Public Utility District No. 1 of Snohomish County v. FERC and the Mobile-Sierra Doctrine

FERC’s Authority to Amend Rate Agreements:
The Snohomish County Decision
Updated October 8, 2008
Adam Vann
Legislative Attorney
American Law Division

FERC’s Authority to Amend Rate Agreements:
The Snohomish County Decision
Summary
In June of 2008, the U.S. Supreme Court issued a decision that has important
implications for the authority of the Federal Energy Regulatory Commission (FERC)
to review wholesale electricity and natural gas contracts under what is known as the
“Mobile-Sierra Doctrine.” The Doctrine mandates that FERC will not abrogate
contracts (including wholesale natural gas and power contracts as well as
transmission agreements) between private parties absent a showing that a change is
necessary in the public interest. This report reviews the Mobile-Sierra Doctrine and
discusses a recent Supreme Court decision that evaluated the Doctrine and FERC’s
review role as set forth in the Federal Power Act in the context of market-based rates.

Contents
Background ..................................................1
What is the Mobile-Sierra Doctrine?...............................2
Evolution of the Mobile-Sierra Doctrine............................2
The Doctrine in the Market-Based Rate Environment:
FERC and Circuit Court Decisions
in the Snohomish Matter....................................4
Reining in FERC’s Application of the Doctrine:
The Supreme Court Decision
in Snohomish.............................................6

FERC’s Authority to Amend Rate Agreements:
The Snohomish County Decision
Background
In June of 2008, the Supreme Court issued its decision in Morgan Stanley¹
Capital Group, Inc. v. Public Utility District No. 1 of Snohomish County. In this
decision, the Court evaluated the authority of the Federal Energy Regulatory
Commission (FERC) to amend wholesale electricity agreements pursuant to the
Mobile-Sierra Doctrine. The decision has wide-reaching implications for FERC’s
authority under the Federal Power Act (FPA), and, by extension, its authority under
the Natural Gas Act (NGA). These two statutes form the basis of FERC’s regulatory
authority.
The federal government regulates wholesale sales of electricity and transmission
of electricity and natural gas under the FPA and the NGA. These two statutes charge²
FERC with a number of oversight responsibilities. One of these responsibilities is
the review of contracts between electricity and natural gas companies and their
wholesale or interstate customers in order to confirm that the rates charged by these
electricity and natural gas companies for power and gas are “just and reasonable.”³
For many years, FERC evaluated these contracts in an environment of “cost-
based” rates; that is, rate approval was based on the actual cost of service, which
includes costs associated with generating or purchasing the electricity or natural gas
on the wholesale market as well as transportation and other costs, plus a rate of
return. Thus, a FERC review of contracts was conducted with an eye toward ensuring
that the wholesale customers were paying just and reasonable rates based on the costs
incurred by the seller. However, in recent years some regulatory authorities have
experimented with “market-based” rates for electricity, in which pricing is
determined not by actual cost of service, but by market forces. This shift was initiated⁴
by passage of the Energy Policy Act of 1992, which created the basic framework for
a competitive wholesale electricity market. This has altered FERC’s regulatory role
to some degree. Some have wondered how certain fundamental doctrines of FERC

¹ 128 S. Ct. 2733 (2008).
² The Federal Power Commission (FPC) was the predecessor to FERC and was responsible
for administration of the FPA and NGA, a responsibility that now is FERC’s. For purposes
of clarity and continuity, this Report will refer to actions of both the FPC and FERC as
FERC activity.
³ NGA, 15 U.S.C. §§ 717c and 717d, FPA, 16 U.S.C. § 824d. Regulation of electricity and
natural gas sales at the retail level are handled by the state public utility commissions.
⁴ P.L. 102-486.

rate review would apply in the context of market-based rates. One such FERC
doctrine is the Mobile-Sierra Doctrine.
What is the Mobile-Sierra Doctrine?
The Mobile-Sierra Doctrine has been a foundation of FERC regulatory behavior
since the Supreme Court decisions were handed down in 1956. The Doctrine
articulates the extent of FERC’s authority to amend rate agreements. In two
concurrent decisions issued in 1956, the U.S. Supreme Court interpreted FERC’s
authority under the FPA and the NGA with respect to contracts, and limited FERC’s
authority in situations where the parties seek to reform contracts that FERC had
previously approved. In these cases, United Gas Pipe Line Co. v. Mobile Gas Serv.
Corp.⁵ and FPC v. Sierra Pacific Power Co.,⁶ the Court held that an electricity or
natural gas contract, once approved by FERC, cannot be changed pursuant to a
unilateral request of one of the parties absent a showing that such a change is in the
public interest. This rule has become known as the Mobile-Sierra Doctrine.
Under both the FPA and the NGA, FERC has substantial authority to amend
the terms of an agreement prior to its becoming effective, and may amend it to ensure
that the rates charged are “just and reasonable.” However, once FERC has approved
a rate agreement, a presumption of validity (sometimes called the Mobile-Sierra
presumption) is created, and the agreement cannot be amended absent a showing that
the change is in the public interest. Thus, the Supreme Court stated that a rate for
electric power that had become unprofitable since formation of a long-term
agreement could not be changed unless the utility could show that the rate was “so
low as to adversely affect the public interest — as where it might impair the financial
ability of the public utility to continue its service, cast upon other consumers an
excessive burden, or be unduly discriminatory.”⁷ This has become the FERC standard
for determining whether a rate is in the public interest.
Evolution of the Mobile-Sierra Doctrine
The Mobile-Sierra Doctrine was strictly enforced for many years after it was⁸
first articulated by the Court. In the early 1980s, the courts began to articulate the
Doctrine in a way that gave FERC more leeway to make changes to approved
contracts. A series of decisions found that in certain situations, FERC has authority

⁵ 350 U.S. 332 (1956).
⁶ 350 U.S. 348 (1956).
⁷ Sierra, 350 U.S. at 355.
⁸ See, e.g., Richmond Power & Light v. FPC, 481 F.2d 490 (D.C. Cir. 1973) (holding that
the Doctrine is applicable to contracts on file with state regulatory agencies that tied the
utility’s wholesale rate to the retail industrial rate, thus expanding the Doctrine beyond
“fixed” rates to cases where the rates are subject to change in a certain manner); Papago
Tribal Util. Auth. v. FERC, 610 F.2d 1979 (D.C. Cir. 1979) (Papago I) (holding that the
Doctrine was applicable to contracts that allow the utility to seek rate increases pursuant to
section 205 of the FPA).

to amend a rate agreement upon a showing that amendment is needed in order to
ensure “just and reasonable” rates.
In Papago Tribal Util. Auth. v. FERC (Papago II),⁹ the U.S. Court of Appeals
for the District of Columbia Circuit considered a utility’s petition to adjust rates
pursuant to Section 206 of the FPA, which authorizes FERC to correct rates on its
own motion or upon complaint whenever it finds them to be “unjust, unreasonable,
unduly discriminatory or preferential.”¹⁰ This authority differs from Section 205 of
the FPA and its accompanying regulations, which require utilities to charge just and
reasonable rates and authorizes utilities unilaterally to file for changes in such rate
schedules as necessitated by changes in costs.¹¹ In Papago I, the court had held that
the rate contract in question had contractually eliminated the utilities’ option to
petition FERC for rate changes pursuant to Section 205, and thus, pursuant to the
Mobile-Sierra Doctrine, the rate could not be altered absent a showing that such a
change was in the public interest. However, the utility subsequently filed a Section
206 complaint. The court held that although the Mobile-Sierra Doctrine barred
Section 205 changes to the negotiated rates absent a showing that such a change was
in the public interest, it did not, in this instance, bar a Section 206 challenge to the
rate agreement.¹² Therefore, FERC could properly evaluate a proposed rate change
under the less stringent “just and reasonable” standard rather than the “public
interest” standard of the Mobile-Sierra Doctrine. The court noted that “[t]he public-
interest standard is practically insurmountable; [FERC] itself is unaware of any case
granting relief under it,”¹³ and thus the “just and reasonable” test provided a less
restrictive standard.
Similarly, a second decision issued by the U.S. Court of Appeals for the District
of Columbia Circuit on the same day as Papago II also held that the Mobile-Sierra
Doctrine was inapplicable to another type of rate dispute. In Kansas Cities v. FERC,¹⁴
the court held that, under certain circumstances, rate contracts containing “regulatory
approval clauses,” or RACs, could be amended by FERC under the “just and
reasonable” standard rather than the stricter “public interest” standard applied under
the Mobile-Sierra Doctrine. RACs come in a variety of types, but they generally
provide that the rates in the contracts are subject to regulatory approval. Although the
Mobile-Sierra Doctrine had previously been held applicable to such contracts, in this
case the court found that the rates could be reviewed under the less stringent “just and

⁹ 723 F.2d 950, 954 (D.C. Cir. 1983).
¹⁰ 16 U.S.C. § 824e. The act does not further define “unjust, unreasonable, unduly
discriminatory or preferential.”
¹¹ The Sierra decision was based on an appeal of a FERC determination under Section 205
of the FPA.
¹² Papago II, 723 F.2d at 954.
¹³ Id.
¹⁴ 723 F.2d 82 (D.C. Cir. 1983).

reasonable” standard.¹⁵ However, the court seemed to take care to narrow the scope
of its ruling, noting that it applied only to the fact pattern presented in the case.¹⁶
Subsequently, a series of decisions related to Northeast Utilities Service
Company in the early 1990s suggested further erosion of the once strict application
of the Mobile-Sierra Doctrine. The contract at issue in this dispute explicitly
incorporated the Doctrine by stating that the rate could not be changed unless FERC
found that the rate was contrary to the public interest. Nevertheless, FERC initially
applied the “just and reasonable” standard in disapproving one aspect of the rate
filing.¹⁷ The U.S. Court of Appeals for the First Circuit rejected this holding, finding
that FERC should have applied the Mobile-Sierra “public interest” standard as
dictated by the contract.¹⁸ On remand, FERC applied the Mobile-Sierra Doctrine as
directed by the court, but stated that “the ‘public interest’ standard of review under
the Mobile-Sierra Doctrine could not be ‘practically insurmountable,’” and that “a
more flexible standard is therefore appropriate.”¹⁹ Pursuant to this line of reasoning,
FERC revised the contracts “in the public interest,” setting forth a long list of
relevant factors to be considered in determining whether a contract reformation was
“in the public interest,” including whether the contract had previously been reviewed
by the Commission and made public, whether the contract truly reflects the intent of
the parties, and what impacts the contract might have on third parties.²⁰ The United
States Court of Appeals for the First Circuit upheld FERC’s broad interpretation of
the Mobile-Sierra “public interest” standard in this instance, noting, as FERC did, the
importance of protecting third parties.²¹
The Doctrine in the Market-Based Rate Environment:
FERC and Circuit Court Decisions in the Snohomish Matter
As described above, FERC’s application of the Mobile-Sierra Doctrine has
evolved and some commentators might suggest that the Doctrine has become a less
significant hurdle to FERC review/amendment of rate agreements in recent years. An
interesting twist on the application of the Doctrine came about with the introduction
of market-based wholesale rates in the late 1990s. Traditionally, utilities had charged
“cost-based” rates, in which customers paid rates that corresponded roughly to the
charges incurred by the utilities in providing services. The Mobile-Sierra Doctrine
was generally applied to disputes over contracts for long-term wholesale power
service where a change had occurred since the signing of the agreement, for example,
if costs had shifted dramatically since the parties signed the agreement. However, in
the late 1990s FERC started to permit utilities to charge market-based rates to

¹⁵ Id. at 96.
¹⁶ Id. at 88, 90.
¹⁷ Northeast Util. Serv. Co., 53 F.E.R.C. ¶ 63,020 (1990).
¹⁸ Northeast Util. Serv. Co. v. F.E.R.C., 993 F.2d 937, 962 (1^st Cir. 1993).
¹⁹ Northeast Util. Serv. Co., 66 FERC ¶ 61,332 at 62,076 (1994).
²⁰ Id. at 62,087-88.
²¹ Northeast Util. Serv. Co. v. FERC, 55 F.3d 686, 691 (1^st Cir. 1994).

customers upon a showing of a sufficiently competitive market to ensure that the
utility could not abuse its market position. A utility charging market-based rates
would charge the rate that the market would bear, rather than the traditional cost-
based rate.
The applicability of the Mobile-Sierra Doctrine to contractual rate agreements
in the context of a market-based rate environment was put to the test in a series of
decisions involving several power purchase contracts. These agreements were formed
in the wake of a severe spike in electricity prices on the spot market in California in
late 2000 and early 2001.²² In response to this extraordinary price shift, a number of
utilities and other wholesale power customers (including Snohomish County) made
long-term power purchase deals to afford them rate stability. In each case, the
wholesale customers paid prices for electricity that were well in excess of the prices
available elsewhere during the terms of their deals, and they were unable to convince
state regulatory agencies to allow them to recoup their losses at the retail level.
These wholesale customers petitioned FERC to change their contract price terms
pursuant to Section 206 of the FPA. The customers felt that the contracts should not
be presumed to be just and reasonable under the Mobile-Sierra Doctrine because they
had not been initially approved by the Commission upon formation. The customers
also argued that they were entitled to contract modification because the high prices
in the contract were a product of extraordinary circumstances that they could not have
predicted, caused at least in part by collusion and market manipulation, and were not
in the public interest.
FERC rejected the wholesale customers’ argument and found that the contracts
formed in a FERC-authorized market-based rate environment were entitled to a
presumption of validity under the Mobile-Sierra Doctrine, even if the individual
contracts were not reviewed prior to formation.²³ FERC also rejected the customers’
claim that the contracts should be amended under the Mobile-Sierra Doctrine
because the rates were so high that they violated the public interest, noting that “[t]he
fact that a contract becomes uneconomic over time does not render it contrary to the
public interest.”²⁴
The wholesale customers appealed FERC’s decision to the U.S. Court of
Appeals for the Ninth Circuit. In its decision on this matter, the court seemed to
tread new ground in the application of the Mobile-Sierra Doctrine. The court found
that “[w]hile there is language in some cases suggesting otherwise, we are convinced
that Mobile-Sierra establishes one means of review under the just and reasonable

²² This price spike was associated with the highly publicized California electricity crisis.
²³ Nevada Power Co. and Sierra Pacific Power Co. v. Enron Power Marketing, Order on
Initial Decision, 103 FERC ¶ 61,353 (2003). This decision affirmed the findings of a FERC
Administrative Law Judge. 101 FERC ¶ 63,031 (2002). FERC later affirmed its decision
in an Order on Request for Rehearing and Clarification. 105 FERC ¶ 61,980 (2003).
²⁴ Id. at 62,384 (2003). This decision affirmed the findings of a FERC Administrative Law
Judge. 101 FERC ¶ 63,031 (2002). FERC later affirmed its decision in an Order on Request
for Rehearing and Clarification. 105 FERC ¶ 61,980 (2003).

standard, applicable in certain limited circumstances.”²⁵ The court found that rather
than establishing a stricter “public interest” standard for review of certain contracts,
the Mobile-Sierra Doctrine simply establishes that “consideration as to what is
‘unjust’ or ‘unreasonable’ differ in the context of an established bilateral contract, not
that the statutory standards no longer govern.”²⁶ In a market-based rate environment,
the court stated that contracts are presumptively reasonable only if FERC has had an
initial opportunity to review them promptly after they are formed.²⁷ The court also
held that when a power purchaser challenges a contract that is entitled to a
presumption of reasonableness under the Mobile-Sierra Doctrine, FERC should
review the contract to determine whether the rate exceeds what the court called the
“zone of reasonableness.”²⁸ Based on these findings, the court held that the
requirements for application of the Mobile-Sierra Doctrine presumption of
contractual validity were not in place when the contracts in question were formed,
and that FERC therefore was in error in applying this presumption in its review of
these contracts. The Ninth Circuit remanded its decision to FERC for evaluation of
the agreements in accordance with its ruling.
Reining in FERC’s Application of the Doctrine:
The Supreme Court Decision in Snohomish
The sellers petitioned the Supreme Court to review the Ninth Circuit’s decision.
The Court granted certiorari, heard arguments on February 19, 2008, and issued its
decision on June 26, 2008. The Court upheld the Ninth Circuit’s remand of the
contracts to FERC for further review, but disagreed with the lower court’s rationale
and its application of the Mobile-Sierra Doctrine.
The Court agreed with the Ninth Circuit that the only standard that should guide
FERC review of contracts is to ensure that they are “just and reasonable,” as required
by the FPA.²⁹ However, the Court disagreed with the Ninth Circuit’s statement that
the Mobile-Sierra Doctrine requires FERC to review contracts upon their formation
to determine whether they are “just and reasonable.” Instead, the Court found that the
Doctrine:
was grounded in the commonsense notion that “[i]n wholesale markets, the party
charging the rate and the party charged [are] often sophisticated businesses
enjoying presumptively equal bargaining power, who could be expected to
negotiate a ‘just and reasonable’ rate as between the two of them.” Therefore,

²⁵ Snohomish, 471 F.3d at 1074 (citations omitted).
²⁶ Id. at 1075.
²⁷ Id. at 1079-85.
²⁸ Id. at 1088-90.
²⁹ Morgan Stanley Capital Group, Inc. v. Public Utility District No. 1 of Snohomish County,

128 S. Ct. 2733 (2008).

only when the mutually agreed-upon contract rate seriously harms the consuming³⁰
public may the Commission declare it not to be just and reasonable.
The Court further stated that FERC did not need to address the possibility of a
“dysfunctional” market before it granted a Mobile-Sierra presumption of justness and³¹
reasonableness to a market-based rate contract. The Court noted that market
imperfection is one of the reasons that parties enter into long-term contracts, and
therefore it would be a “perverse rule” if it were more difficult to enforce long-term
contracts formed in volatile markets.³²
The Court also took issue with the Ninth Circuit’s assertion that FERC should
employ a “zone of reasonableness” test to evaluate a buyer’s claim that a contract rate
is not just and reasonable, characterizing it as “overarching.”³³ The Court stated that
there should not be a distinction between power contract challenges brought by
buyers and those brought by sellers. In both cases, the Court held, the proper test is³⁴
whether the contract rate in question “seriously harms the public interest.” The
Court stated:
A presumption of validity that disappears when the rate is above a marginal rate
is not presumption of validity at all, but a reinstitution of cost-based rather than
contract-based regulation. We have said that, under the Mobile-Sierra
presumption, setting aside a contract rate requires a finding of “unequivocal
public necessity,” or “extraordinary circumstances.” In no way can these³⁵
descriptions be thought to refer to the mere exceeding of marginal cost.
Despite these rejections of the Ninth Circuit’s reasoning, the Court agreed with
the Ninth Circuit’s decision to remand the decision to FERC. The Court was critical
of FERC’s analysis of the customer’s petition to amend the rates. The Court noted
that FERC appeared to have looked solely at the rates paid by consumers
immediately after the contracts in question went into effect, instead of determining
whether consumers bore an excessive burden at any later point.³⁶ The Court was
critical of FERC in this respect, noting that “[t]he ‘unequivocal public necessity’ that
justifies overriding the Mobile-Sierra presumption does not disappear as a factor
once the contract enters into force.”³⁷
The Court thus set forth what could be considered a stricter standard that must
be met before FERC will adjust rates, noting that contracts should not be adjusted or
set aside absent “unequivocal public necessity” or “extraordinary circumstances.”

³⁰ Id. at 2746 (quoting Verizon Communications, Inc. v. F.E.R.C., 535 U.S. 467, 479 (2002).
³¹ Id.
³² Id.
³³ Id. at 2748.
³⁴ Id. at 2737.
³⁵ Id. at 2748-49.
³⁶ Id. at 2749-50.
³⁷ Id. at 2750.

The Ninth Circuit’s “zone of reasonableness” test could have been interpreted as
greatly extending FERC’s authority to adjust rate contracts pursuant to the Mobile-
Sierra Doctrine. The Court’s decision appears to rein in any such extension of
authority.
The Court also took issue with FERC’s dismissal of the relevance of its own
findings that some of the power sellers in question had engaged in market
manipulation. The buyers had argued that their contracts were entered into as a way
to hedge against high prices on the open market, and that these high prices were the
result of market manipulation. FERC had dismissed this argument despite a FERC
Staff Report that had concluded that abnormally high open market prices during the
relevant time frame had influenced the terms of power purchase contracts. The Court
found that, given the conclusion of the Staff Report, FERC had erred in presuming
the contracts were “just and reasonable.”
As of the date of this report, FERC has not taken further action on this matter.