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The Mobile-Sierra Doctrine, Part Deux

A new twist on an old doctrine.

Fortnightly Magazine - March 2007

commission itself is subject to the “public interest” standard, described by one court as “practically insurmountable,” 11 has been the subject of lively controversy. Some have held to the view that when the commission is acting sua sponte or in a generic policy role, it may abrogate contracts or terms thereof upon a finding that they have become unjust and unreasonable. Others, however, aver that the commission itself must demonstrate that abrogation is required by the public interest no matter how generically it may be acting.

The Ninth’s PUD Opinion

At issue before the Ninth Circuit were a number of forward contracts that voluntarily had been entered into at the height of the California energy crisis. In most cases, the purchaser relinquished any unilateral right to seek revisions to the contract. When the crisis passed, however, purchasers entreated the commission to abrogate these contracts on the basis that fraud and abuse tainted the contract-formation process. The commission declined to grant relief on the basis that petitioners had failed to show that the “public interest” required contract abrogation. 12

In Public Utility District No. 1 of Snohomish County, Wash. v. FERC ( PUD), the Ninth Circuit prefaced its opinion with the observation that it was confronting, for the first time, “the intersection of two doctrines—one, the Mobile-Sierra doctrine, the product of the courts; the other, market-based rate authorization, the product of recent agency policy—as they affect the application of the just and reasonable standard.” 13 The phenomenon of market-based rate authority adds a new dimension to the analysis, according to the court, because in the prior regime, the commission made a just and reasonable determination when an individual contract was filed, while market-based rate authority is granted before each contract is formed.

In a dramatic shift of prevailing precedent, the court characterizes the “public interest” test as a presumption as opposed to a standard of review separate and apart from the just-and-reasonable standard, and articulates two new conditions precedent for the presumption itself to arise. Under the court’s view, the “public-interest” test as a standard of review finds no support in the FPA. Instead, the Mobile-Sierra doctrine merely creates a rebuttable presumption that voluntarily negotiated prices are, and will remain for the life of the contract, just and reasonable. According to the court, Sierra “simply held that considerations as to what is ‘unjust’ or ‘unreasonable’ differ in the context of an established bilateral contract, not that the statutory standards no longer govern.” 14 For the presumption that rates under bilateral contracts are just and reasonable to arise, the court held that three prerequisites must be satisfied: (1) the contract by its own terms must not preclude the limited Mobile-Sierra review ( i.e., does not provide contractual authority to make unilateral rate filings); (2) the regulatory scheme in which the contracts are formed must provide FERC with an opportunity for effective, timely review of the contracted rates; and (3) in the context of market-based rates, the commission’s review must include consideration of all factors relevant to the propriety of the contract’s formation.