554 U.S. 527 | SCOTUS | 2008
Lead Opinion
delivered the opinion of the Court.
Under the Mobile-Sierra doctrine, the Federal Energy Regulatory Commission (FERC or Commission) must presume that the rate set out in a freely negotiated wholesale-energy contract meets the “just and reasonable” requirement imposed by law. The presumption may be overcome only if FERC concludes that the contract seriously harms the public interest. These cases present two questions
I
A
Statutory Background
The Federal Power Act (FPA), 41 Stat. 1063, as amended, gives the Commission
The FPA requires all wholesale-electricity rates to be “just and reasonable.” § 824d(a). When a utility files a new
The statutory requirement that rates be “just and reasonable” is obviously incapable of precise judicial definition, and we afford great deference to the Commission in its rate decisions. See FPC v. Texaco Inc., 417 U. S. 380, 389 (1974); Permian Basin Area Rate Cases, 390 U. S. 747, 767 (1968). We have repeatedly emphasized that the Commission is not bound to any one ratemaking formula. See Mobil Oil Exploration & Producing Southeast, Inc. v. United Distribution Cos., 498 U. S. 211, 224 (1991); Permian Basin, supra, at 776-777. But FERC must choose a method that entails an appropriate “balancing of the investor and the consumer interests.” FPC v. Hope Natural Gas Co., 320 U. S. 591, 603 (1944). In exercising its broad discretion, the Commission traditionally reviewed and set tariff rates under the “cost-of-service” method, which ensures that a seller of electricity recovers its' costs plus a rate of return sufficient to attract necessary capital. See J. McGrew, Federal Energy Regulatory Commission 152, 160-161 (2003) (hereinafter McGrew).
In two cases decided on the same day in 1956, we addressed the authority of the Commission to modify rates set bilaterally by contract rather than unilaterally by tariff. In United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U. S. 332, we rejected a natural-gas utility’s argument that
In FPC v. Sierra Pacific Power Co., 350 U. S. 348, 352-353 (1956), we applied the holding of Mobile to the analogous provisions of the FPA, concluding that the complaining utility could not supersede a contract rate simply by filing a new tariff. In Sierra, however, the Commission had concluded not only (contrary to our holding) that the newly filed tariff superseded the contract, but also that the contract rate itself was not just and reasonable, “solely because it yield[ed] less than a fair return on the net invested capital” of the utility. 350 U. S., at 355. Thus, we were confronted with the question of how the Commission may evaluate whether a contract rate is just and reasonable.
We answered that question in the following way:
“[T]he Commission’s conclusion appears on its face to be based on an erroneous standard. . . . [W]hile it may be that the Commission may not normally impose upon a public utility a rate which would produce less than a fair return, it does not follow that the public utility may not itself agree by contract to a rate affording less than a fair return or that, if it does so, it is entitled to be relieved of its improvident bargain. ... In such circumstances the sole concern of the Commission would seem to be whether the rate is so low as to adversely affect the public interest — as where it might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory.” Id., at 354-355 (emphasis deleted).
Over the past 50 years, decisions of this Court and the Courts of Appeals have refined the Mobile-Sierra presumption to allow greater freedom of contract. In United Gas Pipe Line Co. v. Memphis Light, Gas and Water Div., 358 U. S. 103, 110-113 (1958), we held that parties could contract out of the Mobile-Sierra presumption by specifying in their contracts that a new rate filed with the Commission would supersede the contract rate. Courts of Appeals have held that contracting parties may also agree to a middle option between Mobile-Sierra and Memphis Light: A contract that does not allow the seller to supersede the contract rate by filing a new rate may nonetheless permit the Commission to set aside the contract rate if it results in an unfair rate of return, not just if it violates the public interest. See, e. g., Papago Tribal Util. Auth. v. FERC, 723 F. 2d 950, 953 (CADC 1983); Louisiana Power & Light Co. v. FERC, 587 F. 2d 671, 675-676 (CA5 1979). Thus, as the Mobile-Sierra doctrine has developed, regulated parties have retained broad authority to specify whether FERC can review a contract rate solely for whether it violates the public interest or also for whether it results in an unfair rate of return. But the Mobile-Sierra presumption remains the default rule.
Moreover, even though the challenges in Mobile and Sierra were brought by sellers, lower courts have concluded that the Mobile-Sierra presumption also applies where a purchaser, rather than a seller, asks FERC to modify a contract. See Potomac Elec. Power Co. v. FERC, 210 F. 3d 403, 404-405, 409-410 (CADC 2000); Boston Edison Co. v. FERC, 856 F. 2d 361, 372 (CA1 1988). This Court has seemingly blessed that conclusion, explaining that under the FPA, “[w]hen commercial parties . . . avail themselves of rate
Over the years, the Commission began to refer to the two modes of review—one with the Mobile-Sierra presumption and the other without—as the “public interest standard” and the “just and reasonable standard.” See, e. g., In re Southern Company Servs., Inc., 39 FERC ¶ 63,026, pp. 65,134, 65,141 (1987). Decisions from the Courts of Appeals did likewise. See, e. g., Kansas Cities v. FERC, 723 F. 2d 82, 87-88 (CADC 1983); Northeast Utils. Serv. Co. v. FERC, 993 F. 2d 937, 961 (CA1 1993). We do not take this nomenclature to stand for the obviously indefensible proposition that a standard different from the statutory just-and-reasonable standard applies to contract rates. Rather, the term “public interest standard” refers to the differing application of that just-and-reasonable standard to contract rates. See Philadelphia Elec. Co., 58 F. R C. 88, 90 (1977). (It would be less confusing to adopt the Solicitor General’s terminology, referring to the two differing applications of the just-and-reasonable standard as the “ordinary” “just and reasonable standard” and the “public interest standard.” See Reply Brief for Respondent FERC 6.)
B
Recent FERC Innovations; Market-Based Tariffs
In recent decades, the Commission has undertaken an ambitious program of market-based reforms. Part of the impetus for those changes was technological evolution. Historically, electric utilities had been vertically integrated monopolies. For a particular geographic area, a single utility would control the generation of electricity, its transmission, and its distribution to consumers. See Midwest ISO Transmission Owners v. FERC, 373 F. 3d 1361, 1363 (CADC 2004). Since the 1970’s, however, engineering innovations have lowered the cost of generating electricity and transmit
To take advantage of these changes, the Commission has attempted to break down regulatory and economic barriers that hinder a free market in wholesale electricity. It has sought to promote competition in those areas of the industry amenable to competition, such as the segment that generates electric power, while ensuring that the segment of the industry characterized by natural monopoly — namely, the transmission grid that conveys the generated electricity — cannot exert monopolistic influence over other areas. See New York, supra, at 9-10; Snohomish, supra. To that end, FERC required in Order No. 888 that each transmission provider offer transmission service to all customers on an equal basis by filing an “open access transmission tariff.” Promoting Wholesale Competition Through Open Access NonDiscriminatory Transmission Services by Public Utilities, 61 Fed. Reg. 21540 (1996); see New York, supra, at 10-12. That requirement prevents the utilities that own the grid from offering more favorable transmission terms to their own affiliates and thereby extending their monopoly power to other areas of the industry.
To further pry open the wholesale-electricity market and to reduce technical inefficiencies caused when different utilities operate different portions of the grid independently, the Commission has encouraged transmission providers to establish “Regional Transmission Organizations” — entities to which transmission providers would transfer operational control of their facilities for the purpose of efficient coordination. Order No. 2000, 65 Fed. Reg. 810, 811-812 (2000); see Midwest ISO, supra, at 1364. It has encouraged the management of those entities by “Independent System Operators,” not-for-profit entities that operate transmission facili
Against this backdrop of technological change and market-based reforms, the Commission over the past two decades has begun to permit sellers of wholesale electricity to file “market-based” tariffs. These tariffs, instead of setting forth rate schedules or rate-fixing contracts, simply state that the seller will enter into freely negotiated contracts with purchasers. See generally Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by Public Utilities, Order No. 697, 72 Fed. Reg. 39904 (2007) (hereinafter Market-Based Rates); McGrew 160-167. FERC does not subject the contracts entered into under these tariffs (as it subjected traditional wholesale-power contracts) to § 824d’s requirement of immediate filing, apparently on the theory that the requirement has been satisfied by the initial filing of the market-based tariffs themselves. See Brief for Respondent FERC 28-29 (hereinafter Brief for FERC).
FERC will grant approval of a market-based tariff only if a utility demonstrates that it lacks or has adequately mitigated market power, lacks the capacity to erect other barriers to entry, and has avoided giving preferences to its affiliates. See Market-Based Rates ¶ 7, 72 Fed. Reg. 39907. In addition to the initial authorization of a market-based tariff, FERC imposes ongoing reporting requirements. A seller must file quarterly reports summarizing the contracts that it has entered into, even extremely short-term contracts. See California ex rel. Lockyer v. FERC, 383 F. 3d 1006, 1013 (CA9 2004). It must also demonstrate every four months
Both the Ninth Circuit and the D. C. Circuit have generally approved FERC’s scheme of market-based tariffs. See Lockyer, supra, at 1011-1013; Louisiana Energy & Power Auth. v. FERC, 141 F. 3d 364, 365 (CADC 1998). We have not hitherto approved, and express no opinion today, on the lawfulness of the market-based-tariff system, which is not one of the issues before us. It suffices for the present cases to recognize that when a seller files a market-based tariff, purchasers no longer have the option of buying electricity at a rate set by tariff and contracts no longer need to be filed with FERC (and subjected to its investigatory power) before going into effect.
C
California’s Electricity Regulation and Its Consequences
In 1996, California enacted Assembly Bill 1890 (AB 1890), which massively restructured the California electricity market. See 1996 Cal. Stat. ch. 854 (codified at Cal. Pub. Util. Code Ann. §§ 330-398.5 (West 2004 and Supp. 2008)); see generally Cudahy, Whither Deregulation: A Look at the Portents, 58 N. Y. U. Annual Survey of Am. Law 155, 172-185 (2001) (hereinafter Cudahy). The bill transferred operational control of the transmission facilities of California’s three largest investor-owned utilities to an Independent Service Operator (Cal-ISO). See Pacific Gas & Elec. Co. v.
In 1997, FERC approved the Cal-ISO as consistent with the requirements for an Independent Service Operator established in Order No. 888. FERC also approved the CalPX and the investor-owned utilities’ authority to make sales at market-based rates in the CalPX, finding that, in light of the divesture of their generation units and other conditions imposed under the restructuring plan, those utilities had adequately mitigated their market power. See Pacific Gas & Elec. Co., 81 FERC ¶ 61,122, pp. 61,435, 61,435-61,436, 61,537-61,548 (1997).
The CalPX opened for business in March 1998. In the summer of 1999, it expanded to include an auction for sales of electricity under “forward contracts”—contracts in which sellers promise to deliver electricity more than one day in the future (sometimes many years). But the participation of California’s large investor-owned utilities in that forward market was limited because, as we have said, AB 1890 strictly capped the amount of power that they could purchase outside of the spot market. See 471 F. 3d, at 1068.
That diminishment of the role of long-term contracts in the California electricity market turned out to be one of the seeds of an energy crisis. In the summer of 2000, the price of electricity in the CalPX’s spot market jumped dramatically — more than fifteenfold. See ibid. The increase was the result of a combination of natural, economic, and regula
In late 2000, the Commission took action. A central plank of its emergency effort was to eliminate the utilities’ reliance on the CalPX’s spot market and to shift their purchases to the forward market. To that end, FERC abolished the requirement that investor-owned utilities purchase and sell all power through the CalPX and encouraged them to enter into long-term contracts. See San Diego Gas & Electric Co. v. Sellers of Energy and Ancillary Servs., 93 FERC ¶ 61,294, pp. 61,980, 61,982 (2000); see also 471 F. 3d, at 1069. The Commission also put price caps on wholesale electricity. See San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary Servs., 95 FERC ¶ 61,418, p. 62,545 (2001). By June 2001, electricity prices began to decline to normal levels. Id., at 62,546.
D
Genesis of These Cases
The principal respondents in these cases are western utilities that purchased power under long-term contracts during that tumultuous period in 2000 and 2001. Although they are not located in California, the high prices in California spilled
The contracts between the parties included rates that were very high by historical standards. For example, respondent Snohomish signed a 9-year contract to purchase electricity from petitioner Morgan Stanley at a rate of $105/ megawatt hour (MWh), whereas prices in the Pacific Northwest have historically averaged $24/MWh. The contract prices were substantially lower, however, than the prices that Snohomish would have paid in the spot market during the energy crisis, when prices peaked at $3,300/MWh. See id., at 1069-1070.
After the crisis had passed, buyer’s remorse set in and respondents asked FERC to modify the contracts. They contended that the rates in the contracts should not be presumed to be just and reasonable under Mobile-Sierra because, given the sellers’ market-based tariffs, the contracts had never been initially approved by the Commission without the presumption. See Nevada Power Co. v. Enron Power Marketing, Inc., 103 FERC ¶ 61,353, pp. 62,382, 62,387 (2003). Respondents also argued that contract modification was warranted even under the Mobile-Sierra presumption because the contract rates were so high that they violated the public interest. See 103 FERC, at 62,383, 62,387-62,395.
In a preliminary order, the Commission instructed the Administrative Law Judge (ALJ) to consider 12 different factors in deciding whether the presumption could be overcome for the contracts, such as the terms of the contracts, the available alternatives at the time of sale, the relationship of the rates to Commission benchmarks, the effect of the contracts on the financial health of the purchasers, and the impact of contract modification on national energy markets. After a hearing, the ALJ concluded that the Mobile-Sierra presumption should apply to the contracts and that the con
Between the ALJ’s decision and the Commission’s ruling, the Commission’s staff issued a report (Staff Report) concluding that unlawful activities of various sellers in the spot market had affected prices in the forward market. See id., at 62,396. Respondents raised the report at oral argument before the Commission, and some of them argued that petitioners “were unlawfully manipulating market prices, thereby engaging in fraud and deception in violation of their market-based rate tariffs.” Ibid. Petitioners contended, however, that the Staff Report demonstrated only a correlation between rates in the spot and forward markets, not a causal connection. See ibid.
FERC affirmed the ALJ. The Commission first held that the Mobile-Sierra presumption did apply to the contracts at issue. Although agreeing with respondents that the presumption applies only where FERC has had an initial opportunity to review a contract rate, the Commission relied on the somewhat metaphysical ground that the grant of market-based authority to petitioners qualified as that initial opportunity. See 103 FERC, at 62,388-62,389. The Commission then held that respondents could not overcome the Mobile-Sierra presumption. It recognized that the Staff Report had “found that spot market distortions flowed through to forward power prices,” 103 FERC, at 62,396-62,397, but concluded that this finding, even if true, was not “determinative” because:
“a finding that the unjust and unreasonable spot market 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. . . . Under the ‘public interest’ standard, to jus*543 tify contract modification it is 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.” Id., at 62,397.
The Commission determined that under the factors identified in Sierra, as well as under a totality-of-the-circumstances test, respondents had not demonstrated that the contracts threatened the public interest. See 103 FERC, at 62,397-62,399. On rehearing, respondents reiterated their complaints, including their charge that “their contracts were the product of market manipulation by Enron, Morgan Stanley and other [sellers].” 105 FERC ¶ 61,185, pp. 61,979, 61,989 (2003). The Commission answered that there was “no evidence to support a finding of market manipulation that specifically affected the contracts at issue.” Id., at 61,989.
Respondents filed petitions for review in the Ninth Circuit, which granted the petitions and remanded to the Commission, finding two flaws in the Commission’s analysis.
We granted certiorari. See 551 U. S. 1189 (2007).
II
A
Application of Mobile-Sierra Presumption to Contracts Concluded Under Market-Based Rate Authority
As noted earlier, the FERC order under review here agreed with the Ninth Circuit’s premise that the Commission must have an initial opportunity to review a contract without the Mobile-Sierra presumption, but maintained that the authorization for market-based rate authority qualified as that initial review. Before this Court, however, FERC changes its tune, arguing that there is no such prerequisite — or at least that FERC could reasonably conclude so and therefore that Chevron deference is in order. See Brief for FERC 20-21, 33-34; Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984). We will not uphold a discretionary agency decision where the agency has offered a justification in court different from what it provided in its opinion. See SEC v. Chenery Corp., 318 U. S. 80, 94-95 (1943). But FERC has lucked out: The Chenery doctrine has no application to these cases, because we conclude that the Commission was required, under our decision in Sierra,
We are in broad agreement with the Ninth Circuit on a central premise: There is only one statutory standard for assessing wholesale-electricity rates, whether set by contract or tariff — the just-and-reasonable standard. The plain text of the FPA states that “[a]ll rates . . . shall be just and reasonable.” 16 U. S. C. § 824d(a); see also § 824e(a) (2000 ed., Supp. V). But we disagree with the Ninth Circuit’s interpretation of Sierra as requiring (contrary to the statute) that the Commission apply the standard differently, depending on when a contract rate is challenged. In the Ninth Circuit’s view, Sierra was premised on the idea that “as long as the rate was just and reasonable when the contract was formed, there would be a presumption . . . that the reasonableness continued throughout the term of the contract.” 471 F. 3d, at 1077. In other words, so long as the Commission concludes (either after a hearing or by allowing a rate to go into effect) that a contract rate is just and reasonable when initially filed, the rate will be presumed just and reasonable in future proceedings.
That is a misreading of Sierra. Sierra was grounded in the commonsense notion that “[i]n wholesale markets, the party charging the rate and the party charged [are] often sophisticated businesses enjoying presumptively equal bargaining power, who could be expected to negotiate a ‘just and reasonable’ rate as between the two of them.” Verizon, 535 U. S., at 479. Therefore, only when the mutually agreed-upon contract rate seriously harms the consuming
The Ninth Circuit found support for its prerequisite in our decision in FPC v. Texaco Inc., 417 U. S. 380 (1974). In that case, we warned that the Commission’s attempt to rely solely on market forces to evaluate rates charged by small natural-gas producers was inconsistent with the Natural Gas Act’s insistence that rates be just and reasonable. See id., at 397. The Ninth Circuit apparently took this to mean that all initially filed contracts must be subject to review without the Mobile-Sierra presumption. But Texaco had nothing to do with that doctrine. It held that the Commission had improperly implemented a scheme of total deregulation by applying no standard of review at all to small-producer rates. See 417 U. S., at 395-397. It did not cast doubt on the proposition that in a proper regulatory scheme, the ordinary mode for evaluating contractually set rates is to look to
Nor do we agree with the Ninth Circuit that FERC must inquire into whether a contract was formed in an environment of market “dysfunction” before applying the Mobile-Sierra presumption. Markets are not perfect, and one of the reasons that parties enter into wholesale-power contracts is precisely to hedge against the volatility that market imperfections produce. That is why one of the Commission’s responses to the energy crisis was to remove regulatory barriers to long-term contracts. It would be a perverse rule that rendered contracts less likely to be enforced when there is volatility in the market. (Such a rule would come into play, after all, only when a contract formed in a period of “dysfunction” did not significantly harm the consuming public, since contracts that seriously harm the public should be set aside even under the Mobile-Sierra presumption.) By enabling sophisticated parties who weathered market turmoil by entering long-term contracts to renounce those contracts once the storm has passed, the Ninth Circuit’s holding would reduce the incentive to conclude such contracts in the future. Such a rule has no support in our case law and plainly undermines the role of contracts in the FPA’s statutory scheme.
To be sure, FERC has ample authority to set aside a contract where there is unfair dealing at the contract formation stage — for instance, if it finds traditional grounds for the abrogation of the contract such as fraud or duress. See 103 FERC, at 62,399-62,400 (“[T]here is no evidence of unfairness, bad faith, or duress in the original negotiations”). In addition, if the “dysfunctional” market conditions under which the contract was formed were caused by illegal action of one of the parties, FERC should not apply the Mobile-Sierra presumption. See Part III, infra. But the mere
We reiterate that we do not address the lawfulness of FERC’s market-based-rates scheme, which assuredly has its critics. But any needed revision in that scheme is properly addressed in a challenge to the scheme itself, not through a disfigurement of the venerable Mobile-Sierra doctrine. We hold only that FERC may abrogate a valid contract only if it harms the public interest.
B
Application of “Excessive Burden” Exception to High-Rate Challenges
We turn now to the Ninth Circuit’s second holding: that a “zone of reasonableness” test should be used to evaluate a buyer’s challenge that a rate is too high. In our view that fails to accord an adequate level of protection to contracts. The standard for a buyer’s challenge must be the same, generally speaking, as the standard for a seller’s challenge: The contract rate must seriously harm the public interest. That is the standard that the Commission applied in the proceedings below.
We are again in agreement with the Ninth Circuit on a starting premise: It is clear that the three factors we identified in Sierra — “where [a rate] might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory,” 350 U. S., at 355—are not all precisely applicable to the high-rate challenge of a purchaser (where, for example, the relevant question is not whether “other customers” [of
Where we disagree with the Ninth Circuit is on the overarching “zone of reasonableness” standard it established for evaluating a high-rate challenge and setting aside a contract rate: whether consumers’ electricity bills “are higher than they would otherwise have been had the challenged contracts called for rates within the just and reasonable range,” i. e., rates that equal “marginal cost.”
The Ninth Circuit’s standard would give short shrift to the important role of contracts in the FPA, as reflected in our decision in Sierra, and would threaten to inject more volatility into the electricity market by undermining a key source of stability. The FPA recognizes that contract stability ultimately benefits consumers, even if short-term rates for a subset of the public might be high by historical standards — which is why it permits rates to be set by contract and not just by tariff. As the Commission has recently put it, its “first and foremost duty is to protect consumers from unjust and unreasonable rates; however, . . . uncertainties regarding rate stability and contract sanctity can have a chilling effect on investments and a seller’s willingness to enter into long-term contracts and this, in turn, can harm customers in the long run.” Market-Based Rates ¶ 6, 72 Fed. Reg. 33906-33907.
Besides being wrong in principle, in its practical effect the Ninth Circuit’s rule would impose an onerous new burden on the Commission, requiring it to calculate the marginal cost of the power sold under a market-based contract. Assuming that FERC even ventured to undertake such an analysis, rather than reverting to the anden regime of cost-of-service ratesetting, the regulatory costs would be enormous. We think that the FPA intended to reserve the Commission’s contract-abrogation power for those extraordinary circumstances where the public will be severely harmed.
Defects in FERC’s Analysis Supporting Remand
Despite our significant disagreement with the Ninth Circuit, we find two errors in the Commission’s analysis, and we therefore affirm the judgment below on alternative grounds.
First, it appears, as the Ninth Circuit concluded, see 471 F. 3d, at 1090, that the Commission may have looked simply to whether consumers’ rates increased immediately upon the relevant contracts’ going into effect, rather than determining whether the contracts imposed an excessive burden on consumers “down the line,” relative to the rates they could have obtained (but for the contracts) after elimination of the dysfunctional market. For example, the Commission concluded that two of the respondents would experience “rate decreases of approximately 20 percent for retail service” during the period covered by the contracts. 103 FERC, at 62,397. But the baseline for that computation was the rate they were paying before the contracts went into effect. That disparity is certainly a relevant consideration; but so is
Second, respondents alleged before FERC that some of the petitioners in these cases had engaged in market manipulation in the spot market. See, e. g., 105 FERC, at 61,989 (“Snohomish and Nevada Companies argue that their contracts were the product of market manipulation by Enron, Morgan Stanley and other Respondents, which, as established by the Commission Staff, engaged in market manipulation”). The Staff Report concluded, as we have said, that the abnormally high prices in the spot market during the energy crisis influenced the terms of contracts in the forward market. But the Commission dismissed the relevance of the Staff Report on the ground that it had not demonstrated that forward market prices were so high as to overcome the
We emphasize that the mere fact of a party’s engaging in unlawful activity in the spot market does not deprive its forward contracts of the benefit of the Mobile-Sierra presumption. There is no reason why FERC should be able to abro
On remand, the Commission should amplify or clarify its findings on these two points. The judgment of the Court of Appeals is affirmed, and the cases are remanded for proceedings consistent with this opinion.
It is so ordered.
The Chief Justice and Justice Breyer took no part in the consideration or decision of these cases.
We also use “Commission” to refer to the Federal Power Commission, FERC’s predecessor.
In a holding not challenged before this Court, the Ninth Circuit concluded that the contracts at issue did not contain “Memphis clause[s],” 471 F. 3d 1053, 1079 (2006) (citing United Gas Pipe Line Co. v. Memphis Light, Gas and Water Div., 358 U. S. 103 (1958)), see supra, at 534, that would have precluded application of the Mobile-Sierra presumption.
We do not say, as the dissent alleges, post, at 561 (opinion of Stevens, J.), that the public interest is not also relevant in a challenge to unilaterally set rates. But it is the “ ‘sole concern’ ” in a contract case. See FPC v. Sierra Pacific Power Co., 350 U. S. 348, 355 (1956).
The dissent criticizes the Commission’s decision because it took into account under the heading “totality of the circumstances” only the circumstances of the contract formation, not “circumstances exogenous to contract negotiations, including natural disasters and market manipulation by entities not parties to the challenged contract.” Post, at 567. Those considerations are relevant to whether the contracts impose an “excessive burden” on consumers relative to what they would have paid absent the contracts. It is precisely our uncertainty whether the Commission considered those “circumstances exogenous to contract negotiations,” discussed in Part III of our opinion, that causes us to approve the remand to FERC.
Elsewhere the Ninth Circuit softened this standard somewhat, saying that “[e]ven if a particular rate exceeds marginal cost... it may still be within this reasonable range — or ‘zone of reasonableness’ — if that higher-than-cost-based price results from normal market forces and is part of a general trend toward rates that do reflect cost.” 471 F. 3d, at 1089. We are not sure (and we think no one can be sure) precisely what this means. It has no basis in our opinions, and is in any event wrong because its point
The Ninth Circuit purported to find support for its “zone of reasonableness” test in the case law of the District of Columbia Circuit. But the cited case stands only for the proposition that a market-based scheme must ensure that market forces will, “over the long pull,” cause rates to approximate marginal cost. Interstate Natural Gas Assn, of Am. v. FERC, 285 F. 3d 18, 31 (2002). Nowhere does the opinion suggest that the standard for reforming a particular contract validly entered into under a market-based scheme is whether the rates approximate marginal cost.
By the same token, our approval of FERC’s decision not to set prospective area rates solely with reference to pre-existing contract prices, Permian Basin Area Rate Cases, 390 U. S. 747, 792-793 (1968), does not support, as the dissent thinks, post, at 562-563, n. 2, the view that the standard for abrogating an existing, valid contract is anything less than the Mobile-Sierra standard. That is the standard Permian Basin applied when actually confronted with the issue of contract modification. See 390 U. S., at 781-784, 821-822.
The dissent claims that we have misread the FPA because its provisions “do not distinguish between rates set unilaterally by tariff and rates set bilaterally by contract.” Post, at 556. But the dissent’s interpretation, whatever plausibility it has as an original matter, cannot be squared with Sierra, which plainly distinguished between unilaterally and bilaterally set rates, and said that the only relevant consideration for the Commission in the latter case is whether the public interest is harmed. And the circumstances identified in Sierra as implicating the public interest
At the end of the day, the dissent simply argues against the settled understanding of the FPA that has prevailed in this Court, lower courts, and the Commission for half a century. Although the dissent is correct that we have never used the phrase “Mobile-Sierra doctrine” in our cases, that is probably because the understanding of it was so uniform that no circuit split concerning its meaning arose until the Ninth Circuit’s erroneous decision in these cases. If one searches the Commission’s reports, over 600 decisions since 2000 alone have cited the doctrine, see Brief for Electric Power Supply Association et al. as Amici Curiae 15, and the Courts of Appeals have used the term “Mobile-Sierra doctrine” (or “Sierra-Mobile” doctrine) over 75 times since 1974. If there were ever a context where long-settled understanding should be honored it is here, where a statutory decision (subject to revision by Congress) has been understood the same way for many years by lower courts, by this Court, by the federal agency the statute governs, and hence surely by the private actors trying to observe the law.
Dissenting Opinion
dissenting.
The basic question presented by these complicated cases is whether “the Federal Energy Regulatory Commission
I
Under the Federal Power Act (FPA), 41 Stat. 1063, 16 U. S. C. § 791a et seq., wholesale electricity prices are established in the first instance by public utilities, either via tariffs or in contracts with purchasers. § 824d(c). Whether set by tariff or contract, all rates must be filed with the Commission. See ibid. Section 205(a) of the FPA provides, “All rates and charges . . . shall be just and reasonable, and any such rate or charge that is not just and reasonable is hereby declared to be unlawful.” 16 U. S. C. § 824d(a). Pursuant to § 206(a), if FERC determines “that any rate ... or that any rule, regulation, practice, or contract affect[ing] such rate ... is unjust [or] unreasonable ..., the Commission shall determine the just and reasonable rate,. . . rule, regulation, practice, or contract to be thereafter observed and in force, and shall fix the same by order.” 16 U. S. C. § 824e(a) (2000 ed., Supp. V). These provisions distinguish between the ratesetting roles of utilities (which initially set rates) and the Commission (which may override utility-set rates that are not just and reasonable), but they do not distinguish between rates set unilaterally by tariff and rates set bilaterally by contract. However the utility sets its prices, the standard of review is the same—rates must be just and reasonable.
Even if the “Mobile-Sierra presumption” were not tantamount to a separate standard, nothing in the statute mandates “differing application” of the statutory standard to rates set by contract. Ibid. Section 206(a) of the FPA provides, “without qualification or exception,” that FERC may replace any unjust or unreasonable contract with a lawful contract. Permian Basin Area Rate Cases, 390 U. S. 747, 783-784 (1968) (construing identical language in the Natural Gas Act, 15 U. S. C. § 717d(a)). The statute does not say anything about a mandatory presumption for contracts, much less define the burden of proof for overcoming it or delineate the circumstances for its nonapplication. Cf. ante, at 530, 547-548. Nor does the statute prohibit FERC from considering marginal cost when reviewing rates set by contract. Cf. ante, at 549-551, and n. 5.
If Congress had intended to impose such detailed constraints on the Commission’s authority to review contract rates, it would have done so itself in the FPA. Congress instead used the general words “just and reasonable” because it wanted to give FERC, not the courts, wide latitude
“ ‘The power of an administrative agency to administer a congressionally created . . . program necessarily requires the formulation of policy and the making of rules to fill any gap left, implicitly or explicitly, by Congress.’ Morton v. Ruiz, 415 U. S. 199, 231 (1974). If Congress has explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation. Such legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute. Sometimes the legislative delegation to an agency on a particular question is implicit rather than explicit. In such a case, a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency.” (Footnote omitted.)
Consistent with this understanding of administrative law, our cases interpreting the FPA have invariably “emphasized that courts are without authority to set aside any rate adopted by the Commission-which is within a ‘zone of reasonableness.’” Permian Basin, 390 U. S., at 797. But see ante, at 548 (asserting that “a ‘zone of reasonableness’ test . . . fails to accord an adequate level of protection to contracts”). This deference makes eminent sense because “rate-making agencies are not bound to the service of any single regulatory formula; they are permitted, unless their statutory authority otherwise plainly indicates, ‘to make the pragmatic adjustments which may be called for by particular circumstances.’” Permian Basin, 390 U. S., at 776-777. Despite paying lipservice to this principle, see ante, at 532, the Court binds the Commission to a rigid formula of the Court’s own making.
II
Neither of the eponymous cases in the “Mobile-Sierra presumption,” nor any of our subsequent decisions, substantiates the Court’s atextual reading of §§ 205 and 206.
As the Court acknowledges, Mobile itself says nothing about what standard of review applies to rates established by contract. See ante, at 532-533. Rather, Mobile merely held that utilities cannot unilaterally abrogate contracts with
In Sierra, a public utility entered into a long-term contract to sell electricity “at a special low rate” in order to forestall potential competition. See 350 U. S., at 351-352. Several years later the utility complained that the rate provided too little profit and was therefore not “just and reasonable.” The Commission agreed and set aside the rate “solely because it yield[ed] less than a fair return on the net invested capital.” See id., at 354-355. The Court vacated and remanded on the ground that the Commission had applied an erroneous standard. “[W]hile it may be that the Commission may not normally impose upon a public utility a rate which would produce less than a fair return,” the Court reasoned, “it does not follow that the public utility may not itself agree by contract to a rate affording less than a fair return or that, if it does so, it is entitled to be relieved of its improvident bargain.” Id., at 355. When the seller has agreed to a rate that it later challenges as too low, “the sole concern of the Commission would seem to be whether the rate is so low as to adversely affect the public interest — as where it might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory.” Ibid. The Court further elaborated on what it meant by the “public interest”:
“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*561 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.” Ibid.
Sierra therefore held that, in accordance with the statement of policy in the FPA, 16 U. S. C. § 824(a), whether a rate is “just and reasonable” is measured against the public interest, not the private interests of regulated sellers. Contrary to the opinion of the Court, see ante, at 551-552, n. 6, Sierra instructs that the public interest is the touchstone for just-and-reasonable review of all rates, not just contract rates. Sierra drew a distinction between the Commission’s authority to impose low rates on utilities and its authority to abrogate low rates agreed to by utilities because these actions impact the public interest differently, not because the public interest governs rates set bilaterally but not rates set unilaterally. When the Commission imposes rates that afford less than a fair return, it compromises the public’s interest in attracting necessary capital. The impact is different, however, if a utility has agreed to a low rate because investors recognize that the utility, not the regulator, is responsible for the unattractive rate of return.
Sierra used “public interest” as shorthand for the interest of consumers in paying “the ‘lowest possible reasonable rate consistent with the maintenance of adequate service in the public interest.’ ” Permian Basin, 390 U. S., at 793 (quoting Atlantic Refining Co. v. Public Serv. Comm’n of N. Y, 360 U. S. 378, 388 (1959)). Whereas high rates directly implicate this interest, low rates do so only indirectly, such as when the rate is so low that it “might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory.” Sierra, 350 U. S., at 355. Nothing in Sierra purports to mandate a “serious harm” standard of review, or to require any assumption that high rates and low rates impose
Brushing aside the text of the FPA, as well as the holdings in Mobile and Sierra themselves, the Court cherry picks language from Verizon, Arkla, and Permian Basin. Both Verizon and Arkla mentioned the Mobile-Sierra line of cases only in passing, and neither case had anything to do with just-and-reasonable review of rates. See Verizon, 535 U. S., at 479; Arkla, 453 U. S. 571, 582 (1981). Furthermore, the statement in Permian Basin about “unequivocal public necessity,” 390 U. S., at 822, speaks to the difficulty of establishing injury to the public interest in the context of a low-rate challenge, not a high-rate challenge.
Ill
Lacking any grounding in the FPA or precedent, the Court concludes, as a matter of policy, that the Mobile-Sierra presumption is necessary to ensure stability in volatile energy markets and to reduce regulatory costs. See ante, at 551. Of course, “the desirability of fostering market-stabilizing long-term contracts,” ante, at 553, plays into the public interest insofar as the “Commission’s responsibilities include the protection of future, as well as present, consumer interests,” Permian Basin, 390 U. S., at 798; see also United Gas Pipe Line Co. v. Memphis Light, Gas and Water Div., 358 U. S. 103, 113 (1958) (“It seems plain that Congress . . . 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”). But under the FPA, Congress has charged FERC, not the courts, with balancing the short-term and long-term interests of consumers. See Permian Basin, 390 U. S., at 792 (“The court’s responsibility is not to supplant the Commission’s balance of these interests with one more nearly to its liking, but instead to assure itself that the Commission has given reasoned consideration to each of the pertinent factors”).
Moreover, not even FERC has the authority to endorse the rule announced by the Court today. The FPA does not indulge, much less require, a “practically insurmountable”
“It may be, as some economists have persuasively argued, that the assumptions of the 1930’s about the competitive structure of the natural gas industry, if true then, are no longer true today. It may also be that control of prices in this industry, in a time of shortage, if such there be, is counterproductive to the interests of the consumer in increasing the production of natural gas. It is not the Court’s role, however, to overturn congressional assumptions embedded into the framework of regulation established by the Act. This is a proper task for the Legislature where the public interest may be considered from the multifaceted points of view of the representational process.” Id., at 400 (footnote omitted).
Balancing the short-term and long-term interests of consumers entails difficult judgment calls, and to the extent FERC actually engages in this balancing, its reasoned determination is entitled to deference. But FERC cannot abdicate its statutory responsibility to ensure just and reasonable rates through the expedient of a heavyhanded presumption.
IV
Even if, as the Court holds today, the “Mobile-Sierra presumption” is merely a “differing application” of the statutory just-and-reasonable standard, FERC’s orders must be set aside because they were not decided on this basis.
The FERC orders repeatedly aver that the agency is applying a “public interest” standard different from and distinctly more demanding than the statutory standard. See, e. g., App. 1198a (“[T]he 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 [§§205 and 206] does not in and of itself demonstrate that the contract is contrary to the public interest under the Supreme Court cases”). Indeed, the Commission’s misunderstanding of our cases is so egregious that the sellers, concerned that the orders would be overturned, asked the Commission for “clarification that the public interest standard of review does not authorize unjust and unreasonable rates.” Id., at 1506a, 1567a. FERC clarified as follows:
“[I]f rates . . . become unjust and unreasonable and the contract at issue is subject to the Mobile-Sierra standard of review, the Commission under court precedent may not change the contract simply because it is no longer just and reasonable. If parties’ market-based rate contracts provide for the public interest standard of review, the Commission is bound to a higher burden to support modification of such contracts.” Id., at 1506a, 1567a.
In addition to misrepresenting FERC’s understanding of the Mobile-Sierra doctrine as a presumption rather than a separate standard, the Court overstates the extent to which FERC considered the lawfulness of the rates. The Court recognizes, as it must, that the three factors identified in Sierra are neither exclusive nor “precisely applicable to the high-rate challenge of a purchaser.” See ante, at 548; Brief for Respondent FERC 41-42. Although FERC applied what it termed the “Sierra Three-Prong Test,” App. 1276a, the Court contends the agency did not err because it also evaluated the “‘totality of [the] circumstances,’” see ante, at 549. But FERC’s totality-of-the-circumstances review was infected by its misapprehension of the standard “dictated by the U. S. Supreme Court under the Mobile-Sierra doctrine.” App. 1229a.
Whereas the focus of §§ 205(a) and 206(a) is on the reasonableness of the rates charged, not the conduct of the contracting parties, FERC restricted its review to the contracting parties’ behavior around the time of formation. See id., at 1280a-1284a. FERC seems to have thought it was powerless to conduct just-and-reasonable review unless the contract was already subject to abrogation based on contract defenses such as fraud or duress. By including contracts within the scope of § 206(a), however, Congress must have concluded that contract defenses are insufficient to protect the public interest. But see ante, at 547 (holding that the
In order to get around the Chenery doctrine, the Court not only mischaracterizes FERC’s orders, but also takes a more radical tack: It concludes that whatever the rationale set forth in FERC’s orders, Chenery does not apply because “the Commission was required, under our decision in Sierra, to apply the Mobile-Sierra presumption in its evaluation of the contracts here.” Ante, at 544-545. This point prompts the Court to comment that “FERC has lucked out.” Ante, at 544. If the Commission has “lucked out,” it is not only a purely fortuitous victory, but also a Pyrrhic one. Although FERC prevails in these cases despite having “offered a justification in court different from what it provided in its opinion,” ibid., it has paid a tremendous price. The Court has curtailed the agency’s authority to interpret the terms “just and reasonable” and thereby substantially narrowed FERC’s discretion to protect the public interest by the means it thinks best. Contrary to congressional intent, FERC no
V
The decision of the Court of Appeals for the Ninth Circuit deserves praise for its efforts to bring the freewheeling Mobile-Sierra doctrine back in line with the FPA and this Court’s cases. I cannot endorse the opinion in its entirety, however, because it verges into the same sort of improper policymaking that I have criticized in the Court’s opinion. Both decisions would hobble the Commission, albeit from different sides. Congress has not authorized courts to prescribe energy policy by imposing presumptions or prerequisites, or by making marginal cost the sole concern or no concern at all. I would therefore vacate and remand the cases in order to give the Commission an opportunity to evaluate the contract rates in light of a proper understanding of its discretion.
I respectfully dissent.
See also, e. g., Arkansas Louisiana Gas Co. v. Hall, 453 U. S. 571, 582 (1981) (Arkla) (“[T]he clear purpose of the congressional scheme” for rate filing is to “gran[t] the Commission an opportunity in every case to judge the reasonableness of the rate”); Permian Basin Area Rate Cases, 390 U. S. 747, 784 (1968) (“[T]he Commission has plenary authority to limit or to proscribe contractual arrangements that contravene the relevant public interests”).
The Court repeatedly quotes the following snippet from the 75-page opinion in Permian Basin: “The regulatory system created by the Act is premised on contractual agreements voluntarily devised by the regulated companies; it contemplates abrogation of these agreements only in circumstances of unequivocal public necessity.” 890 U. S., at 822 (cited ante, at 534, 550, 553). Like FPC v. Sierra Pacific Power Co., 350 U. S. 348 (1956), however, Permian Basin made this statement in the course of rejecting a low-rate challenge. Read in context, the Court’s reference to “unequivocal public necessity” is a loose restatement of Sierra, which required “evidence of injury to the public interest,” and which underscored how rarely a utility will be able to demonstrate that a “contract price is so ‘low as to adversely affect the public interest.’ ” 390 U. S., at 820-821 (quoting Sierra, 350 U. S., at 355). The Court’s expansive reading of the “unequivocal public necessity” statement cannot be squared with Permian Basin’s discussion of the Commission’s authority to review rates set by contract: “Although the Natural Gas Act is premised upon a continuing system of private contracting, the Commission has plenary authority to limit or to proscribe contractual arrangements that contravene the relevant public interests.” 390 U. S., at 784 (citation omitted). Nor can it be reconciled with Permian Basin’s rejection of the producers’ arguments (1) that the Commission “wrongly invalidated existing contracts” by imposing a ceiling on rates, see id., at 781-784, and (2) that the Commission was compelled
The Court contends that FERC’s application of the Mobile-Sierra doctrine “should be honored” because it represents the “settled understanding of the FPA.” Ante, at 552, n. 6. As explained above, however, FERC’s interpretation of the FPA (and of our cases construing the FPA) is “‘obviously indefensible,”’ supra, at 557 (quoting ante, at 535), and is therefore not entitled to any deference.
The Court quite sensibly instructs FERC that “if it is clear that one party to a contract engaged in such extensive unlawful market manipulation as to alter the playing field for contract negotiations, the Commission should not presume that the contract is just and reasonable”; and that the “mere fact that the unlawful activity occurred in a different (but related) market does not automatically establish that it had no effect upon the contract — especially given the Staff Report’s (unsurprising) finding that high prices in the one market produced high prices in the other.” Ante, at 554. I disagree, however, with the Court’s suggestion that the FPA restricts FERC’s review of contract rates to these limited criteria.
The FPA does not specify how market deficiencies should weigh in FERC’s review of contract rates. Depending on the circumstances and how one balances the short-term and long-term interests of consumers, evidence of “market turmoil” may, as the Court argues, support rather than detract from a finding that contract rates are just and reasonable. See ante, at 547. Whether any given contract rate “ultimately benefits consumers,” ante, at 551, however, is a determination that Congress has vested in FERC, not this Court.
See, e. g., App. 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. As we have previously concluded, the contracts at issue in this proceeding do not provide for such a standard but rather evidence an intent that the contracts may be changed only pursuant to the ‘public interest’ standard of review. Under the ‘public interest’ standard, to justify contract modification it is not enough to show that forward prices became unjust and unreasonable due to the impact of spot market dysfunctions” (footnote omitted)); id., at 1527a (“Complainants were required to meet the public interest standard of review, not the just and reasonable standard of review which could have taken
Concurrence in Part
concurring in part and concurring in the judgment.
Recommending denial of the petition for certiorari in these cases, the Federal Energy Regulatory Commission urged that review “would be premature” given “the interlocutory nature of th[e] issues.” Brief in Opposition for Respondent Federal Energy Regulatory Commission 22, 25. In this regard, the Commission called our attention to “new measures” it had taken, as well as recent enactments by Congress, bearing on “the evaluation of contracts under Mobile-Sierra.” Id., at 14-16. In view of these developments, the Commission suggested, this Court should await “the better-developed record that would be produced by FER[C]... on remand.” Id., at 22. I agree that the Court would have been better informed had it awaited the Commission’s decision on remand. I think it plain, however, that the Commission erred in the two respects identified by the Court. See ante, at 552-554. I therefore concur in the Court’s judgment and join Part III of the Court’s opinion.