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The Mobile-Sierra Doctrine, Part Deux

A new twist on an old doctrine.

Fortnightly Magazine - March 2007

As the court put it, “taken together, the satisfaction of these three conditions justifies a presumption that parties have negotiated a contract that is just and reasonable between them and therefore triggers the Mobile-Sierra public-interest mode of review.” 15

The first condition reflects settled law that, absent contractual authority, a party to a jurisdictional contract cannot file to collect higher rates unless it can show that the abrogation of its contract is in the public interest. 16 The second condition carries forward the Ninth Circuit’s holding in Lockyer17 that a market-based rate regime must include some provision by which the commission considers whether market-based rates are just and reasonable, i.e., that the assumptions upon which market-rate authority was granted were obtained when the contract was executed. The third condition is cut from whole cloth and requires the commission to examine whether anomalies were extant at the time of contract formation, which call into question whether the rates and terms of the contract reflect the outcome of a workably competitive market.

In the case at bar, the court found that none of the contested contracts authorized unilateral action, and thus held that its first Mobile-Sierra precondition was satisfied. As to the second condition, the court stated that “although market-based rate authority can qualify as sufficient prior review to justify limited Mobile-Sierra review, it can do so only when accompanied by effective oversight permitting timely reconsideration of market-based authorization if market conditions change.” 18

In the instant case, as with Lockyer before it, the court found that the commission failed to adopt any monitoring mechanism before applying the deferential Mobile-Sierra review to the challenged contracts. Rather, the commission accepted the grant of market-based rate authority as conclusive proof that the terms of subsequently negotiated contracts were just and reasonable without any inquiry into the actual state of the market at the time contracts were negotiated. According to the court, “by layering Mobile-Sierra review on top of a market-based rate authority that can be revoked only prospectively ... FERC abdicates its statutory responsibility to provide such rate revision when appropriate.” 19 The court found that the “fatal flaw in FERC’s approach to ‘oversight’[was] that it preclude[d] timely consideration of sudden market changes and offer[ed] no protection to purchasers victimized by the abuses of sellers or dysfunctional market conditions that FERC itself only notices in hindsight.” 20 Therefore, the second prerequisite to the application of the Mobile-Sierra doctrine was unfulfilled in this case.

As to the third condition, the court held that FERC must establish that the challenged contract initially was formed free from the influence of improper factors, such as market manipulation, the leverage of market power, or an otherwise dysfunctional market. In the challenged orders, the commission acknowledged a report by its own staff finding that the flaws in the spot market artificially influenced rates in the forward markets, but found such evidence to be irrelevant to its Mobile-Sierra analysis. The court held that the FERC’s application of the Mobile-Sierra doctrine without considering contract formation issues was in error.

The Ninth Circuit