds that Mobile-Sierra precludes
inquiry into whether the contract rates were the
product of uncompetitive market conditions, J.A.
1173a, 1275a-76a, was an abdication of its
statutory responsibility to ensure just-and-
reasonable rates, and the Ninth Circuit was right
to remand.
27
B. MBR Authority Does Not
Foreclose Review of Contract
Reasonableness.
FERC and Petitioners invoke FERC’s grant of
MBR authority to foreclose questioning of the
market conditions under which Respondents’
contracts were negotiated. In doing so, they place
more weight on FERC’s grant of MBR authority
than it can bear. While FERC’s ex ante review of
market conditions and imposition of ongoing
reporting requirements were intended “to ensure
that sellers cannot exercise market power and thus
that rates charged are just and reasonable,” FERC
Br. at 7, the facts of this case refute any implication
that these measures were effective—or could be
deemed effective—in guarding against market
power and unjust or unreasonable rates.?!
FERC grants MBR authority based upon its
assessment of then-existing market conditions and
its prediction of future conditions. While
reasonable predictions may justify waiving prior
notice and filing requirements,?2 no prediction is
21 FERC states (Br. at 33) that its MBR “framework must be
taken as a given in assessing the validity of” subsequent MBR
contracts. But one may take the framework as given without
indulging the fiction that it was effective.
22 See MS Br. at 8-9 (noting that FERC’s MBR regime was
enacted “under [FERC’s} statutory authority to detail the
‘rules and regulations’ about the ‘time’ and ‘form’ for filing of
wholesale energy rates”) (quoting 16 U.S.C. § 824d(c)); FERC
28
infallible. As FERC admits (Br. at 34), “any initial
determination ... can only be based on the factual
_ circumstances existing at the time, and those
circumstances can change.” Moreover, “[t]here will
inevitably be situations in which a seller evades
detection and is later found to have acquired
market power or manipulated markets.” Jd. at 34-
35. Accordingly, MBR authority cannot “pre-
determine[],” J.A. 1245a, that contracts negotiated
under unforeseen circumstances are indisputably
just and reasonable. Cf. Elec. Dist. No. 1 v. FERC,
774 F.2d 490, 495 (D.C. Cir. 1985) (Judge
Scahia) (“[T]he Commission cannot fix a rate, as it
purports to have done here, without ever seeing
it.”) That is one reason why FERC imposed
ongoing transaction-reporting requirements (see
n.18 supra), non-compliance with which was
“rampant” during the relevant period. Lockyer, 383
F.3d at 1014.
For example, in 1994, Morgan Stanley
requested “approval to sell electricity at market-
based rates.” Morgan Stanley Capital Group Inc.,
‘69 F.E.R.C. 461,175, at 61,691 (1994), rehg
granted in other part, 72 F.E.R.C. 4 61,082 (1995).
While it granted that request, FERC did not
purport to predetermine that the resulting rates
would be just and reasonable. The phrase “just and
reasonable” appears nowhere in the order. The
Br. at 28-29.
——— = LL AE
29
grant of “MBR authority” consisted instead of the
waiver of otherwise-applicable FERC regulations
requiring (among other things) prior notice and
filing of rates, with cost support. Id. at 61,697-98.
Because those waivers would prevent FERC from
“hav[ing] the opportunity to examine the particular
circumstances of each transaction,” FERC imposed
ongoing “reporting and periodic review
requirements.” Jd. at 61,692. FERC explained that
the reporting requirements were imposed both to
monitor for the acquisition of market power and “to
allow the Commission to evaluate’ the
reasonableness of the marketer’s charges.” Jd. at
61,696.28
Acknowledging that an MBR authority grant
does not ensure continued market competitiveness
or future just and reasonable rates (see FERC Br.
at 34-35), FERC imposed ongoing reporting
requirements (which many sellers violated) and
invited customers or others who believed the prices
were unjust and unreasonable to file complaints.4
23 FERC’s brief recasts the import of FERC’s reporting
requirements, stating only that they “place[] sellers on notice
that their [MBR] authority will be subject to continuing
review and, if necessary, to remedial action.” Br. at 8.
24 FERC dismissed protests of MBR rates that were filed or
reported, deeming them procedurally improper and advising
protestors to file formal complaints. E.g., GWF Energy LLC,
98 F.E.R.C. 4 61,330, at 62,389 (2002). See also J.A. 522a
(December 15, 2000 order establishing “benchmark” to be
“use[d] as a reference point in addressing any complaints
30
Yet, faced with such complaints, FERC declined to
determine whether rates were just and reasonable.
FERC now says that “the primary remedy” upon
complaint is not rate relief, but prospective
revocation of MBR authority (precluding future
MBR agreements but leaving existing ones
unaffected), disgorgement of profits reaped through
tariff violations, or “civil penalties.” Br. at 35. In
effect, FERC says that it will punish wrongdoers (if
caught), and will protect future customers, but will
allow existing consumers to remain saddled with
unjust rates extracted during the “market
meltdown,” J.A. 626a.
That position is consistent neither with the FPA
nor with FERC’s” response to complaints
challenging short-term rates charged during the
same period and under the same MBR authority as
Petitioners’ long-term contracts. In response to a
complaint attacking California spot-market prices,
the Commission established a refund effective date,
investigated, concluded that prices were unjust and
unreasonable, and began a proceeding to consider
refunds of short-term rates collected from
October 2, 2000 through June 19, 2001. Yet, when
Respondents complained about their long-term
contracts as FERC had contemplated, J.A. 522a,
regarding the pricing of long-term contracts negotiated over
the next year”).
31
FERC held that it had _ predetermined the
reasonableness of those rates and denied relief.?
FERC is correct that “[o}]nce dysfunction in the
spot market occurred, it was inevitable that it
would impose costs on someone,” Br. at 45, but the
FPA does not permit FERC to foist the costs of
market dysfunction on consumers. FERC’s
attempts to justify that result blame the victim.
“Had the purchasers believed that the rates in their
contracts might become unjust and unreasonable
based on future developments in the spot market,
they could have insisted on a clause preserving
their right to seek Commission modification of the
contracts,” FERC says. Jd. But Respondents were
not negotiating under competitive conditions to
allocate the risk of future market dysfunction.
They were bargaining in an already-dysfunctional
market.?6
25 FERC also noted that there had been no finding of
manipulation “specific to” the long-term contracts at issue.
J.A. 1285. In contrast, FERC dismissed the need for such
findings in concluding that short-term rates were unjust and
unreasonable. E.g., J.A. 824a, 933a-34a.
26 Morgan Stanley argues (Br. at 25) that its contract was
reasonable because “were market conditions to repeat the
events of 2000-2001 during the remaining term of the
contract, Snohomish again would reap the benefit ... of
purchasing power at or below the spot market rate.” But
Morgan Stanley’s argument is a tautology that would justify
any rate. That an unreasonably high contract rate protects
32
C. Petitioners and FERC Would
Unduly Limit FERC’s Ability
to Protect the Public
Interest.
1. FERC Must Protect More
Than “Unequivocal
Public Necessity.”
By restricting FERC’s contract-modification
power to “extraordinary circumstances” of
“unequivocal public necessity,"27 FERC and
Petitioners not only would frustrate FERC’s duty to
protect contracting parties subjected’ to
uncompetitive markets but also would limit its
ability to protect non-parties and the public.
Such restrictions find no support in either
Mobile or Sierra. Mobile “in no way impair|[ed]”
FERC’s regulatory powers. 350 U.S. at 344.
Instead, the decision clarified that contracts are
“fully subject” to FERC’s “paramount power ... to
modify them when necessary in the _ public
interest.” Jd. Although natural gas companies may
against even higher (and potentially less reasonable) spot
prices does not render the contract rate just and reasonable
under the FPA.
27 FERC Br. at 22; MS Br. at 24, 45-46 (arguing that FERC
may modify a “valid energy contract” only to avoid “extensive”
or “extraordinary” damage to the public, “akin to the closing
of a public utility”).
33
not “unilaterally chang[e] their contracts simply
because it is in their private interests to do so,”
they may obtain relief “when their interests
coincide with the public interest.” Jd.
Sierra similarly acknowledged FERC’s
“undoubted” power under FPA Section 206(a) to
modify contract rates “whenever” it finds them
unlawful. 350 U.S. at 353. While FERC may not
find an agreement “unreasonable solely because it
yields less than a fair return,” id. at 355, Sierra did
not purport to limit FERC’s authority to find a rate
unlawful for other reasons. On the contrary, Sierra
instructed the Court of Appeals to remand the case
“for such further proceedings, not inconsistent with
this opinion, as [FERC] may deem desirable.” Id.
Far from commanding FERC to refrain from
modifying contracts-except in cases of unequivocal
public necessity, the Court remanded with
guidance that, in the “circumstances” presented,
FERC’s concern “would seem to be” whether the
rate was “so low as to adversely affect the public
interest.” Id.
Petitioners’ claims regarding FERC’s “highly
limited” contract-modification authority, e.g., MS
Br. at 4, derive from misreading dicta in Permian
Basin and Arkansas Louisiana Gas Co. v. Hall, 453
U.S. 571 (1981) (“Arkla”). Permian Basin explained
that “[a]lthough the [NGA] is premised upon a
continuing system of private contracting, [FERC]
34
has plenary authority to limit or to proscribe
contractual arrangements that contravene the
relevant public interests.” 390 U.S. at 784 (citation
omitted) (emphasis added). The Court added that
FERC may not abdicate its responsibility based on
“conjectures about the prospective responses of the
capital market,” but, rather, was “obliged at each
step of its regulatory process to assess the
requirements of the broad public interests
entrusted to its protection by Congress.” Jd. at 791.
Arkla rejected sellers’ claims for breach-of-
contract damages on grounds that their “theory of
the case would give inordinate importance to the
role of contracts between buyers and sellers in the
federal scheme for regulating the sale of natural
gas.” 453 U.S. at 582. In Arkla, a natural gas
purchaser had agreed to a most-favored-nations
clause but then failed to inform the seller when
another transaction triggered that clause. The
seller sought damages in state court, and the buyer
defended on filed-rate and primary-jurisdiction
grounds. Id. at 573-76. The seller claimed that the
buyer’s failure to inform it of the other transaction
excused its failure to file a higher rate with FERC.
Id. The Court rejected the seller's arguments,
explaining that while “nothing in the Act forbids
parties to set their rates by contract” that rule
“does not affect the supremacy of the Act itself.” Id.
at 582. The Court held that allowing state-court
damages based on the presumption that an un-filed
35
contract rate was reasonable would “undercut the
clear purpose of the congressional scheme: granting
the Commission an opportunity in every case to
judge the reasonableness of the rate.” Jd.
Thus, none of the cited cases supports the claim
that FERC must accept a contract as reasonable
except in cases of “unequivocal public necessity.”
Moreover, holding FERC to such an exacting
standard would eviscerate its ability to protect the
“public interest”’—a broad standard, see FERC Br.
at 21 (citing FCC v. RCA Commce'ns, Inc., 346 U.S.
86, 90 (1953)), that takes “content and meaning”
from “the purposes for which the [FPA] [was]
adopted,” NAACP v. FPC, 425 U.S. 662, 669 (1976),
including the “protect[ion] [of] power consumers
against excessive prices,” id. at 670 n.5 (quoting Pa.
Water & Power Co. v. FPC, 343 U.S. 414, 418
(1952)).
Contrary to Petitioners’ (and now FERC’s)
claims, courts have affirmed FERC’s authority to
modify contracts for the protection of third parties
and the public without requiring the exacting
showing that Petitioners and FERC would require.
See FERC Opp. Cert. at 23 (citing Ne. Utils. Serv.
Co., 55 F.3d 686 (1st Cir. 1995); Me. ub. Utils.
Comm'n v. FERC, 454 F.3d 278 (D.C. Cir. 2006)).
Further, Petitioners’ assertion that contracts
must be accepted as reasonable except in cases of
unequivocal public necessity would undermine
36
settled precedent regarding FERC’s rejection of
unreasonable contract rates when they are first
filed.28
2. The Ninth Circuit
Correctly Interpreted
Section 206.
Petitioners and amici contend that the Ninth
Circuit interpreted Section 206 to create a “heads I
win, tails you lose” rule under which purchasers
may challenge unfavorable contracts but sellers
cannot. Brief of Coral Power et al. (“Coral Br.”) at
26. FERC now joins the chorus, contending that
the public-interest standard “protects both buyers
and sellers” against claims by the other, either of
28 E.g., Bridgeport Energy, LLC, 118 F.E.R.C. 4 61,243,
PP 41-42 (2007) (conditioning settlement acceptance on
removal of a Mobile-Sierra provision); Wabash Valley Power
Ass'n, 107 F.E.R.C. 4 61,327, P 11 (2004) (“The 2000 Contract,
filed here for the first time, arguably attempts to bind the
Commission to a ‘public interest’ standard of review when the
Commission first reviews that contract. We will not apply a
‘public interest’ standard in cases where we have not
previously determined the contracts to be just and
reasonable.”) (footnote omitted); Fla. Power & Light Co., 67
F.E.R.C. 4 61,141, at 61,396 (1994) (Contracting parties “may
not unilaterally preclude the Commission from fulfilling its
statutory responsibility, under [FPA] section 205 ..., to review
the rates, terms and conditions of an agreement to ensure
that they are just and reasonable ....”).
37
whom “can make bargains which in hindsight prove
improvident.”29
The Ninth Circuit properly construed
Section 206. FERC’s duty to assess a contract’s
reasonableness to the public protects neither the
buyer nor the seller directly but focuses on non-
parties to the contract—including, notably,
ultimate consumers.*® Consumer protection is a
paramount concern in both low- and high-rate
cases. Consumer harm occurs in low-rate cases if
the rate threatens continuation of service or shifts
cost responsibility to other consumers. Sierra, 350
U.S. at 355. Consumer harm occurs in high-rate
cases when the costs of unreasonable wholesale
contracts are passed on to ultimate consumers.*!
29 FERC Br. at 40 (quoting Boston Edison Co. v. FERC, 856
F.2d 361, 372 (ist Cir. 1988)) (emphasis added); compare
FERC Opp. Cert. at 20-21 (denying that the Ninth Circuit
“create(d}] a rule ... biased against sellers” and noting that
“even under the just-and-reasonable standard, a purchaser
may not claim ‘buyer’s remorse’ and be excused from a long-
term contract simply because market prices have fallen
during the term of the contract”).
30 As explained below, contracting parties’ interests do not
always align with the public interest.
%! Consumer harm also may occur because unreasonable
long-term contracts formed under uncompetitive conditions
have long-term market-distorting effects. FERC must take
into account “the anticompetitive effects of regulated aspects
of interstate utility operations pursuant to ... directives
contained in §§ 205, 206....”". FPC v. Conway Corp., 426 U.S.
38
Assuming arguendo that Mobile-Sierra precluded
inquiry into the contracts’ reasonableness to
Respondents, the Ninth Circuit correctly remanded
for FERC to determine whether the contracts
produced unreasonable rates affecting ultimate
consumers.
D. MBR Agreements Represent
One of Many Contexts In
Which Mobile-Sierra Is
Invoked.
As national organizations, APPA and NRECA
ask the Court to recognize that this case involves
just one of many contracting contexts in which
Mobile-Sierra is invoked. Here, the contracts at
issue were arms-length agreements between
buyers and sellers with opposed interests and
unequal bargaining power resulting from
uncompetitive market conditions. In other cases,
contracting parties may join forces to advance
shared interests at the expense of third parties or
the public. And in still other cases, increasingly
common in today’s restructured energy industry,
contracting parties may be simply indifferent to
costs that can be externalized or that they are
virtually assured of passing through to others.*?
271, 279 (1976).
32 In this case, the alignment of Respondents’ interests with
the consuming public’s interest in reasonable rates allows
39
For example, Reliability Must-Run (“RMR”)
agreements superficially resemble bilateral
purchase-sale agreements similar to those at issue
here. See Bridgeport, 118 F.E.R.C. 4 61,243, at
P 41 (“RMR agreements are contracts between a
generator and the ISO [Independent System
Operator] that commit a generator to provide
reliability service in return for fixed monthly
payments by load in the affected zone.”). But such
RMR agreements are negotiated by not-for-profit
ISOs that do not pay the resulting costs—which are
passed directly to consumers—and therefore lack
incentives to reduce such costs. See NSTAR Elec.
& Gas Corp. v. FERC, 481 F.3d 794, 803 (D.C. Cir.
2007). FERC also has determined that such
agreements harm markets and should be accepted
only as a “last resort” when necessary to maintain
system reliability. Bridgeport at P 41.
FERC thus has rejected attempts to invoke
Mobile-Sierra to foreclose complaints seeking to
terminate RMR agreements, holding that it “would
amici to characterize protection of the consuming public as
indirect protection of Respondents. See Coral Br. at 26; Br. of
Electric Power Supply Ass'n et al. at 29. But Mobile expressly
allowed for modification when a party’s “interests coincide
with the public interest.” 350 U.S. at 344. Moreover, in many
other contexts, neither party's interests will align with the
public interest. The Court must not tie FERC’s hands in such
cases out of misplaced concern that protecting the public
interest will allow Respondents to accomplish indirectly what
Petitioners and FERC say they cannot do directly.
ill
40
be inconsistent with our duty under the [FPA] to be
bound to the higher ‘public interest’ standard when
reviewing RMR agreements.” Id. at P 41; see also
Milford Power LLC, 119 F.E.R.C. 4 61,167, P 31
(clarifying that non-parties, as well as FERC, may
challenge RMR agreements under a _ just-and-
reasonable standard), reh'y denied, 121 F.E.R.C.
461,042 (2007), appeal dismissed sub nom.
Blumenthal v. FERC, No. 07-1270 (D.C. Cir. Oct.
25, 2007). Petitioners’ position here would require
FERC to accept such provisions and to allow RMR
agreements to remain in effect as long as the
contracting parties wished, unless “unequivocal
public necessity” dictated otherwise.
FERC also has refused to accept Mobile-Sierra
provisions seeking to insulate aspects of the
relationship between ISOs and _transmission-
owning public utilities (“TOs”). For example, in
2003, a group of New England TOs and New
England’s ISO entered into an agreement to
facilitate formation of a regional transmission
organization (“RTO”). FERC rejected the TOs’
proposal that “the Mobile-Sierra ‘public interest’
standard govern FERC review of termination and
withdrawal” from the RTO, Me. Pub. Utils., 454
F.3d at 281, finding (inter alia) that such
withdrawal could “have a substantial [deleterious]
impact on other market participants and the
markets themselves,” id. at 286 (quotation
omitted), and that the threat of withdrawal “could
4]
subvert the independence of the RTO,” id. at 287.
The D.C. Circuit affirmed, noting that “there is no
expectation of contract stability when a contract is
submitted to FERC for the first time, has yet to be
approved ..., and has not yet gone into effect—
particularly when that contract is a complex
agreement establishing a new regional structure
impacting all market participants.” Id. at 284.
FERC’s position here, that contracts may not be
reformed absent “exceptional circumstances of
unequivocal public necessity,” Br. at 37 (quotations
omitted), involving “harm of comparable severity”
to threatened discontinuation of service, id. at 39,
cannot be squared with FERC’s reformation of
contracts in the above-cited cases. More
fundamentally, as FERC recognized in those cases,
FERC may not abdicate its statutory duty to
protect the public through blind reliance on
contracting parties’ self-interest. FERC’s and
Petitioners’ position here would disable FERC from
protecting non-parties and the public against all
but the severest harms, even in cases where the
contracting parties’ interests diverge from the
public interest. The Court must reject such
sweeping and misguided positions.
42
Iii. FERC MAY NOT ACCEPT |
UNREASONABLE CONTRACTS
TO PROMOTE FUTURE
CONTRACTING.
Petitioners and amici claim that modifying
contract rates entered under uncompetitive
conditions will deter sellers from contracting
during future periods of market dysfunction. E.g.,
Coral Br. at 25; Br. of Calpine Energy Servs. et al.
at 51-52.
Such arguments focus on only one side of the
equation, however. Refusing to modify long-term
rates formed under uncompetitive conditions, while
simultaneously refunding unreasonable short-term
rates charged during the same period, will deter
buyers from entering long-term contracts when
FERC urges them to do so, as it did here.
Moreover, exclusive focus on sellers’ incentives
proves too much. Monopolists have strong
incentives to monetize market power by entering
into long-term, uncompetitive contracts. They have
strong (albeit self-serving) reasons to claim that
reducing prices to reasonable levels will undermine
incentives to enter into future contracts. But the
FPA does not allow such assertions, or even FERC’s
own views of the potential responses of capital
markets, to trump other considerations under the
Act. Permian Basin, 390 U.S. at 791 (FERC
“cannot confine its inquiries either to the
43
computation of costs of service or to conjectures
about the prospective responses of the capital
market.”); Texaco, 417 U.S. at 400 (“It may also be
that control of prices ... is counterproductive to the
interests of the consumer in increasing the
production of natural gas[, but i]t is not the Court’s
role ... to overturn congressional assumptions
embedded into the framework of regulation
established by the Act.”)
Finally, efficient economic outcomes do not
require FERC to enforce contracts entered into
under uncompetitive conditions. All that is
required is that FERC enforce reasonable contracts
entered into in competitive markets.
CONCLUSION
Therefore, the Court should affirm the Ninth
Circuit’s decision remanding these cases to FERC.
Respectfully submitted,
Scott H. STRAUSS
Counsel o,; Record
MARK S. HEGEDUS
JEFFREY A. SCHWARZ
SPIEGEL & MCDIARMID LLP
1333 New Hampshire Avenue, NW
Washington, DC 20036
SUSAN N. KELLY
Vice President of Policy Analysis and General
Counsel
AMERICAN PUBLIC POWER ASSOCIATION
1875 Connecticut Avenue, N.W., Suite 1200
Washington, D.C. 20009-5715
WALLACE F. TILLMAN
General Counsel
RICHARD MEYER
Senior Regulatory Counsel
NATIONAL RURAL ELECTRIC COOPERATIVE
ASSOCIATION
4301 Wilson Boulevard
Arlington, VA 22203-1860
Counsel for Amici Curiae
American Public Power Association and
National Rural Electric Cooperative Association
January 14, 2008
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