Applying the Mobile-Sierra Doctrine to Market-Based Rate Contracts

Article excerpt

I. INTRODUCTION

In companion decisions issued nearly half a century ago, United Gas Pipe Line Co. v. Mobile Gas Services Corp.1 and FPC v. Sierra Pacific Power Co.,2 the Supreme Court considered the authority of the Federal Power Commission (FPC), predecessor of the Federal Energy Regulatory Commission (FERC),3 to modify the rates, terms, and conditions of contracts for services subject to its jurisdiction under the Natural Gas Act (NGA)4 and Part II of the Federal Power Act (FPA),5 respectively. Recognizing that these statutes "permit[] the relations between the parties to be established initially by contract,"6 the Court articulated the so-called "Mobile-Sierra" doctrine, which bars the Commission from reforming or abrogating a fixed-rate contract absent a showing that contract reformation or abrogation is required to protect the public interest.7 In articulating the doctrine, the Supreme Court explained that the resulting "public interest" standard of review under Mobile-Sierra "presences] the integrity of contracts," thereby "permit[ting] the stability of supply arrangements which all agree is essential to the health of the ... industry."8

Mobile and Sierra were decided in the context of a traditional, cost-ofservice regulatory regime under which contracts were, as a general matter, individually filed with, and reviewed by, the Commission. In recent years, the FERC has adopted a market-oriented ratemaking approach for wholesale sales of electricity and certain other jurisdictional services that, among other things, largely dispenses with the filing and review of individual contracts in favor of an increased focus on the adequacy of competition in markets.

While there is a large body of judicial precedent applying the Mobile-Sierra doctrine to cost-based contracts9 and a growing body of judicial precedent affirming the lawfulness of the FERC's market-based rate regime,10 to date, only the FERC has had occasion to consider the applicability and application of the doctrine to contracts for sales of electricity at market-based rates." For its part, the FERC has rejected claims that Mobile-Sierra is inapplicable or should be applied any less stringently where market-based rate contracts12 are concerned. The Commission has done so in three parallel proceedings involving allegedly excessive rates in forward market-based rate contracts executed during the Western energy crisis of 2000-2001. These proceedings were initiated by complaints filed pursuant to section 206 of the FPA13 in late 2001 and early 2002 by: (i) Nevada Power Company (Nevada Power) and Sierra Pacific Power Company ("Sierra" and, together with Nevada Power, the "Nevada Companies"), Southern California Water Company (SCWC) and Public Utility District No. 1 of Snohomish County, Washington (Snohomish);14 (ii) the California Public Utilities Commission (CPUC) and the California Electricity Oversight Board (CEOB);15 and (iii) PacifiCorp (together with the Nevada Companies, SCWC, Snohomish, the CPUC and the CEOB, the "Forward Contracts Complainants").16 The FERC has likewise applied a very stringent Mobile-Sierra public interest standard of review in a proceeding where it perceived a seller reorganizing under Chapter 11 of the United States Bankruptcy Code (Bankruptcy Code) to be attempting to abrogate a long-term, market-based rate contract through its efforts to cease performance after rejecting the contract in bankruptcy.18 The courts, or at least one court, will soon have an opportunity to address the issue as well, because the FERC's orders in the Nevada Power and CPUC Proceedings denying challenges to forward contracts executed during the Western energy crisis of 2000-2001 are now pending before the Ninth Circuit.19

This article addresses both the applicability and the application of the Mobile-Sierra doctrine to market-based rate contracts. In other words, it considers the question: What, if anything, about market-based rate contracts would warrant a change in when and how the Mobile-Sierra doctrine is applied? …