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The Mobile-Sierra Doctrine: A Return to Its Statutory Roots

The 9th Circuit’s Snohomish and PUC decisions rationalize what has been a confusing, conflicted area of law.

Fortnightly Magazine - May 2007

to seek changes to unjust and unreasonable contracts seems premised on traditional buyer/seller paradigms and a fear that remorseful buyers will use non-parties as proxies to end-run  Mobile-Sierra restrictions on their own ability to seek to modify their agreements. However, non-parties frequently are affected, sometimes profoundly, by FERC-jurisdictional contracts, and their interests are not necessarily represented by the contracting parties. For example, in some regions, RTOs negotiate RMR agreements with generators that are needed for reliability but the RTO does not pay the resulting bills and has little incentive to minimize costs. 21

Indeed, in many cases, the contracting parties’ interests are not unaligned merely with those of the ultimate consumers but are actively opposed to them. For example, public utilities’ buying power or other services from affiliated entities may have incentives to maximize the costs they incur and pass through to other parties. Yet agreements among affiliated entities are among the most likely to restrict unilateral contract modification by parties and non-parties, because the contracting parties can be confident that their own interests are aligned and that they will be able to agree among themselves on any changes that are in their interests.

In construing and applying the  Mobile-Sierra doctrine, the commission must not turn a blind eye to the nature of the contracts at issue or the circumstances under which they were entered. Nor is the 9th Circuit alone in suggesting that the commission is required to do so. Although Teichler and Levitine accuse the 9th Circuit of “discover[ing] new prerequisites to the initial application of the Mobile-Sierra doctrine” and cutting new conditions “from whole cloth,” courts routinely emphasize that Mobile-Sierra depends on validly formed agreements that were just and reasonable when they were entered.

As the D.C. Circuit explained, “The purpose of the  Mobile-Sierra doctrine is to preserve the benefits of the parties’ bargain as reflected in the contract, assuming that there was no reason to question what transpired at the contract formation stage .”22 To put it bluntly, a doctrine so frequently associated with notions of sanctity of contract cannot sanctify contracts that are products of fraud, abuse, undue discrimination, or the exercise of market power. Almost 25 years before Atlantic City , the D.C. Circuit drew the salient distinction: “When there is no reason to question what occurred at the contract formation stage, the parties may be required to live with their bargains as time passes and various projections about the future are proved correct or incorrect. 23 However, where “allegations … go to the fairness and good faith of the parties at the contract formation stage,”  Mobile-Sierra does not “permit a utility to use a fixed-rate contract as a device to render unassailable” otherwise prohibited conduct. Id. at 1313.

Teichler and Levitine accept as “settled law” the 9th Circuit’s first prerequisite for application of a  Mobile-Sierra presumption: The contract must not preclude such a presumption. However, they ignore the reason for that prerequisite. “ Mobile-Sierra presumes that private parties have negotiated an agreement that they view as just and reasonable over the time period covered.”