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The Mobile-Sierra Doctrine, Part Deux

A new twist on an old doctrine.

Fortnightly Magazine - March 2007

went on to opine that the commission’s error in deciding whether to apply the Mobile-Sierra presumption was compounded by its use of an erroneous standard for determining whether the challenged contracts affect the public interest. The court held that the public interest factors cited by the court in Sierra only were applicable in the context of a low-rate challenge, and were not apropos to the high-rate challenge presented in the case before it. In a high-rate challenge, such as the PUD case, the FERC must give predominant weight to the impact of a challenged wholesale contract on the rates paid by the consuming public. According to the court, the narrow conception of “public interest” taken from Sierra does not suffice in this circumstance.

The court admonished that FERC must take into account the Supreme Court’s observation that even “‘a small dent in the consumer’s pocket’ is relevant to the determination of fair rates.” 21 Thus, the proper test is not whether the contracted rates pose an “excessive burden” on consumers, but whether the wholesale contract is outside the “zone of reasonableness” and results in retail rates higher than would be the case if that zone were not exceeded. The “zone-of-reasonableness” test, which originated in the Supreme Court’s decision in Hope,22 is, of course, a hallmark of the “just and reasonable” analysis, which is now conflated, at least in some circumstances, with the previously distinct (and more stringent) “public-interest” review under Mobile-Sierra. Given this new standard, the court concluded that the commission did not properly assess the public interest of any of the contracts before it in the case at bar. A similar decision was reached in the companion CPUC case, where the Court applied the new standard articulated in PUD.

Choppy Waters Again

Just when the commission believed it had found its way under the Mobile-Sierra doctrine, the waters are roiled again. If the court’s PUD decision is good law, then the “public-interest” standard as we have known it is a dead letter. Instead, existing contracts merely carry a presumption that the rates and terms thereunder will remain just and reasonable over the term of the contract. If the seller is challenging the contract, the presumption is strong. If the buyer is challenging a contract on the basis that the price is too high, the presumption appears to conflate to little more, if any, than the standard burden under Section 206 to show that the rates are unjust and unreasonable.

In a market-based regime, the commission may be hard pressed to show that it is maintaining an oversight role that is applicable at the time of contract formation. Even with market monitors and a newly invigorated enforcement function, the commission’s detection and remediation of temporal or systemic market flaws or abuse becomes effective only after objectionable circumstances have occurred. There is nothing in FERC’s arsenal of regulatory arms that would allow it to conduct meaningful oversight of contracts executed under the blanket market-based rate authority of a seller. As a result, the FERC’s ability to authorize market-based rates