On March 17 a divided FERC (4-1) ruled that the Federal Power and Natural Gas Acts give the regulator discretion to apply to a non-contract rate the Mobile-Sierra doctrine that presumes freely negotiated contract rates and terms are just and reasonable under the Acts unless otherwise shown to be contrary to the public interest. Dissenting, Commissioner John Norris complained that the majority’s interpretation could not be reconciled with either the original 1956 Supreme Court decisions in Mobile and Sierra (for which the doctrine is eponymously named) or two more recent High Court rulings confirming that the presumption “is grounded on the presence of a freely negotiated contract.”

The March 17 order in Devon Power LLC came in response to a 2010 Supreme Court ruling in NRG Power Marketing v. Maine Public Utilities Commission that reversed a lower court ruling holding that the Mobile-Sierra presumption applied only to the parties to a contract and not to a third party’s challenge to the justness and reasonableness of a contract rate. To the contrary, the Court ruled that the presumption protects contracts against challenges by parties and third-parties alike. Remanded to FERC, the question of whether the rates at issue — rates set in an ISO New England’s electric capacity ‘Dutch” auction — were contract rates to which the Mobile-Sierra presumption attached. Both the majority and Commissioner Norris answered that the auction produced a tariff rate, not a contract rate. The majority (over Commissioner Norris’ dissent) went on to answer in the affirmative the further question of whether FERC could nevertheless choose to afford the non-contract rate Mobile-Sierra protection.

Application of the Mobile-Sierra presumption was justified, the majority opined, since “although these auctions will not result in contracts between buyers and sellers, we find that they nevertheless share with freely negotiated contracts certain market-based features [of the auction] that tend to assure just and reasonable rates.” Those market-based features, together with the purpose of the capacity auction in stabilizing capacity prices, the majority concluded, justify the application of Mobile-Sierra even in the absence of a contract rate. Commissioner Norris, for his part, replied that “[m]any (if not most) of the tariffs, settlements, and other legal instruments that the Commission considers today can be said to contain ‘market-based features’ and stability and certainty are always important in the industries we regulate.” In short, if those are the criteria for determining the eligibility of non-contract rates and contract terms for Mobile-Sierra protection, then nearly everything FERC regulates becomes eligible and the unique protection conferred on negotiated contracts risks dilution.