[Federal Register Volume 67, Number 153 (Thursday, August 8, 2002)]
[Proposed Rules]
[Pages 51516-51519]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-19915]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 2

[Docket No. PL02-7-000]


Standard of Review for Proposed Changes to Market-Based Rate 
Contracts for Wholesale Sales of Electric Energy by Public Utilities

August 1, 2002.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Notice of proposed policy statement.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) is 
proposing to adopt a policy statement to announce a general policy 
regarding the standard of review that must be met to justify proposed 
changes to market-based rate contracts for wholesale sales of electric 
energy by public utilities. The intent of the proposed policy statement 
is to promote the sanctity of contracts, recognize the importance of 
providing certainty and stability in competitive electric energy 
markets, and provide adequate protection of electric energy customers. 
The Commission is inviting comments on the proposed policy statement.

DATES: Comments on the proposed policy statement are due September 23, 
2002.

ADDRESSES: File written comments with the Office of Secretary, Federal 
Energy Regulatory Commission, 888 First Street, NE., Washington, DC 
20426.

FOR FURTHER INFORMATION CONTACT:

Shaheda Sultan,Office of the General Counsel, Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426, Telephone: 
(202) 219-2685.
Jonathan First, Office of the General Counsel, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426, 
Telephone: (202) 208-2142.
    Before Commissioners: Pat Wood III, Chairman; William L. Massey, 
Linda Breathitt, and Nora Mead Brownell.

Proposed Policy Statement

I. Introduction

    1. The Federal Energy Regulatory Commission is proposing to adopt a 
policy statement to announce a general policy regarding the standard of 
review that must be met to justify proposed changes to market-based 
rate contracts for wholesale sales of electric energy by public 
utilities. The specific prices, terms and conditions of service agreed 
to by willing sellers and buyers in such contracts are not required to 
be filed with the Commission when these contracts are entered into 
pursuant to generic market-based rate tariffs already approved by, and 
on file with, the Commission.\1\ Because the generic tariffs are 
authorized only after the Commission has made findings that the sellers 
under such tariffs lack or have mitigated market power, the prices, 
terms and conditions of contracts pursuant to market-based tariffs are 
presumed to fall within a zone of

[[Page 51517]]

reasonableness.\2\ In an electric utility industry increasingly 
dominated by such market-based rate contracts, and in light of recent 
uncertainties in the industry brought about by the market dysfunctions 
in California and the collapse of Enron Corp., the Commission believes 
it is critical to promote the stability of power supply contracts to 
meet future energy needs. One step toward this end is to clarify the 
standards under which such contracts may be modified. Accordingly, the 
purpose of this proposed policy statement is to recognize the sanctity 
of contracts and allow the parties to a market-based power sales 
contract to have greater certainty against contractual changes, by 
clarifying our application of the ``Mobile-Sierra'' doctrine.\3\
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    \1\ See Order No. 2001, Revised Public Utility Filing 
Requirements, III FERC Stats. & Regs., Regulations Preambles para. 
31,127 at 30,135-140 (April 25, 2002), reh'g pending (although 
contracts are not filed, detailed information about each transaction 
is reported to the Commission).
    \2\ See, e.g., State of California v. British Columbia Power 
Exchange Corporation, et al., 99 FERC para. 61,247 (2002), reh'g 
pending (prior review consists of ``analysis to assure that the 
seller lacks or has mitigated market power so that its prices will 
fall within a zone of reasonableness'').
    \3\ United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 
332 (1956); FPC v. Sierra Power Co., 350 U.S. 348 (1956) (Mobile-
Sierra). Under the Mobile-Sierra doctrine, private contracts that 
set firm rates or establish a methodology for setting the rates for 
service, and deny either party the right to unilaterally change 
those rates, can be modified or abrogated by the Commission only if 
required by the public interest. Texaco Inc. v. FERC, 148 F.3d 1091, 
1095 (D.C. Cir. 1998) (Texaco).
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    2. Recently, the Commission received complaints against numerous 
sellers, alleging that certain market-based rate contracts for electric 
energy contain excessive rates and should be reformed.\4\ One of the 
contested issues in these cases was what standard of review to apply in 
determining whether changes are permitted to the contract, i.e., 
whether to apply the ``just and reasonable'' standard of review or the 
``public interest'' standard of review in determining whether to permit 
one of the parties to seek changes to the contract over the objections 
of the other party. In earlier cases, another contested issue was 
whether the Commission is bound by the same standard of review that the 
parties agreed to in the contract, when the Commission acts on the 
complaint of a third party or on its own motion under Section 206 of 
the Federal Power Act (FPA).\5\
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    \4\ See, e.g., Pub. Utilities Comm'n of the State of California, 
et al., v. Sellers of Long-Term Contracts to the California Dep't of 
Water Resources, et al., 99 FERC para.61,087 (2002), reh'g pending; 
Nevada Power Co. and Sierra Pacific Power Co. v. Duke Energy Trading 
and Mktg. L.P., et al., 99 FERC para.61,047 (2002), reh'g pending.
    \5\ 16 U.S.C. 824e.
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    3. The Commission believes that the proposed policy statement would 
serve to limit, as much as possible, such disputes in the future. The 
Commission is proposing precise language that parties would be required 
to include in their electric power sales contracts if they intend that 
the Commission apply the ``public interest'' standard of review to 
their contract. If the parties include in their contract the proposed 
language laid out below, they would be able to bind themselves and, if 
they choose, they would also be able to bind the Commission (acting sua 
sponte or on behalf of a third party) to a public interest standard of 
review. Under the proposed policy, if parties to a market-based power 
sales contract do not include this exact language in their contract, 
however, we would construe the omission as demonstrating the intent of 
the parties to allow a just and reasonable standard of review. In other 
words, the omission of, or any deviation from, the language quoted 
below would result in the use of a just and reasonable standard of 
review.
    4. We note that the Commission is proposing to depart from past 
precedent by agreeing to be bound to a public interest standard of 
review for market-based power sales contracts where both parties to the 
contract agree to bind themselves, and also seek to bind the 
Commission, to this standard.\6\ We propose this in order to promote 
the contract certainty necessary to support competitive wholesale power 
markets. Further, we emphasize that, even under a public interest 
standard of review for these types of contracts, we believe we would 
have adequate authority to protect non-parties to the contract.
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    \6\ Northeast Utilities Service Co. v. FERC, 55 F.3d 686, 692 
(1st Cir. 1995) (Northeast Utilities).
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II. Background

    5. The FPA requires that rates must be just and reasonable and not 
unduly discriminatory or preferential.\7\ The selling public utility 
can propose the rates and the Commission can approve them if it finds 
they meet the just and reasonable standard.\8\ The Commission can also 
on its own motion or on the complaint of a third party investigate 
existing rates, and alter them prospectively, if it finds that such 
rates are no longer just and reasonable.\9\ The FPA also provides that 
contracts between individual parties can be used to set rates.\10\ In 
such contracts, selling utilities may agree to voluntarily restrict 
some or all of their freedom to change the contract rates, customers 
may agree to restrict their right to request the Commission to change 
the rate, and sometimes the parties to the contract may attempt to 
restrict not only themselves but also the Commission from changing the 
contract rate under the ``just and reasonable'' standard. Some courts 
have held that where the utility and the customer have contracted for a 
particular rate and not reserved their rights to propose contractual 
changes, the contract has been filed with the Commission, and the 
Commission has permitted the rate to become effective, the utility 
cannot over the objections of the customer file a new rate (under 
Section 205 of the FPA), and the customer and the Commission cannot 
(under Section 206 of the FPA) propose changing the existing contract 
rate under the ``just and reasonable'' standard of review.\11\ Certain 
courts have instead required the Commission to use the ``public 
interest'' standard to effect a change to the contract rate. Although 
not clearly defined,\12\ the ``public interest'' standard of review has 
been held to be higher or stricter than the ``just and reasonable'' 
standard of review.\13\
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    \7\ 16 U.S.C. 824d.
    \8\ 16 U.S.C. 824d.
    \9\ 16 U.S.C. 824e.
    \10\ See, e.g., 16 U.S.C. 824d(d) and 824e(a).
    \11\ See Boston Edison Co. v. FERC, 233 F.3d 60 (1st Cir. 2000) 
(Boston Edison), citing Mobile-Sierra.
    \12\ Northeast Utilities, 55 F.3d at 690, describing the Mobile-
Sierra standard of review: ``[N]owhere in the Supreme Court opinion 
is the term `public interest' defined. Indeed, the Court seems to 
assume that the Commission decides what circumstances give rise to 
the public interest.''
    \13\ Papago Tribal Utility Authority v. FERC, 723 F.2d 950, 954 
(D.C. Cir. 1983).
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III. Discussion

    6. A great deal of time and expense is incurred and much 
uncertainty is engendered when the parties involved in contract 
disputes and the Commission attempt to resolve the issues of whether 
the parties intended to invoke a public interest standard of review, 
and whether this standard binds only one party, both parties, third 
parties, and/or the Commission. In some cases there is the issue of 
whether the parties intended to include other language in the contract 
that invokes the just and reasonable standard of review for particular 
portions of the contract rate.\14\ More time and resources are

[[Page 51518]]

expended and the uncertainty is prolonged when these cases are appealed 
to the courts, but as acknowledged by at least one court: ``[t]he truth 
is that the cases, even within the D.C. Circuit itself, do not form a 
completely consistent pattern. Compare, e.g., Texaco, 148 F.3d at 1096 
with Union Pac. Fuels, Inc. v. FERC, 327 U.S. App. D.C. 74, 129 F.3d 
157, 161-162 (D.C. Circuit 1997).'' \15\ The Boston Edison court also 
stated that these issues would remain in a state of confusion until the 
Commission ``squarely confronted the underlying issues,'' and if the 
Commission ``wanted to eliminate much of the existing uncertainly 
regarding the parties'' intent, it might prescribe prospectively the 
terms that parties would have to use to invoke Mobile-Sierra 
protection.'' \16\
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    \14\ See, e.g., Texaco; Union Pacific Fuels, Inc. v. FERC, 129 
F.3d 157 (D.C. Cir. 1997) (Union Pacific); Northeast Utilities. 
Section 35.1(d) of the Commission's regulations sought to reduce 
this uncertainty somewhat in the electric area, by specifying 
contractual language to be used by parties in certain circumstances, 
18 CFR 35.1(d) (2002). However, this regulation applies only to 
contracts for the transmission or sale of firm power for resale to 
an all-requirements customer, and addresses the standard of review 
only when a seller proposes contractual changes. If a contract for 
services covered by this regulation contains the language specified 
in section 35.1(d)(3), we will continue to construe this language as 
requiring a public interest standard of review only when a seller 
proposes contractual changes.
    \15\ Boston Edison, 233 F.3d at 67.
    \16\ Id. at 68.
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    7. The Commission is of the opinion that under the circumstances 
existing in today's electric power industry, it is necessary to 
eliminate as much uncertainty as possible and to prospectively 
prescribe the terms that parties must use to invoke a public interest 
standard of review to changes in their market-based power sales 
contracts. Accordingly, the Commission is hereby proposing to adopt a 
general policy to require parties to market-based power sales contracts 
to include specific language in their contract if they intend to invoke 
the public interest standard of review. (The proposed language is set 
forth at the end of this document.) Under the proposal, the Commission 
would apply the ``public interest'' standard of review only if this 
specific language is included in the contract. The parties could choose 
specific language that binds only the parties to the public interest 
standard or language that also binds the Commission when it acts on 
behalf of a non-party or on its own motion. Under the proposed policy, 
it is contemplated that if neither version of the specific language is 
included in the contract, the Commission would apply the ``just and 
reasonable'' standard of review to the contract regardless of whether 
it was to act on behalf of a party, a non-party, or on its own motion.

IV. Comment Procedure

    8. The Commission invites interested persons to submit comments on 
this Notice of Proposed Policy Statement.
    9. Comments may be filed on paper or electronically via the 
Internet and must be received by the Commission on or before September 
23, 2002. The Commission strongly encourages electronic filings. Those 
filing electronically do not need to make a paper filing. For paper 
filings, the original and 14 copies of such comments should be 
submitted to the Office of the Secretary, Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426 and should 
refer to Docket No. PL-0-7-000.
    10. Comments filed via the Internet must be prepared in 
WordPerfect, MS Word, Portable Document Format, or ASCII format. To 
file the document, access the Commission's website at http://www.ferc.gov and click on ``e-Filing,'' and then follow the 
instructions on each screen. First time users will have to establish a 
user name and password. The Commission will send an automatic 
acknowledgment to the sender's e-mail address upon receipt of comments.
    11. User assistance for electronic filing is available at 202-208-
0258 or by e-mail to [email protected]. Comments should not be submitted 
to the e-mail address. All comments will be placed in the Commission's 
public files and will be available for inspection in the Commission's 
Public Reference Room at 888 First Street, NE., Washington DC 20426, 
during regular business hours. Additionally, all comments may be 
viewed, printed, or downloaded remotely via the Internet through FERC's 
Homespage using the RIMS link. User assistance for RIMS is available at 
202-208-2222, or by e-mail to [email protected].

V. Document Availability

    12. In addition to publishing the full text of this document in the 
Federal Register, the Commission also provides all interested persons 
an opportunity to view and/or print the contents of this document via 
the Internet through FERC's Home Page (http://www.ferc.gov/) and in 
FERC's Public Reference Room during normal business hours (8:30 a.m. to 
5:00 p.m. Eastern time) at 888 First Street, NE., Room 2A, Washington, 
DC 20426.
    13. From FERC's Home Page on the Internet, this information is 
available in the Federal Energy Regulatory Records Information System 
(FERRIS). The full text of this document is available on FERRIS in PDF 
and WordPerfect format for viewing, printing, and/or downloading. To 
access this document in FERRIS, type the docket number excluding the 
last three digits of this document in the docket number field.
    14. User assistance is available for FERRIS and the FERC website 
during normal business hours from our Help line at (202) 208-2222 or 
the Public Reference Room at (202) 208-1371 Press 0, TTY (202) 208-
1695. E-mail the Public Reference Room at 
[email protected].

List of Subjects in 18 CFR Part 2

    Administrative practice and procedure; Electric power; Natural gas; 
Pipelines; Reporting and record keeping requirements.

    By direction of the Commission. Commissioners Massey, Brownell, 
and Breathitt concurred with separate statements attached.
Magalie R. Salas,
Secretary.
    The Commission proposes to amend part 2, Chapter I, Title 18 of the 
Code of Federal Regulations as follows:

PART 2--GENERAL POLICY AND INTERPRETATIONS

    1. The authority citation for part 2 continues to read as follows:

    Authority: 5 U.S.C. 601; 15 U.S.C. 717-717w, 3301-3432; 16 
U.S.C. 792-825y, 2601-2645; 42 U.S.C. 4321-4361, 7101-7352.

    2. In part 2, Sec. 2.27 is added to read as follows:


Sec. 2.27  Commission policy on standard of review for proposed changes 
to market-based power sales contracts.

    (a) The Commission, by this policy statement, seeks to clarify the 
standard of review that will apply when reviewing proposed changes to 
market-based power sales contracts executed after [date that is 30 days 
after publication of the Final Rule in the Federal Register].
    (b)(1) Market-based power sales contracts must contain the 
following provision when it is the intent of the contracting parties to 
bind only themselves to a ``public interest'' standard of review for 
that contract:

    Absent the agreement of all parties to the proposed change, the 
standard of review for changes to [sections __ of] this contract 
proposed by a party to the contract shall be the ``public interest'' 
standard of review set forth in United Gas Pipe Line Co. v. Mobile 
Gas Service Corp., 350 U.S. 332 (1956) and Federal Power Commission 
v. Sierra Pacific Power Co., 350 U.S. 348 (1956) (the ``Mobile-
Sierra'' doctrine).

    (2) Market-based power sales contracts must contain the following 
provision when it is the intent of the contracting parties to bind 
themselves and the Commission (acting on behalf of a non-party or on 
its own motion) to a ``public interest'' standard of review for that 
contract:

    Absent the agreement of all parties to the proposed change, the 
standard of review for

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changes to [sections __ of] this contract proposed by a party, a 
non-party or the Federal Energy Regulatory Commission acting sua 
sponte shall be the ``public interest'' standard of review set forth 
in United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 
332 (1956) and Federal Power Commission v. Sierra Pacific Power Co., 
350 U.S. 348 (1956) (the ``Mobile-Sierra'' doctrine).

    (c) Any market-based power sales contract that does not contain 
either of the provisions in paragraph (b) of this section will be 
construed by the Commission as allowing a ``just and reasonable'' 
standard of review for any proposed changes to the contract.

    Note: The following concurring commissioners' statements will 
not appear in the Code of Federal Regulations.

    MASSEY, Commissioner, concurring:
    I support this order's objective of clarifying standards under 
which contracts may be modified and allowing parties to market-based 
power sales contracts greater certainty in the application of the 
Mobile-Sierra doctrine. Nevertheless, I write separately because I 
believe the Proposed Policy Statement would have been stronger if it 
had recognized explicitly the potential use of market power to extract 
an agreement to a Mobile-Sierra clause in a contract. As recognized by 
the DC Circuit Court of Appeals in Atlantic City Electric Company:\1\
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    \1\ Atlantic City Electric Company v. FERC, Docket No. 97-1097 
(issued July 12, 2002), mimeo at 20.

    As we have held, the purpose of the Mobile-Sierra doctrine is to 
preserve the benefits of the parties' bargain as reflected in the 
contract, assuming there was no reason to question what transpired 
at the contract formation stage. (Citing Town of Norwood v. FERC 
\2\)
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    \2\ 587 F.2d 1306, 1312 (D.C. Cir. 1978).


The Mobile-Sierra doctrine assumes that contracts are entered into 
voluntarily. Thus, a seller may not dictate, through the exercise of 
market power, the standard of review specified in a contract. I believe 
the Proposed Policy Statement should have explicitly addressed this 
concern. If a party to a contract would not have agreed to the 
insertion of the Mobile-Sierra clause absent the exercise of market 
power, then the Commission should allow that party to advocate the use 
of the just and reasonable standard.
    With these thoughts in mind, I concur with today's order.

William L. Massey,
Commissioner.
    BROWNELL, Commissioner, and BREATHITT, Commissioner, concurring:
    1. We are voting in favor of this proposal for two reasons. First, 
we support providing the market with greater certainty concerning the 
Commission's review of market-based rate contracts. Second, we support 
changing the Commission's existing policy of not applying the Mobile-
Sierra public interest standard when modifying market-based rate 
contracts on its own motion. However, we wonder if the proposal has 
gotten things backward on when the public interest standard is 
triggered.
    2. Under the proposed policy, the Commission will not apply the 
Mobile-Sierra public interest standard when reviewing proposed changes 
to a market-based rate contract (regardless of whether the changes are 
sought by the seller, the buyer, a third party, or the Commission 
itself) unless explicit language dictating that standard is included in 
the contract. We would have preferred to propose a policy of applying 
the public interest standard unless there is explicit language in the 
contract that invites the Commission to apply a lower standard.
    3. Competitive markets rely on investors to provide the capital 
needed to build generation. Investors will not participate in a market 
in which disgruntled buyers are allowed to break their contracts, at 
least not without charging a significant risk premium--a cost that will 
ultimately be borne by consumers. Therefore, as a policy matter, we 
think it might be preferable to hold everyone to the same high standard 
when seeking changes to market-based rate contracts, absent contract 
language indicating that the parties to the contract have agreed to a 
lower standard.
    4. Moreover, we see nothing in the Mobile-Sierra case law that bars 
the Commission from adopting such a policy. Faced with balancing the 
sanctity of contracts against the Commission's statutory duty to review 
the justness and reasonableness of rates, the Supreme Court in Mobile, 
Sierra, and subsequent cases has ruled that, absent contractual 
language to the contrary, the Commission may not approve a seller's 
unilateral contract modification under Sec. 205 of the Federal Power 
Act unless the modification is necessary for the public interest.\1\ 
The case law on when the public interest standard applies in a Sec. 206 
proceeding, be it brought by the buyer, a third party, or by the 
Commission acting sua sponte, is much less clear. However, at least two 
courts have applied the public interest standard in Sec. 206 
proceedings notwithstanding the absence of contractual language 
specifying that standard.\2\
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    \1\ See United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 
U.S. 332 (1956); FPC v. Sierra Pacific Power, 350 U.S. 348 (1956); 
and United Gas Pipeline Co. v. Memphis Light, Gas and Water Div., 
358 U.S. 103 (1958).
    \2\ See Texaco Inc. v. FERC, 148 F.3d 1091, 1096 (D.C. Cir. 
1998) (stating that prior decisions ``did not suggest that the 
parties' failure to explicitly foreclose the Commission's authority 
to replace rates [under Sec. 206] would leave it intact. The law is 
quite clear: absent contractual language susceptible to the 
construction that the rate may be altered while the contract 
subsists, the Mobile-Sierra doctrine applies.''); Boston Edison Co. 
v. FERC, 233 F.3d 60, 67 (1st Cir. 2000) (``[T]he specification of a 
rate or formula by itself implicates Mobile-Sierra (unless the 
parties negate the implication).'').
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    5. Therefore, we urge interested parties to comment on whether, as 
both a legal and a policy matter, the ``default'' in the policy 
statement should be reversed.

Nora Mead Brownell.
Linda Key Breathitt.
[FR Doc. 02-19915 Filed 8-7-02; 8:45 am]
BILLING CODE 6717-01-P