558 U.S. 165 | SCOTUS | 2010
Lead Opinion
delivered the opinion of the Court.
The Federal Power Act (FPA or Act), 41 Stat. 1063, as amended, 16 U. S. C. § 791a et seq., authorizes the Federal Energy Regulatory Commission (FERC or Commission) to superintend the sale of electricity in interstate commerce and provides that all wholesale-electricity rates must be “just and reasonable,” §824d(a). Under this Court’s Mobile-Sierra doctrine, FERC must presume that a rate set by “a freely negotiated wholesale-energy contract” meets the statutory “just and reasonable” requirement. Morgan Stanley Capital Group Inc. v. Public Util. Dist. No. 1 of Snohomish Cty., 554 U S. 527, 530 (2008). “The presumption may be overcome only if FERC concludes that the contract seriously harms the public interest.” Ibid.
This ease stems from New England’s difficulties in maintaining the reliability of its energy grid. In 2006, after several attempts by the Commission and concerned parties to
We reverse the D. C. Circuit’s judgment to the extent that it rejects the application of Mobile-Sierra to noncontracting parties. Our decision in Morgan Stanley, announced three months after the D. C. Circuit’s disposition, made clear that the Mobile-Sierra public interest standard is not an exception to the statutory just-and-reasonable standard; it is an application of that standard in the context of rates set by contract. The “venerable Mobile-Sierra doctrine” rests on “the stabilizing force of contracts.” Morgan Stanley, 554 U. S., at 548; see id., at 551 (describing contract rates as “a key source of stability”). To retain vitality, the doctrine must control FERC itself, and, we hold, challenges to contract rates brought by noncontracting as well as contracting parties.
I
In a capacity market, in contrast to a wholesale-energy market, an electricity provider purchases from a generator an option to buy a quantity of energy, rather than purchasing the energy itself. To maintain the reliability of the grid,
In 2003, a group of generators sought to enter into “reliability must-run” agreements with the New England Independent System Operator (ISO), which operates the region’s transmission system.
In March 2004, the ISO proposed a market structure responsive to FERC’s directions. See Devon Power LLC, 107 FERC ¶ 61,240, p. 62,020 (2004). FERC set the matter for hearing before an Administrative Law Judge (ALJ), who issued a 177-page order largely accepting the ISO’s proposal. Devon Power LLC, 111 FERC ¶ 63,063, p. 65,205 (2005). Several parties filed exceptions to the ALJ’s order; on September 20, 2005, the full Commission heard arguments on the proposed market structure, and thereafter established settlement procedures. Devon Power LLC, 113 FERC ¶ 61,075, p. 61,271 (2005).
After four months of negotiations, on March 6, 2006, a settlement was reached. Of the 115 negotiating parties, only 8 opposed the settlement.
The issue before us centers on §4.C of the Agreement (hereinafter Mobile-Sierra provision). Under that provision, challenges to both transition-period payments and auction-clearing prices would be adjudicated under “the ‘public interest’ standard of review set forth in United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U. S. 332 (1956)[,] and [FPC] v. Sierra Pacific Power Co., 350 U. S. 348 (1956) (the ‘Mobile-Sierra’ doctrine).” App. 95. Mobile-Sierra applies, § 4.C instructs, “whether the [price is challenged] by a Settling Party, a non-Settling Party, or [by] the FERC acting sua sponte.” Ibid.
FERC approved the Settlement Agreement, “finding that as a package, it presents a just and reasonable outcome for this proceeding consistent with the public interest.” 115 FERC, at 62,304. The Mobile-Sierra provision, FERC explicitly determined, “appropriately balances the need for rate stability and the interests of the diverse entities who will be subject to the [forward capacity market’s auction system].” Id., at 62,335.
Because of the importance of the issue, and in light of our recent decision in Morgan Stanley, we granted certiorari, 556 U. S. 1207 (2009), to resolve this question: “[Does] Mobile-Sierra!s public-interest standard appl[y] when a contract rate is challenged by an entity that was not a party to the contract[?]” Brief for Petitioners i. Satisfied that the answer to that question is yes, we reverse the D. C. Circuit’s judgment insofar as it rejected application of Mobile-Sierra to noncontracting parties.
II
The FPA gives FERC authority to regulate the “sale of electric energy at wholesale in interstate commerce.” See 16 U. S. C. § 824(b)(1). The Act allows regulated utilities to set rates unilaterally by tariff; alternatively, sellers and buyers may agree on rates by contract. See §824d(c), (d). Whether set by tariff or contract, however, all rates must be “just and reasonable.” §824d(a). Rates may be examined by the Commission, upon complaint or on its own initiative, when a new or altered tariff or contract is filed or after a rate goes into effect. §§ 824d(e), 824e(a). Following a hearing, the Commission may set aside any rate found “unjust, unreasonable, unduly discriminatory or preferential,” and replace it with a just and reasonable rate. § 824e(a).
The Sierra case involved a further issue. Not only had the Commission erroneously concluded that a newly filed tariff superseded a contract rate. In addition, the Commission had suggested that, in any event, the contract rate, which the utility sought to escape, was itself unjust and unreasonable. The Commission thought that was so “solely because [the contract rate] yieldfed] less than a fair return on the [utility’s] net invested capital.” 350 U. S., at 355.
The Commission’s suggestion prompted this Court to home in on “the question of how the Commission may evaluate whether a contract rate is just and reasonable.” Morgan Stanley, 554 U. S., at 533. The Sierra Court answered the question this 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*173 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.” 350 U. S., at 354-355 (some emphasis added).
In a later case, we similarly explained: “The regulatory system created by the [FPA] is premised on contractual agreements voluntarily devised by the regulated companies; it contemplates abrogation of these agreements only in circumstances of unequivocal public necessity.” Permian Basin Area Rate Cases, 390 U. S. 747, 822 (1968).
Two Terms ago, in Morgan Stanley, 554 U. S. 527, the Court reaffirmed and clarified the Mobile-Sierra doctrine. That case presented two questions: First, does the Mobile-Sierra presumption (that contract rates freely negotiated between sophisticated parties meet the just-and-reasonable standard imposed by 16 U. S. C. §824d(a)) “apply only when FERC has had an initial opportunity to review a contract rate without the presumption?” 554 U. S., at 531. “Second, does the presumption [generally] impose as high a bar to challenges by purchasers of wholesale electricity as it does to challenges by sellers?” Id., at 531; see id., at 548. An
Morgan Stanley did not reach the question presented here: Does Mobile-Sierra’s public interest standard apply to challenges to contract rates brought by noncontraeting parties? But Morgan Stanley’s reasoning strongly suggests that the D. C. Circuit’s negative answer misperceives the aim, and diminishes the force, of the Mobile-Sierra doctrine.
In unmistakably plain language, Morgan Stanley restated Mobile-Sierra’s instruction to the Commission: FERC “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.” 554 U. S., at 530. As our instruction to FERC in Morgan Stanley conveys, the public interest standard is not, as the D. C. Circuit presented it, a standard independent of, and sometimes at odds with, the “just and reasonable” standard, see 520 F. 3d, at 478; rather, the public interest standard defines “what it means for a rate to satisfy the just-and-reasonable standard in the contract context,” Morgan Stanley, 554 U. S., at 546. And if FERC itself must presume just and reasonable a contract rate re-
Moreover, the Mobile-Sierra doctrine does not overlook third-party interests; it is framed with a view to their protection. The doctrine directs the Commission to reject a contract rate that “seriously harms the consuming public.” Morgan Stanley, 554 U. S., at 545-546; see Verizon Communications Inc. v. FCC, 535 U. S. 467, 479 (2002) (When a buyer and a seller agree upon a rate, “the principal regulatory responsibility [i]s not to relieve a contracting party of an unreasonable rate, . . . but to protect against potential discrimination by favorable contract rates between allied businesses to the detriment of other wholesale customers.” (emphasis added)).
Finally, as earlier indicated, see supra, at 173-174, the D. C. Circuit’s confinement of Mobile-Sierra to rate challenges by contracting parties diminishes the animating purpose of the doctrine: promotion of “the stability of supply arrangements which all agree is essential to the health of the [energy] industry.” Mobile, 350 U. S., at 344. That dominant concern was expressed by FERC in the order on review: “Stability is particularly important in this case, which was initiated in part because of the unstable nature of [installed capacity] revenues and the effect that has on generating units, particu
We therefore hold that the Mobile-Sierra presumption does not depend on the identity of the complainant who seeks FERC investigation. The presumption is not limited to challenges to contract rates brought by contracting parties. It applies, as well, to challenges initiated by third parties.
III
The objectors to the settlement appearing before us maintain that the rates at issue in this ease — the auction rates and the transition payments — are prescriptions of general applicability rather than “contractually negotiated rates,” hence Mobile-Sierra is inapplicable. See Brief for Respondents 15-17, and n. 1 (internal quotation marks omitted). FERC agrees that the rates covered by the settlement “are not themselves contract rates to which the Commission was required to apply Mobile-Sierra.” Brief for FERC 15. But, FERC urges, “the Commission had discretion to do so,” id., at 28; furthermore, “[t]he court of appeals’ error in creating a third-party exception to the Mobile-Sierra presumption is a sufficient basis for reversing its judgment,” id., at 22. Whether the ratés at issue qualify as “contract rates,” and, if not, whether FERC had discretion to treat them analogously are questions raised before, but not ruled upon by, the Court of Appeals. They remain open for that court’s consideration on remand. See Tr. of Oral Arg. 16.
For the reasons stated, the judgment of the Court of Appeals for the D. C. Circuit is reversed to the extent that it rejects the application of Mobile-Sierra to noncontracting parties, and the case is remanded for farther proceedings consistent with this opinion.
It is so ordered.
An ISO is an independent company that has operational control, but not ownership, of the transmission facilities owned by member utilities. ISOs “provide open access to the regional transmission system to all electricity generators at rates established in a single, unbundled, grid-wide tariff____” Midwest ISO Transmission Owners v. FERC, 373 F. 3d 1361, 1364 (CADC 2004) (internal quotation marks omitted).
The transition period runs from December 1, 2006, to June 1, 2010.
Consistent with the lead role of contracts recognized in Mobile-Sierra, we held in United Gas Pipe Line Co. v. Memphis Light, Gas and Water Div., 358 U. S. 103, 110-113 (1958), that parties may contract out of the Mobile-Sierra presumption. They could do so, we ruled, by specifying in their contracts that a new rate filed with the Commission would supersede the contract rate. Courts of Appeals have approved an option midway 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, without a further showing that it adversely affects 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).
The D. C. Circuit emphasized a point no doubt true, but hardly dispositive: Contracts bind parties, not nonparties. Maine Pub. Util. Comm’n v. FERC, 520 F. 3d 464, 478 (2008) (per curiam). Mobile-Sierra holds sway, however, because well-informed wholesale-market participants of approximately equal bargaining power generally can be expected to negotiate just-and-reasonable rates, see Morgan Stanley Capital Group Inc. v. Public Util. Dist. No. 1 of Snohomish Cty., 554 U. S. 527, 545 (2008), and because “contract stability ultimately benefits consumers,” id., at 551. These reasons for the presumption explain why FERC, surely not legally bound by a contract rate, must apply the presumption and, correspondingly, why third parties are similarly controlled by it.
The FPA authorizes "[a]ny person, electric utility, State, municipality, or State commission” to complain. 16 U. S. C. §825e (emphasis added). FERC regulations similarly permit “[a]ny person [to] file a complaint seeking Commission action.” 18 CFR §385.206(a) (2009) (emphasis added).
Dissenting Opinion
dissenting.
The opinion that the Court announces today is the third chapter in a story about how a reasonable principle, extended beyond its foundation, becomes bad law.
In the first chapter the Court wisely and correctly held that a seller who is a party to a long-term contract to provide energy to a wholesaler could not unilaterally repudiate its contract obligations in response to changes in market conditions by simply filing a new rate schedule with the regulatory commission. Only if the rate was so low that the seller might be unable to stay in business, thereby impairing the public interest, could the seller be excused from performing its contract. That is what the Court held in United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U. S. 332 (1956), and FPC v. Sierra Pacific Power Co., 350 U. S. 348 (1956).
In the second chapter the Court unwisely and incorrectly held that the same rule should apply to a buyer who had been forced by unprecedented market conditions to enter into a long-term contract to buy energy at abnormally high prices. The Court held the Federal Energy Regulatory Commission (FERC) could not set aside such a contract as unjust and unreasonable, even though it saddled consumers with a duty to pay prices that would be considered unjust and unreasonable under normal market conditions, unless the purchaser could also prove that “the contract seriously harms the public interest.” Morgan Stanley Capital Group Inc. v. Public Util. Dist. No. 1 of Snohomish Cty., 554 U. S. 527, 530 (2008).
As I explained in my dissent in Morgan Stanley, the imposition of this additional burden on purchasers challenging rates was not authorized by the governing statute. Under the Federal Power Act (FPA), all wholesale electricity rates must be “just and reasonable.” 16 U. S. C. §824d(a). “[N]othing in the statute mandates differing application of the statutory standard to rates set by contract.” Morgan Stanley, 554 U. S., at 557 (Stevens, J., dissenting) (internal quotation marks omitted; emphasis deleted). And the Mobile-Sierra line of cases did not “mandate a ‘serious harm’ standard of review,” much less “require any assumption that high rates and low rates impose symmetric burdens on the public interest.” Morgan Stanley, 554 U. S., at 561-562
But even accepting Morgan Stanley as the law, the Court unwisely goes further today. In this third chapter of the Mobile-Sierra story, the Court applies a rule — one designed initially to protect the enforceability of freely negotiated contracts against parties who seek a release from their obligations — to impose a special burden on third parties exercising their statutory right to object to unjust and unreasonable rates. This application of the rule represents a quantum leap from the modest origin set forth in the first chapter of this tale. As the Court of Appeals correctly concluded in the opinion that the Court sets aside today: “This case is clearly outside the scope of the Mobile-Sierra doctrine.” Maine Pub. Util. Comm’n v. FERC, 520 F. 3d 464, 477 (CADC 2008) (per curiam).
As the D. C. Circuit noted,
The Court further reasons that “confinement of Mobile-Sierra to rate challenges by contracting parties diminishes the animating purpose of the doctrine,” which is ensuring the stability of contract-based supply arrangements. Ante, at 175. Maybe so, but applying Mobile-Sierra to rate challenges by noncontracting parties loses sight of the animating purpose of the FPA, which is “the protection of the public interest.” Sierra, 350 U. S., at 355. That interest is “the interest of consumers in paying ‘the “lowest possible reasonable rate consistent with the maintenance of adequate service in the public interest.”’” Morgan Stanley, 554 U. S., at 561 (Stevens, J., dissenting) (quoting Permian Basin, 390 U. S., at 793). I do not doubt that stable energy markets are important to the public interest, but “under the FPA, Congress has charged FERC, not the courts, with balancing the short-term and long-term interests of consumers” under the just-and-reasonable standard of review. Morgan Stanley, 554 U. S., at 563 (Stevens, J., dissenting). The Court
The Court assures respondents that the “public interest standard” does not “overlook third-party interests” and is “framed with a view to their protection.” Ante, at 174, 175. Perhaps in practice the Mobile-Sierra doctrine will protect third parties’ interests, and the public interest, just as well as the so-called “ordinary” just-and-reasonable standard. But respondents are rightly skeptical. The Mobile-Sierra doctrine, as interpreted by the Court in Morgan Stanley, must pose a higher bar to respondents’ rate challenge — that is, it requires them to show greater harm to the public.
It was sensible to require a contracting party to show something more than its own desire to get out of what proved to be a bad bargain before FERC could abrogate the parties’ bargain. It is not sensible, nor authorized by the statute, for the Court to change the de facto standard of review whenever a rate is set by private contract, based solely on the Court’s view that contract stability should be preserved unless there is extraordinary harm to the public interest.
For these reasons, I respectfully dissent.
Whether the Court explains the Mobile-Sierra doctrine as a presumption or as a different standard of review, “[t]here is no significant difference between requiring a heightened showing to overcome an otherwise conclusive presumption and imposing a heightened standard of review.” Morgan Stanley, 554 U. S., at 557 (Stevens, J., dissenting).
Because the D. C. Circuit’s opinion was written before this Court’s decision in Morgan Stanley, that court’s purported error in describing the Mobile-Sierra doctrine as an “exception” to the just-and-reasonable standard, 520 F. 3d, at 477, is understandable. As that court recognized, and the majority does not change today, the Mobile-Sierra standard in fact “makes it harder for [respondents] to successfully challenge rates.” 520 F. 3d, at 478.
FERC agrees with petitioners that the public interest standard “govern[s] all challenges to the rates set by contract, regardless of the identity of the challenger.” Reply Brief for FERC 4. But “not even FERC has the authority to endorse [this] rule.” Morgan Stanley, 554 U. S., at 563 (Stevens, J., dissenting). “The FPA does not indulge, much less require, a ‘practically insurmountable’ presumption, see Papago Tribal Util. Auth. v. FERC, 723 F. 2d 950, 954 (CADC 1983) (opinion for the court by Scalia, J.), that all rates set by contract comport with the public interest and are therefore just and reasonable.” Id., at 563-564.
In my view, “whether a rate is ‘just and reasonable’ is measured against the public interest, not the private interests of regulated [parties].” Id., at 561. But I note the Court’s assertion that the Mobile-Sierra doctrine protects “third-party interests,” ante, at 175, is a new twist on the “public interest standard” as traditionally understood. As the Court recognized in Morgan Stanley, one consequence of applying Mobile-Sierra is that “‘the sole concern of the Commission’” is the public interest, and FERC cannot consider, for example, whether a rate guarantees a sufficient rate of return to a regulated entity. 554 U. S., at 533 (quoting FPC v. Sierra Pacific Power Co., 350 U. S. 348, 355 (1956)); see also Morgan Stanley, 554 U. S., at 566, n. 3. In addition to requiring that FERC find some greater degree of harm to the public than would be required under the ordinary just-and-reasonable standard, therefore, the Mobile-Sierra doctrine leaves little room for respondents — at least one of