The main issue in this case is whether the Federal Energy Regulatory Commission (FERC) complied with our mandate in
Northeast Utilities Service Co. v. FERC,
In Northeast I we upheld FERC’s decision conditionally approving the merger of Northeast Utilities (NU) and the Public Service Company of New Hampshire (PSNH). Before us also was the objection of Northeast Utilities Service Company (ÑUSCO) to the Commission’s modification of the rate schedules filed by ÑUSCO. The rate schedules were part of a wholesale electric power contract (the Seabrook Power Contract) among NU, PSNH and the State of New Hampshire. Under the contract each party waived its right to file a complaint under § 206(a) of the Federal Power Act (FPA) concerning the specified rates. Each party also agreed “that in any proceeding by the FERC under Sectiоn 206 the FERC shall not change the rate charged under this Agreement unless such rate is found to be contrary to the public interest.” FERC was not a party to the contract.
Section 206(a) of the FPA, 16 U.S.C. § 824e provides:
Whenever the Commission, after a hearing had upon its own motion or upon complaint, shall find that any rate, charge, or classification, demanded, observed, charged, or collected by any public utility for any transmission or sale subject to the jurisdiction of the Commission, or that any rule, regulаtion, practice, or contract affecting such rate, charge, or classification is unjust, unreasonable, unduly discriminatory or preferential, the Commission shall determine the just and reasonable rate, charge, classification, rule, regulation, practice, or contract to be thereafter observed and in force, and shall fix the same by order.
Invoking its power under § 206(a), the Commission examined the terms and conditions of the Seabrook Power contract. FERC found that the contract might unduly discriminate against entities not parties to it and that there was no genuine arms-length bargaining because the agreement was negotiated at a time when NU and PSNH were about to merge and assume identical interests. It ordered ÑUSCO to make three changes in the contract to bring it within the “just and reasonable” standard of § 206(a): (1) delete the automatically adjusting rate-of-return-on-equity provision; (2) reduce thе current rate-of-return-on-equity used to derive the rate for Seabrook power; and (3) submit for Commission review an initial estimate of the cost of decommissioning the Sea-brook Power Plant, which is an atomic energy facility. The reduction order (2) on the current rate of return on equity was not appealed.
After summarizing the
Mobile-Sierra
“public interest” doctrine as explicated in
Papago Tribal Authority v. FERC,
authority under the public interest standard to modify a contract where: it may be unjust, unreasonable, unduly discriminatory or preferential to the detriment of purchasers that are not parties to the contract; it is not the result of arm’s length bargaining; or it reflects circumstances where the seller has exercised market power over the purchaser.
Northeast I,
The Commission made clear that in the particular circumstances surrounding the Seabrook contract, it retains power— *688 through the “public interest” language — to make modificаtions under the traditional just and reasonable and nondiscrimination standards.
Id.
We found that the standard enunciated by the Commission and applied by the ALJ, “conflates the ‘just and reasonable’ and ‘public interest’ standards, thereby circumventing the Mobile-Sierra doctrine.” Id. We stated that
the Commission was bound to follow the Mobile-Sierra doctrine as explicated by Papago, and therefore should have evaluated the SPC under the public interest standard, not the just and reasonable standard.
Id. We remanded the issue “for reconsideration by FERC under the public interest standard.” Id. at 962.
It is FERC’s position that on remand it reconsidered its previously ordered modifications of the Seabrook Power contract under the public interest standard and affirmed the orders previously issued under that standard.
ÑUSCO contends that FERC did not comply with our mandate but instead created a wholly new version of the public interest standard which is more flexible and less stringent than the judicially adopted public interest standard.
Standard of Review
Not surprisingly, the parties differ on the standard of review to be followed. FERC urges thаt we follow the same deferential standard as we did in our prior case:
On review, we give great deference to the Commission’s decision. U.S. Dep’t of Interior v. FERC,952 F.2d 538 , 543 (D.C.Cir.1992). FERC’s findings of fact are reviewed under the “substantial evidence” standard of review. 16 U.S.C. § 8251 (“The finding of the Commission as to the facts, if supported by substantial evidence, shall be conclusive.”).
“Pure” legal errors require no deference to agency expertise, and are reviewed de novo. Questions involving an interpretation of the FPA involve a de novo determination by the court of Congressional intent; if that intent is ambiguous, FERC’s conclusion will only be rejected if it is unreasonable. Chevron USA v. Natural Resources Defense Council,467 U.S. 837 , 842-56,104 S.Ct. 2778 , 2781-83,81 L.Ed.2d 694 (1984); Boston Edison Co. v. FERC,856 F.2d 361 , 363 (1st Cir.1988).
Northeast I,
ÑUSCO, on the other hand, plumps for the “law of the case” doctrine, arguing that we issued a mandate that had to be strictly construed and followed.
In this circuit the “law of the case” doctrine has not been construed as an inflexible straitjacket that invariably requires rigid compliance with the terms of the mandate. In
United States v. Connell,
To be sure, neither the law of the case doctrine nor its kissing сousin, the so-called “mandate rule,” is designed to function as a straitjacket. Rather, these are discretion-guiding principles, generally thought to be subject to exceptions in the interests of justice.
So also we said in
United States v. Bell,
After all, the so-called “mandate rule,” generally requiring conformity with the commands of a superior court on remand, is simply a specific application of the law of the case doctrine and, as such, is a discretion-guiding rule subject to an оccasional exception in the interests of justice.
In
Doe v. Anrig,
That doctrine “does not rigidly bind a court to its former decisions, but is only addressed to its good sense.” Higgins v. California Prune & Apricot Grower, Inc.,3 F.2d 896 , 898 (2d Cir.1924) (L. Hand, J.). See Messenger v. Anderson,225 U.S. 436 , 444,32 S.Ct. 739 , 740,56 L.Ed. 1152 (1912) (Holmes, J.) (“the phrase, law of the ease, as applied to the effect of previous orders on the later aсtion of the court rendering *689 them in the same case, merely expresses the practice of courts generally to refuse to reopen what has been decided, not a limit to their power”). (Other citations omitted.)
Under the circumstances, we will review the actions of FERC under the usual deferential standard, but always keeping in mind the restraints imposed on FERC by the terms of our mandate and the “law of the case” doctrine.
The Case Law
We think it necessary to revisit the
Mobile-Sierra
doctrine, which represеnts the Supreme Court’s attempt to strike a balance between private contractual rights and the regulatory power to modify contracts when necessary to protect the public interest. We start with
United Gas Pipe Line Co. v. Mobile Gas Corp.,
The Court held that the Natural Gas Act did not give natural gas companies the right to change their rate contracts unilaterally.
Id.
at 337,
Our conclusion that the Natural Gas Act does not empower natural gas companies unilaterally to change their contracts fully promotes the purposes of the Act. By preserving the integrity of contracts, it permits the stability of supply arrangements which all agree is essential to the health of the natural gas industry. Conversion by consumers, particularly industrial users, to the use of nаtural gas may frequently require substantial investments which the consumer would be unwilling to make without long-term commitments from the distributor, and the distributor can hardly make such commitments if its supply contracts are subject to unilateral change by the natural gas company whenever its interests so dictate. The history of the Ideal contract furnishes a case in point. On the other hand, denying to natural gas companies the power unilaterally to change their contracts in no way impairs the regulatory powers of the Commission, for the contracts remain fully subject to the paramount power of the Commission to modify them when necessary in the public interest. The Act thus affords a reasonable accommodation between the conflicting interests of contract stability on the one hand and public regulation on the other.
Id.
at 344,
We make two observations. First, the obvious, that the facts of Mobile are quite different from those in the case at bar. The issue here is not whether one party to a rate *690 contract filed with FERC can effect a rate change unilaterally, but the standard to be used by FERC in examining electric power contracts filed with it. Our second observation is that nowhere in the Supreme Court opinion is the term “public interest” defined. Indeed, the Court seems to assume that the Commission decides what circumstances give rise to the public interest.
We next examine the other leg of the
Mobile-Sierra
doctrine,
FPC v. Sierra Pacific Power Co.,
The Court addressed a second question, not present in
Mobile,
which directly involved the “public interest” doctrine. In its decision finding that the new rate was lawful, the Commission held that the old contract rate was unreasonable solely “because it yields less than a fair return on the net invested capital.”
Id.
at 354-55,
But, while 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 intеrest — 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. That the purpose of the power given the Commission by § 206(a) is the protection of the public interest, as distinguished from the private interests of the utilities, is evidenced by the recital in § 201 of the Act that the scheme of regulation imposed “is necessary in the public interest.” When § 206(a) is read in the light of this purpоse, 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.
Id.
at 355,
The holding of Sierra is clear; what justifies protective action in the public interest by the Commission when it is considering whether a contract rate is too low is where the rate might impair the financial ability of the utility to continue to supply electricity, force electricity consumers to bear an excessive burden, or be unduly discriminatory. This definition of what is necessary in the public interest was formulated in the context of a low-rate case. It was not and could not be an across-the-board definition of what constitutes the public interest in other types of cases. One of the orders at issue in the case at bar is the submission by ÑUSCO to FERC of the cost of decommissioning the Seabrook Power Plant. The other order had to do with changing the rate of return-on-equity formula. Neither were low-rate issues in the context of Mobile and Sierra.
The next case directly implicated in our remand order is
Papago Tribal Authority v. FERC,
The rates hereinabove set out in this Section 3 ... are to remain in effect for the initial one (1) year of the term of this contract and thereafter unless and until *691 changed by the Federal Power Commission or other lawful regulatory authority, with either party hereto to be free unilaterally to take appropriate action before the Federal Power Commission or other lawful regulatory authоrity in connection with changes which may be desired by such party.
Id.
at 953.
Papago,
like the case before us, was an appeal after a remand. In the first appeal the court held that the contract did not permit unilaterally effected rate increases under § 205 of the Act. The Federal Power Commission held in its
Order on Remand
that after its first year, the contract permitted changes under § 206 of the Act on the basis of a just and reasonable standard. The court agreed and intеrpreted the contract as follows: “the restriction envisioned during the first year of the contract must allow rate changes required by the public interest. The scheme to be in effect ‘thereafter’ — obviously intended to be less restrictive — must therefore permit changes that are just and reasonable.”
Papago,
During the course of its opinion the court quoted the “public interest” standard from
Sierra,
[Sjpecific acknowledgment of the possibility of future rate change is virtually meaningless unless it envisions a just-and-reasonable standard. The public interest standard is practically insurmountable; the Commission itself is unaware of any ease granting relief under it. Future rate changes would be a dim prospect, hardly worthy of recognition, if the parties did not intend the just-and-reasonable standard to govern.
Id. at 954 (citation omitted).
Papago has unfortunately been identified with the notion that the “public interest” standard of review is “practically insurmountable,” regardless of the circumstances of the case. This is the misreading that ÑUSCO presses upon us as the law of the case. We do not think that Papago, read in context, means that the “public interest” standard is practically insurmountable in all circumstances. It all depends on whose ox is gored and how the public interest is affected.
It should be noted that neither
Mobile
nor
Sierra
stated or intimated that the “public interest” doctrine was “practically insurmountable.” This was a gloss that the court in
Papago
put on it. In
Northeast I
we said that the “public interest” standard was “a more difficult standard for the Commission to meet than the statutory ‘unjust and unreasonable’ standard,”
Our opinion also recognized that “[t]he most attractive case for affording additional protection [under the public interest standard], despite the presence of a contract, is where the protection is intended to safeguard the interests of third parties....”
Northeast I,
Although our opinion questioned the significance of the seller’s market power and the *692 lack of arms-length bargaining, id. at 961, it left open the possibility thаt these factors may so affect third parties as to warrant intervention even under the public interest standard. See id. (“there would seem to be little justification for the Commission stepping in on behalf of the disfavored subsidiary absent some threat to the public interest ”) (emphasis added). For all of these reasons, we reject NUSCO’s argument that under the law of the case the public interest standard should be considered “practically insurmountable” in all circumstances.
The Order on Remand
We turn to FERC’s explanation of how it аpplied the “public interest” doctrine on remand.
We conclude that if the Commission is to comply with both the Mobile-Sierra imperative to respect private contractual arrangements, on the one hand, and our statutory mandate to protect the public interest and ensure that rates are just and reasonable and not unduly discriminatory or preferential, on the other, the “public interest” standard of review under the Mobile-Sierra doctrine cannot be “prаctically insurmountable” in all cases. In the “classic” Mobile-Sierra situation, for example— when a seller utility unilaterally seeks an increase from a fixed-rate contract already on file with the Commission — the public interest (as opposed to the private interest of the party seeking the rate increase) only rarely is served by making the requested change (that is, granting the requested increase), and a strict standard is appropriate. In other situations, however— when, for example, as here, the Commission is presented with an agreement for the first time and concludes that certain modifications to material rate provisions are necessary to protect the interests of non-parties — the public interest is served by making the modifications, and a more flexible standard is therefore appropriate. Based upon that understanding of the public interest standard of review under the Mobile-Sierra doctrine, we confirm our previously ordered modifications to the Seabrook Power Contract.
66 F.E.R.C. ¶ 61,382 at 62,076 (1994) (footnotes omitted).
In its order on remand, FERC has responded to our concerns by explaining how the disputed contractual terms may harm third parties to the contract. It no longer relies so heavily upon the possibility that the contract may favor one party over another. For example, the Commission found the automatic rate-of-return-on-equity adjustment provision unacceptable because third parties may ultimately bear the burden of a rate component that does not reflect actual capital market conditions. Likewise, the “blank check” given owners of the power plant to determine the decommissioning costs for themselves under New Hampshire law is impermissible because it may be cashed at the expense of non-parties to the contract. See 66 F.E.R.C. ¶ 61,332 at 62,090-91. This new emphasis on harm to third рarties suggests that FERC has done more on remand than simply substitute the words “public interest” for the forbidden phrase “just and reasonable.”
We end by noting the decision in
Mississippi Indus. v. FERC,
that, in the instant case, this doctrine does not bar the exercise of FERC’s power under section 206 of the FPA to reform a practice or contract affecting а rate charged by a public utility for wholesale service in interstate commerce.
*693 Id. at 1551. The court’s discussion of the sweep of the Mobile-Sierra doctrine is instructive.
Finally, even if the contracts fall within the scope of the Mobile-Sierra decisions, the Supreme Court has emphasized that the relevant agency, here FERC, may always reform a contract found to be “unlawful” or “contrary to the public interest,” i.e., that “contracts remain fully subject to the paramount power of the Commission to modify them when necessary in the public interest.” The Court stated in Sierra that the Commission “has undoubted power under § 206(a) to prescribe a change in contract rates whenever it determines such rates to be unlawful” and indicated three circumstances under which the Commission might conclude that a rate or a contract term affecting a rate could be found contrary to the public interest and therefore subject to revision: “where it might impair the financial ability of the public utility to continue its service, cast upon consumers an excessive burden, or be unduly discriminatory.” Here FERC expressly adopted the findings of ALJ Lieb-man who found the level of discrimination in the [contract] “profound” and agreed that its impact on customers in Louisiana and Mississippi would be “dramatic[ ].” The Commission’s specific determination of unlawfulness provides the “unequivocal public necessity” for reformation of the [contract] under section 206 of the FPA.
Id. at 1553 (footnotes omitted).
We conclude that under the circumstances of this case FERC, on remand, gavе thoughtful consideration to the public interest in reviewing its previously ordered modification of the Seabrook Power contract. We, therefore, deny NUSCO’s petition for review and affirm FERC’s order. We go no further. Specifically, we are not in any way suggest ing the parameters of or limitations on the authority of FERC to change the contract in future rate proceedings.
Notes
. Contrary to NUSCO’s suggestion at oral argument,
Boston Edison v. FERC,