by Larry Eisenstat and George Johnson
The Mobile-Sierra Doctrine recognizes that in requiring that rates be “just and reasonable,” Congress did not intend to impose this standard on rates initially fixed by private contracts when later challenged by FERC or a third party. Rather, in such cases, the rates can be changed only if the entity seeking the change can show that the modification is required by the “public interest,” as opposed to showing simply that the rates are “unjust and unreasonable.”
Increasingly, FERC has been re-examining when it should allow the Mobile-Sierra public interest standard to apply to challenges by FERC itself or third parties.
Although more than 50 years old, many Mobile-Sierra issues are now in flux, including the factors that had to have been present at the time the contract was entered into in order for the protection to apply; whether, by including a Mobile-Sierra provision, the contracting parties may bind not only themselves, but non-parties and the Commission as well, to the “public interest” standard; and exactly what the difference is between the “public interest” and “just and reasonable” standards of review.
In Public Utility District No. 1 of Snohomish County, Washington v. FERC and California v. FERC the Court determined that FERC had improperly applied the Mobile-Sierra public interest standard when it reviewed challenges to market-based power sales contracts that were filed with, but never reviewed by, FERC.
Because FERC never considered market deficiencies that existed when the contracts were executed, it was ordered to reconsider whether it should have applied a Mobile-Sierra standard of review. On remand, though, it is not clear whether a requirement that power contracts initially be reviewed under the just and reasonable standard can be squared with FERC’s policy of allowing market-based contracts to go into effect based merely on a prior finding that the seller lacked market power, i.e., without FERC review of the circumstances at contract execution.
Increasingly, FERC has been re-examining when it should allow the Mobile-Sierra public interest standard to apply to challenges by FERC itself or third parties. Presently, a majority of the Commission appears generally to accept application of the public interest standard in such cases, while Commissioners Kelly and Wellinghoff generally appear to oppose agreements requiring the Commission and/or third parties to meet a “public interest” standard when challenging such agreements.
However, in Entergy Services, Inc. issued in October 2006, Commissioners Kelly and Wellinghoff voted to approve Mobile-Sierra protection for an Independent Coordinator of Transmission (ICT) Agreement because FERC had initially reviewed the ICT Agreement under a just and reasonable standard; the Entergy tariff provisions governing the ICT’s services are not subject to a public interest standard of review; and the ICT Agreement resulted from broad stakeholder involvement.
Commissioner Wellinghoff stated, in Entergy, that requests for Mobile-Sierra protection should be accompanied by “substantial evidence that a factual and policy basis supports [the] request,” addressing whether the agreement was negotiated using a broad-based stakeholder process; whether state commissions had the opportunity to participate in the stakeholder process; the extent of and justification for opposition to the “public interest” standard of review; and whether use of the Mobile-Sierra provision was necessary to resolve the proceeding.
These criteria were not entirely new. When FERC approved Mobile-Sierra protection for a New England RTO proposal, it relied on the fact that such protection did not significantly impact the rights and obligations of market participants. More recently, FERC underscored that, where an agreement “has broad applicability,” it may also decline to be bound by Mobile-Sierra.
These decisions along with Entergy, suggest an apparent consensus that FERC and/or third parties can be required to meet the higher Mobile-Sierra standard provided that when the contract was first reviewed there had been a substantial showing that Mobile-Sierra protection was appropriate, the scope of such protection was sufficiently narrow, and there had been broad stakeholder involvement concerning the matters in issue.
Finally, what a “public interest” showing itself requires also remains an open question in light of the Ninth Circuit’s decisions. Where a utility challenges a rate as being “too low,” it must still show that the rate impairs its ability to continue service, casts an excessive burden on consumers, or is unduly discriminatory. However, where the rate is challenged as “too high,” the Ninth Circuit held that FERC must consider contract stability and whether the challenged rate “is now too high to be within a ‘zone of reasonableness,’” and “whether consumers’ bills are higher than they otherwise would have been” had the rates been within the zone.
Larry F. Eisenstat is head of the energy practice and George Johnson is an energy partner with Dickstein Shapiro LLP. They can be reached at [email protected] and [email protected] dicksteinshapiro.com, respectively.