OPINION OF THE COURT
MORGAN STANLEY CAPITAL GROUP INC. V. PUBLICUTIL. DIST. NO. 1 OF
SNOHOMISH CTY.
554 U. S. ____ (2008)
SUPREME COURT OF THE UNITED STATES
NOS. 06-1457 AND 06-1462
MORGAN STANLEY CAPITAL GROUP INC., PETITIONER
06–1457
v.
PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH
COUNTY, WASHINGTON, et al.
AMERICAN ELECTRIC POWER SERVICE CORPORATION,
et al., PETITIONERS
06–1462
v.
PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH
COUNTY, WASHINGTON, et al.
on writs of certiorari to the united states
court of appeals for the ninth circuit
[June 26, 2008]
Justice Scalia 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 about the
scope of the
Mobile-Sierra doctrine: First, does the
presumption apply only when FERC has had an initial opportunity to
review a contract rate without the presumption? Second, does the
presumption impose as high a bar to challenges by purchasers of
wholesale electricity as it does to challenges by sellers?
I
A Statutory Background
The Federal Power Act (FPA), 41
Stat. 1063, as amended, gives the Commission[
Footnote 1] the authority to regulate the sale of
electricity in interstate commerce—a market historically
characterized by natural monopoly and therefore subject to abuses
of market power. See 16 U. S. C. §824
et seq. Modeled
on the Interstate Commerce Act, the FPA requires regulated
utilities to file compilations of their rate schedules, or
“tariffs,” with the Commission, and to provide service to
electricity purchasers on the terms and prices there set forth.
§824d(c). Utilities wishing to change their tariffs must notify the
Commission 60 days before the change is to go into effect.
§824d(d). Unlike the Interstate Commerce Act, however, the FPA also
permits utilities to set rates with individual electricity
purchasers through bilateral contracts. §824d(c), (d). As we have
explained elsewhere, the FPA “departed from the scheme of purely
tariff-based regulation and acknowledged that contracts between
commercial buyers and sellers could be used in ratesetting.”
Verizon Communications Inc. v.
FCC,
535 U. S. 467, 479
(2002). Like tariffs, contracts must be filed with the Commission
before they go into effect. 16 U. S. C. §824d(c), (d).
The FPA requires all
wholesale-electricity rates to be “just and reasonable.” §824d(a).
When a utility files a new rate with the Commission, through a
change to its tariff or a new contract, the Commission may suspend
the rate for up to five months while it investigates whether the
rate is just and reasonable. §824d(e). The Commission may, however,
decline to investigate and permit the rate to go into effect—which
does not amount to a determination that the rate is “just and
reasonable.” See 18 CFR §35.4 (2007). After a rate goes into
effect, whether or not the Commission deemed it just and reasonable
when filed, the Commission may conclude, in response to a complaint
or on its own motion, that the rate is not just and reasonable and
replace it with a lawful rate. 16 U. S. C. §824e(a) (2000 ed.,
Supp. V).
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 the
Natural Gas Act’s requirement that it file all new rates with the
Commission authorized it to abrogate a lawful contract with a
purchaser simply by filing a new tariff, see
id., at
336–337. The filing requirement, we explained, is merely a
precondition to changing a rate, not an
authorization to change rates in violation of a lawful
contract (
i.e., a contract that sets a just and reasonable
rate). See
id., at 339–344.
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.
Id.,
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).
As we said in a later case, “[t]he 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, supra, at 822.
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 agreements, the principal
regulatory responsibility [is] not to relieve a contracting party
of an unreasonable rate.”
Verizon, 535 U. S., at 479
(citing
Sierra, supra, at 355).
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.,
Southern Co. Servs., Inc. Gulf States Utils. Co. v.
Southern Co. 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. P. 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 transmitting it over long
distances, enabling new entrants to challenge the regional
generating monopolies of traditional utilities. See generally
New York v.
FERC,
535 U. S. 1, 7–8 (2002);
Public Util. Dist. No. 1 of Snohomish Cty. v.
FERC, 272 F. 3d 607, 610 (CADC 2001).
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 Non-Discriminatory
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 facilities in a nondiscriminatory manner.
See
Midwest ISO,
supra. In addition to
coordinating transmission service, Regional Transmission
Organizations perform other functions, such as running auction
markets for electricity sales and offering contracts for hedging
against potential grid congestion. See Blumsack, Measuring the
Benefits and Costs of Regional Electric Grid Integration, 28 Energy
L. J. 147, 147 (2007).
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 that it still lacks or has adequately mitigated market
power. See
ibid. If FERC determines from these filings
that a seller has reattained market power, it may revoke the
authority prospectively. See Market-Based Rates, ¶5, 72 Fed. Reg.
39906. And if the Commission finds that a seller has violated its
Regional Transmission Organization’s market rules, its tariff, or
Commission orders, the Commission may take appropriate remedial
action, such as ordering refunds, requiring disgorgement of
profits, and imposing civil penalties. See
ibid.
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.
FERC, 464 F. 3d 861, 864 (CA9 2006). It also
established the California Power Exchange (CalPX), a nonprofit
entity that operated a short-term market—or “spot market”—for
electricity. The bill required California’s three largest
investor-owned utilities to divest most of their
electricity-generation facilities. It then required those utilities
to purchase and sell the bulk of their electricity from and to the
CalPX’s spot market, permitting only limited leeway for them to
enter into long-term contracts. See
Public Util. Dist. No. 1 of
Snohomish Cty. v.
FERC, 471 F. 3d 1053, 1068
(CA9 2006) (case below).
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 regulatory factors: “flawed
market rules; inadequate addition of generating facilities in the
preceding years; a drop in available hydropower due to drought
conditions; a rupture of a major pipeline supplying natural gas
into California; strong growth in the economy and in electricity
demand; unusually high temperatures; an increase in unplanned
outages of extremely old generating facilities; and market
manipulation.”
CAlifornians for Renewable Energy, Inc. v.
Sellers of Energy and Ancillary Servs., 119 FERC ¶61,058,
pp. 61,243, 61,246 (2007). Because California’s investor-owned
utilities had for the most part been forbidden to obtain their
power through long-term contracts, the turmoil in the spot market
hit them hard. See Cudahy 174. The high prices led to rolling
blackouts and saddled utilities with mounting debt.
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 62,456.
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 over into other Western States. See 471
F. 3d, at 1069. Petitioners are the sellers that entered into
the contracts with respondents.
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 contracts did not seriously harm the
public interest. In fact, according to the ALJ, even if the
Mobile-Sierra presumption did not apply, respondents would
not be entitled to have the contracts modified. 103 FERC, at
62,390–62,394.
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 justify 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.”
Ibid.
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.[
Footnote 2] First,
the court agreed with respondents that rates set by contract
(whether pursuant to a market-based tariff or not) are
presumptively reasonable only where FERC has had an initial
opportunity to review the contracts without applying the
Mobile-Sierra presumption. To satisfy that prerequisite
under the market-based tariff regime, the court said, the
Commission must promptly review the terms of contracts after their
formation and must modify those that do not appear to be just and
reasonable when evaluated without the
Mobile-Sierra
presumption (rather than merely revoking market-based authority
prospectively but leaving pre-existing contracts intact). See 471
F. 3d, at 1075–1077, 1079–1085. This initial review must
include an inquiry into “the market conditions in which the
contracts at issue were formed,” and market “dysfunction” is a
ground for finding a contract not to be just and reasonable.
Id., at 1085–1087. Second, the Ninth Circuit held that
even assuming that the
Mobile-Sierra presumption applied,
the standard for overcoming that presumption is different for a
purchaser’s challenge to a contract, namely, whether the
contract rate exceeds a “zone of reasonableness.” 471 F. 3d,
at 1088–1090.
We granted certiorari. See 551 U. S. ___
(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, to apply the
Mobile-Sierra presumption in
its evaluation of the contracts here. That it provided a different
rationale for the necessary result is no cause for upsetting its
ruling. “To remand would be an idle and useless formality.
Chenery does not require that we convert judicial review
of agency action into a ping-pong game.”
NLRB v.
Wyman-Gordon Co.,
394 U. S. 759, 766–767,
n. 6 (1969) (plurality opinion).
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 public may the
Commission declare it not to be just and reasonable.[
Footnote 3]
Sierra thus provided a
definition of what it means for a rate to satisfy the
just-and-reasonable standard in the contract context—a definition
that applies regardless of when the contract is reviewed. The Ninth
Circuit, by contrast, essentially read
Sierra “as the
equivalent of an estoppel doctrine,” whereby an initial Commission
opportunity for review prevents the Commission from modifying the
rates absent serious future harm to the public interest. Tewksbury
& Lim, Applying the
Mobile-Sierra Doctrine to
Market-Based Rate Contracts, 26 Energy L. J. 437, 457–458 (2005).
But
Sierra said nothing of the sort. And given that the
Commission’s passive permission for a rate to go into effect does
not constitute a finding that the rate is just and reasonable, it
would be odd to treat that initial “opportunity for review” as
curtailing later challenges.
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 whether the rates seriously harm the public
interest, not to whether they are unfair to one of the parties that
voluntarily assented to the contract. Cf.
id., at 391,
n. 4.
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 fact that the market is
imperfect, or even chaotic, is no reason to undermine the
stabilizing force of contracts that the FPA embraced as an
alternative to “purely tariff-based regulation.”
Verizon,
535 U. S., at 479. We may add that evaluating market “dysfunction”
is a very difficult and highly speculative task—not one that the
FPA would likely require the agency to engage in before holding
sophisticated parties to their bargains.
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
the utility] would be excessively burdened, but whether any
customers of the purchaser would be); and that those three factors
are in any event not the exclusive components of the public
interest. In its decision below, the Commission recognized both
these realities. See 103 FERC, at 62,397 (“Nevada Companies failed
to show that the contract terms at issue impose an excessive burden
on their customers” (emphasis added));
id., at
62,398 (“The record also demonstrates that Snohomish presented no
evidence that its contract with Morgan Stanley adversely affected
Snohomish
or its ratepayers” (emphasis added));
id., at 62,398–62,399 (evaluating the “totality of
circumstances”); see also Brief for FERC 41–42.[
Footnote 4]
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.”[
Footnote 5] 471 F. 3d, at 1089. The Ninth Circuit
derived this test from our statement in
Sierra that a
contract rate would have to be modified if it were so low that it
imposed an “excessive burden” on other wholesale purchasers. The
Ninth Circuit took “excessive burden” to mean merely the burden
caused when one set of consumers is forced to pay above marginal
cost to compensate for below-marginal-cost rates charged other
consumers. See 471 F. 3d, at 1088. And it proceeded to apply a
similar notion of “excessive burden” to high-rate challenges (where
all the burden of the above-marginal-cost contract rate falls on
the purchaser’s own customers, and does not affect the customers of
third parties).
Id., at 1089. That is a misreading of
Sierra and our later cases. A presumption of validity that
disappears when the rate is above marginal cost is no presumption
of validity at all, but a reinstitution of cost-based rather than
contract-based regulation. We have said that, under the
Mobile-Sierra presumption, setting aside a contract rate
requires a finding of “unequivocal public necessity,”
Permian
Basin, 390 U. S., at 822, or “extraordinary circumstances,”
Arkansas Louisiana Gas Co. v.
Hall,
453 U. S. 571, 582
(1981). In no way can these descriptions be thought to refer to the
mere exceeding of 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
ancien régime 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.[
Footnote 6]
III
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 the disparity between the contract rate
and the rates consumers would have paid (but for the contracts)
further down the line, when the open market was no longer
dysfunctional. That disparity, past a certain point, could amount
to an “excessive burden.” That is what was contemplated by
Sierra, which involved a challenge 5 years into a 15-year
contract. The “excessive burden” on other customers to which the
opinion referred was assuredly the current burden, and not only the
burden imposed at the very outset of the contract. See 350 U. S.,
at 355. The “unequivocal public necessity” that justifies
overriding the
Mobile-Sierra presumption does not
disappear as a factor once the contract enters into force. Thus,
FERC’s analysis on this point was flawed—or at least incomplete. As
the Ninth Circuit put it, “[i]t is entirely possible that rates had
increased so high during the energy crises because of dysfunction
in the spot market that, even with the acknowledged decrease in
rates, consumers still paid more under the forward contracts than
they otherwise would have.” 471 F. 3d, at 1090. If that is so,
and if that increase is so great that, even taking into account the
desirability of fostering market-stabilizing long-term contracts,
the rates impose an excessive burden on consumers or otherwise
seriously harm the public interest, the rates must be
disallowed.
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
Mobile-Sierra presumption. We conclude, however, 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. Like fraud and duress,
unlawful market activity that directly affects contract
negotiations eliminates the premise on which the
Mobile-Sierra presumption rests: that the contract rates
are the product of fair, arms-length negotiations. 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. We are unable to determine from the Commission’s orders
whether it found the evidence inadequate to support the claim that
respondents’ alleged unlawful activities affected the contracts at
issue here. It said in its order on rehearing, 105 FERC, at 61,989,
that “[w]e … found no evidence to support a finding of market
manipulation [by respondents] that specifically affected the
contracts at issue.” But perhaps that must be read in light of the
Commission’s above described rejection of the Staff Report on the
ground that high spot market prices caused by manipulation are
irrelevant unless the forward market prices fail the
Mobile-Sierra standard; and in light of the statement in
its initial order, in apparent response to the claim of spot-market
manipulation by respondents, 103 FERC, at 62,397, that “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.”
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 abrogate
a contract on these grounds without finding a causal connection
between unlawful activity and the contract rate. Where, however,
causality has been established, the
Mobile-Sierra
presumption should not apply.
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.
Footnote 1
We also use “Commission” to refer to the
Federal Power Commission, FERC’s predecessor.
Footnote 2
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 5, that would have precluded application of the
Mobile-Sierra presumption.
Footnote 3
We do not say, as the dissent alleges,
post, at 7 (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).
Footnote 4
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 13. 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.
Footnote 5
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 of departure (the general principle that rates
cannot exceed marginal cost) contradicts
Mobile-Sierra.
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 assure 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 8, 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.
Footnote 6
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 2. 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 refer to
something more than a small dent in the consumer’s pocket, which is
why our subsequent cases have described the standard as a high
one.
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.
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