Commissioner James Danly Statement
September 14, 2020
Docket Nos. ER20-2441-000, ER20-2442-000, EL20-68-000
I support the holdings in the Commission’s order in this case, except for the Commission’s decision to set for hearing the question of whether the Mobile-Sierra presumption[1] should attach to Rate Schedules No. 1 through No. 19 (Wholesale Power Contracts). My disagreement with that decision stems from my general disagreement as to the analysis applied by the Commission in considering whether and when the Mobile-Sierra presumption should apply.
The Commission’s order describes its analysis of this question as follows:
The Mobile-Sierra “public interest” presumption applies only if an agreement has certain characteristics that justify the presumption. In ruling on whether the characteristics necessary to justify a Mobile-Sierra presumption are present, the Commission must determine whether the agreement at issue embodies either: (1) individualized rates, terms, or conditions that apply only to sophisticated parties who negotiated them freely at arm’s-length; or (2) rates, terms, or conditions that are generally applicable or that arose in circumstances that do not provide the assurance of justness and reasonableness associated with arm’s-length negotiations. Unlike the latter, the former constitute contract rates, terms, or conditions that necessarily qualify for a Mobile-Sierra presumption.[2]
I concede that this analysis follows Commission precedent issued over a number of years. However, the approach taken in this precedent is not supported by the court cases addressing Mobile-Sierra. Further, this approach is inconsistent with the basis for the Supreme Court’s holdings establishing the Mobile-Sierra doctrine.
As an initial matter, the Commission provides no citation to a court decision for the proposition that the Mobile-Sierra public interest presumption applies only if an agreement has certain characteristics that justify the presumption. Nor am I aware of any case so holding. Presumably, it is intended to flow from the Supreme Court’s statement in Morgan Stanley,[3] and quoted in NRG,[4] that “[u]nder the Mobile-Sierra doctrine, the Federal Energy Regulatory Commission (FERC or Commission) must presume that the rate set out in a freely negotiated wholesale-energy contract meets the ‘just and reasonable’ requirement imposed by law.”[5]
I accept, as a general principle, that it might be appropriate to impose a requirement that contracts be freely negotiated in order to be entitled to the Mobile-Sierra presumption. But I cannot accept the Commission’s apparent reliance on the “freely negotiated” language in Morgan Stanley and NRG to hold that the presumption applies only to contracts with individualized rates, terms, or conditions, and not to contracts with standard rates, terms, or conditions entered into with multiple counterparties. I find no support for such a conclusion in any court decision.[6] And it is in making this distinction that I think the Commission has violated the basic purpose of the Mobile-Sierra doctrine.
In Morgan Stanley, the Court reversed the Ninth Circuit’s holding that the Mobile-Sierra presumption does not apply to market-based rate contracts not initially approved by the Commission. In so doing, the Court explained the important public policy benefits of this doctrine:
The Ninth Circuit's standard would give short shrift to the important role of contracts in the FPA, as reflected in our decision in Sierra, and would threaten to inject more volatility into the electricity market by undermining a key source of stability. The FPA recognizes that contract stability ultimately benefits consumers, even if short-term rates for a subset of the public might be high by historical standards—which is why it permits rates to be set by contract and not just by tariff. As the Commission has recently put it, its “first and foremost duty is to protect consumers from unjust and unreasonable rates; however, ... uncertainties regarding rate stability and contract sanctity can have a chilling effect on investments and a seller’s willingness to enter into long-term contracts and this, in turn, can harm customers in the long run.”[7]
Similarly, in NRG, the Court referenced “the essential role of contracts as a key factor fostering stability in the electricity market, to the long-run benefit of consumers.”[8]
These benefits are provided by all contracts, not only by contracts with individualized rates, terms, or conditions. One can easily understand why sellers of power would prefer to use standardized form contracts. And one can also understand why purchasers would freely agree to such contracts if the price and the standard contract terms are reasonable. I see no justification for depriving a seller of the protections of contract sanctity simply for using form contracts. The Commission’s glosses on Mobile-Sierra have inevitable consequences: to chill investments and to reduce utilities’ willingness to enter into further contracts.
To be sure, as the Supreme Court held in Morgan Stanley, we have “ample authority to set aside a contract where there is unfair dealing at the contract formation stage—for instance, if [we] find[] traditional grounds for the abrogation of the contract such as fraud or duress.”[9] But unfair dealing at contract formation should be the sole inquiry in determining whether the presumption applies—not whether a contract has standard terms and conditions.
As explained in the Commission’s order, Basin’s counterparties under the Wholesale Power Contracts almost uniformly: (1) agree that “without a doubt” the Wholesale Power Contracts were freely negotiated;[10] (2) stress “the important role their wholesale power contracts play in securing a long-term source of power for the member and allowing the cooperative access to capital,”[11] and (3) assert that “application of the public interest standard is particularly appropriate here, given, the direct involvement and supervision of Basin’s Members in formulating and annually reviewing the rates under the Wholesale Power Contracts.”[12] Only one counterparty—Tri-State Generation and Transmission Association, Inc. (Tri-State)—asserts that the negotiation of its contract “was . . . not accomplished on an even playing field.”[13] But Tri-State is a large, sophisticated entity, and merely claiming an uneven playing field does not amount to a showing of the fraud or duress that would impair contract formation.
Given the near universal support for the Wholesale Power Contracts other than Tri-State’s generalized complaint about bargaining positions, there is no credible claim of infirmity in the formation of the Wholesale Power Contracts that would lead us to conclude that they do not represent the fully voluntary agreement of the parties. This issue should not be set for hearing. In so doing, the Commission subjects these contracts to scrutiny on matters not contemplated by the holdings establishing the Supreme Court’s Mobile-Sierra doctrine, thereby defeating the very purpose of the doctrine: to ensure that—absent extraordinary circumstances that would justify a public interest finding—contracts can be relied upon.
For these reasons, I respectfully dissent in part.
[1] As described herein, the Mobile-Sierra presumption has its genesis in the twin Supreme Court cases of United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332 (1956) and FPC v. Sierra Pac. Power Co., 350 U.S. 348 (1956) (together, Mobile-Sierra).
[2] Basin Elec. Power Coop., 172 FERC ⁋ 61,221, at P 48 (2020) (Commission Order) (citing Linden VFT, LLC v. Pub. Serv. Elec. & Gas Co., 161 FERC ¶ 61,264, at P 27 (2017), order on reh’g, 170 FERC ¶ 61,023 (2020); PJM Interconnection, L.L.C., 161 FERC ¶ 61,262, at P 46 (2017), order on reh’g, 170 FERC ¶ 61,021 (2020); Sw. Power Pool, Inc., 144 FERC ¶ 61,059, at P 127 (2013), order on reh’g & compliance, 149 FERC ¶ 61,048, at P 94 (citations omitted); Midwest Indep. Transmission Sys. Operator, Inc., 142 FERC ¶ 61,215, at P 177 (2013), order on reh’g & compliance, 147 FERC ¶ 61,127, at P 108 (2014) (citations omitted)).
[3] Morgan Stanley Capital Grp. Inc. v. Pub. Util. Dist. No. 1 of Snohomish Cty., 554 U.S. 527 (2008) (Morgan Stanley).
[4] NRG Power Mktg., LLC v. Me. Pub. Util. Comm’n, 558 U.S. 165, 167 (2010) (NRG);
[5] Morgan Stanley, 554 U.S. at 530 (emphasis added); accord NRG, 558 U.S. at 167 (quoting, in part, Morgan Stanley, 554 U.S. at 530) (emphasis added).
[6] The D.C. Circuit described the Commission’s approach in Okla. Gas & Elec. Co. v. FERC, 827 F.3d 75, 78–80 (D.C. Cir. 2016). However, although the court went on to uphold the Commission’s determination that the Mobile-Sierra presumption does not apply to the right of first refusal provision in the Southwest Power Pool Membership Agreement, the court did not rule on the Commission’s approach. Instead, the court’s ruling was based on its conclusion that “FERC did not err in determining that the doctrine does not extend to anti-competitive measures that were not arrived at through arms-length bargaining.” Id. at 79.
[7] Morgan Stanley, 554 U.S. at 551 (quoting Market–Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by Public Utilities, Order No. 697, 72 Fed. Reg. 39,904, 119 FERC ¶ 61,295, at P 6 (2007)) (emphasis added).
[8] NRG, 558 U.S. at 174 (citing Morgan Stanley, 554 U.S. at 547-48, 551) (emphasis added).
[9] Morgan Stanley, 554 U.S. at 547.
[10] Commission Order, 172 FERC ⁋ 61,221 at P 38; see also id. P 36.
[11] Id. P 36.
[12] Id. P 38.
[13] Tri-State September 8, 2020 Answer at 14.