USCA1 Opinion
UNITED STATES COURT OF APPEALS
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
FOR THE FIRST CIRCUIT
____________________
No. 94-1948
NORTHEAST UTILITIES SERVICE COMPANY,
Petitioner,
v.
FEDERAL ENERGY REGULATORY COMMISSION,
Respondent.
____________________
ON PETITION FOR REVIEW OF ORDER OF
THE FEDERAL ENERGY REGULATORY COMMISSION
____________________
Before
Torruella, Chief Judge,
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Bownes, Senior Circuit Judge,
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and Selya, Circuit Judge.
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J.A. Bouknight, Jr., with whom David B. Raskin, Edward J. Twomey,
___________________ ________________ ________________
Newman, Bouknight & Edgar, P.C., and Frederic Lee Klein, Assistant
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General Counsel, Northeast Utilities Service Company, were on brief
for petitioner.
Randolph Lee Elliott, Attorney, with whom Susan Tomasky, General
____________________ _____________
Counsel, and Jerome M. Feit, Solicitor, Federal Energy Regulatory
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Commission, were on brief for respondent.
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May 23, 1995
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BOWNES, Senior Circuit Judge. The main issue in
BOWNES, Senior Circuit Judge.
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this case is whether the Federal Energy Regulatory Commission
(FERC) complied with our mandate in Northeast Utilities
___________________
Service Co. v. FERC, 993 F.2d 937 (1st Cir. 1993) (Northeast
____________ ____ _________
I) and applied the "public interest" test in ordering the
_
modification of a wholesale electric power contract.
In Northeast I we upheld FERC's decision
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conditionally approving the merger of Northeast Utilities
(NU) and the Public Service Company of New Hampshire (PSNH).
Before us also was the objection of Northeast Utilities
Service Company (NUSCO) to the Commission's modification of
the rate schedules filed by NUSCO. The rate schedules were
part of a wholesale electric power contract (the Seabrook
Power Contract) among NU, PSNH and the State of New
Hampshire. Under the contract each party waived its right to
file a complaint under 206(a) of the Federal Power Act
(FPA) concerning the specified rates. Each party also agreed
"that in any proceeding by the FERC under Section 206 the
FERC shall not change the rate charged under this Agreement
unless such rate is found to be contrary to the public
interest." FERC was not a party to the contract.
Section 206(a) of the FPA, 16 U.S.C. 824(e)
provides:
Whenever the Commission, after a
hearing had upon its own motion or upon
complaint, shall find that any rate,
charge, or classification, demanded,
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observed, charged, or collected by any
public utility for any transmission or
sale subject to the jurisdiction of the
Commission, or that any rule, regulation,
practice, or contract affecting such
rate, charge, or classification is
unjust, unreasonable, unduly
discriminatory or preferential, the
Commission shall determine the just and
reasonable rate, charge, classification,
rule, regulation, practice, or contract
to be thereafter observed and in force,
and shall fix the same by order.
Invoking its power under 206(a), the Commission
examined the terms and conditions of the Seabrook Power
contract. FERC found that the contract might unduly
discriminate against entities not parties to it and that
there was no genuine arms-length bargaining because the
agreement was negotiated at a time when NU and PSNH were
about to merge and assume identical interests. It ordered
NUSCO to make three changes in the contract to bring it
within the "just and reasonable" standard of 206(a): (1)
delete the automatically adjusting rate-of-return-on-equity
provision; (2) reduce the current rate-of-return-on-equity
used to derive the rate for Seabrook power; and (3) submit
for Commission review an initial estimate of the cost of
decommissioning the Seabrook Power Plant, which is an atomic
energy facility. The reduction order (2) on the current rate
of return in equity was not appealed.
After summarizing the Mobile-Sierra "public
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interest" doctrine as explicated in Papago Tribal Authority
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v. FERC, 723 F.2d 950, 953 (D.C. Cir. 1983), cert. denied,
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467 U.S. 1241 (1984), we quoted the holding of the Commission
that it had
authority under the public interest
standard to modify a contract where: it
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may be unjust, unreasonable, unduly
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discriminatory or preferential to the
detriment of purchasers that are not
parties to the contract; it is not the
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result of arm's length bargaining; or it
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reflects circumstances where the seller
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has exercised market power over the
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purchaser.
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Northeast I, 993 F.2d at 961. We also pointed out the
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interpretation given to the holding by the Administrative Law
Judge ("ALJ"):
The Commission made clear that in the
particular circumstances surrounding the
Seabrook contract, it retains power--
through the "public interest" language--
to make modifications under the
traditional just and reasonable and
nondiscrimination standards.
Id.
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We found that the standard enunciated by the
Commission and applied by the ALJ, "conflates the 'just and
reasonable' and 'public interest' standards, thereby
circumventing the Mobile-Sierra doctrine." Id. We stated
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that
the Commission was bound to follow the
Mobile-Sierra doctrine as explicated by
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Papago, and therefore should have
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evaluated the SPC under the public
interest standard, not the just and
reasonable standard.
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Id. We remanded the issue "for reconsideration by FERC under
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the public interest standard." Id. at 962.
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It is FERC's position that on remand it
reconsidered its previously ordered modifications of the
Seabrook Power contract under the public interest standard
and affirmed the orders previously issued under that
standard.
NUSCO contends that FERC did not comply with our
mandate but instead created a wholly new version of the
public interest standard which is more flexible and less
stringent than the judicially adopted public interest
standard.
Standard of Review
Standard of Review
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Not surprisingly, the parties differ on the
standard of review to be followed. FERC urges that we follow
the same deferential standard as we did in our prior case:
On review, we give great deference to the
Commission's decision. U.S. Dep't of
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Interior v. FERC, 952 F.2d 538, 543 (D.C.
________ ____
Cir. 1992). FERC's findings of fact are
reviewed under the "substantial evidence"
standard of review. 16 U.S.C. 825l
("The finding of the Commission as to the
facts, if supported by substantial
evidence, shall be conclusive.").
. . . .
"Pure" legal errors require no deference
to agency expertise, and are reviewed de
__
novo. Questions involving an
____
interpretation of the FPA involve a de
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novo determination by the court of
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Congressional intent; if that intent is
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ambiguous, FERC's conclusion will only be
rejected if it is unreasonable. Chevron
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USA v. Natural Resources Defense Council,
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467 U.S. 837, 842-56, 104 S. Ct. 2778,
2781-83, 81 L. Ed. 2d 694 (1984); Boston
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Edison Co. v. FERC, 856 F.2d 361, 363
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(1st Cir. 1988).
Northeast I, 993 F.2d at 943-44.
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NUSCO, on the other hand, plumps for the "law of
the case" doctrine, arguing that we issued a mandate that had
to be strictly construed and followed.
In this circuit the "law of the case" doctrine has
not been construed as an inflexible straitjacket that
invariably requires rigid compliance with the terms of the
mandate. In United States v. Connell, 6 F.3d 27, 31 (1st
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Cir. 1993), we noted:
To be sure, neither the law of the case
doctrine nor its kissing cousin, the so-
called "mandate rule," is designed to
function as a straitjacket. Rather,
these are discretion-guiding principles,
generally thought to be subject to
exceptions in the interests of justice.
So also we said in United States v. Bell, 988 F.2d 247, 251
_____________ ____
(1st Cir. 1993):
After all, the so-called "mandate rule,"
generally requiring conformity with the
commands of a superior court on remand,
is simply a specific application of the
law of the case doctrine and, as such, is
a discretion-guiding rule subject to an
occasional exception in the interests of
justice.
In Doe v. Anrig, 728 F.2d 30, 31 (1st Cir. 1984),
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Justice Breyer, then circuit judge, reached back to Judge
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Learned Hand and Justice Holmes for an explanation of the
meaning of the law of the case doctrine:
That doctrine "does not rigidly bind a
court to its former decisions, but is
only addressed to its good sense."
Higgins v. California Prune & Apricot
_______ ____________________________
Grower, Inc., 3 F.2d 896, 898 (2d Cir.
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1924) (L. Hand, J.). See Messenger v.
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Anderson, 225 U.S. 436, 444, 32 S. Ct.
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739, 740, 56 L. Ed. 1152 (1912) (Holmes,
J.) ("the phrase, law of the case, as
applied to the effect of previous orders
on the later action of the court
rendering them in the same case, merely
expresses the practice of courts
generally to refuse to reopen what has
been decided, not a limit to their
power"). (Other citations omitted.)
Under the circumstances, we will review the actions
of FERC under the usual deferential standard, but always
keeping in mind the restraints imposed on FERC by the terms
of our mandate and the "law of the case" doctrine.
The Case Law
The Case Law
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We think it necessary to revisit the Mobile-Sierra
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doctrine, which represents the Supreme Court's attempt to
strike a balance between private contractual rights and the
regulatory power to modify contracts when necessary to
protect the public interest. We start with United Gas Co. v.
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Mobile Gas Corp., 350 U.S. 332 (1956). The issue in Mobile
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was, "whether under the Natural Gas Act . . . a regulated
natural gas company furnishing gas to a distributing company
under a long-term contract may, without the consent of the
distributing company, change the rate specified in the
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contract simply by filing a new rate schedule with the
Federal Power Commission." Id. at 333-34 (statutory citation
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omitted). The facts can be summarized as follows. Mobile
Gas Service (Mobile) was a distributor of natural gas to
users (domestic and industrial) in Mobile, Alabama. Mobile
obtained its gas from United Gas Co. (United). In 1946 the
Ideal Cement Company (Ideal) decided to build a cement plant
in the city if it could be assured gas supplied at a
sufficiently low rate. Mobile agreed to supply Ideal with
gas for ten years at 12 cents per MCF (thousand cubic feet).
Before entering into the contract with Ideal, Mobile obtained
from United a ten-year contract to supply gas to Mobile for
resale to Ideal at the rate of 10.7 cents per MCF. This was
a substantially lower rate than other gas furnished by
United. This contract was filed with the Federal Power
Commission and with its approval, became a part of United's
filed schedule of rates and contracts. In June of 1953,
United, without the consent of Mobile, filed new rate
schedules with the Commission purporting to increase the rate
on gas to be sold by Mobile to Ideal to 14.5 cents per MCF.
Id. at 335-36.
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The Court held that the Natural Gas Act did not
give natural gas companies the right to change their rate
contracts unilaterally. Id. at 337. The Court noted that
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the Act "evinces no purpose to abrogate private rate
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contracts as such." Id. at 338. It pointed out that the
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public interest was protected by the supervision of the
individual rate contracts filed with the Commission. Id. at
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339. The Court explained its rationale as follows:
Our conclusion that the Natural Gas
Act does not empower natural gas
companies unilaterally to change their
contracts fully promotes the purposes of
the Act. By preserving the integrity of
contracts, it permits the stability of
supply arrangements which all agree is
essential to the health of the natural
gas industry. Conversion by consumers,
particularly industrial users, to the use
of natural gas may frequently require
substantial investments which the
consumer would be unwilling to make
without long-term commitments from the
distributor, and the distributor can
hardly make such commitments if its
supply contracts are subject to
unilateral change by the natural gas
company whenever its interests so
dictate. The history of the Ideal
contract furnishes a case in point. On
the other hand, denying to natural gas
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companies the power unilaterally to
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change their contracts in no way impairs
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the regulatory powers of the Commission,
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for the contracts remain fully subject to
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the paramount power of the Commission to
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modify them when necessary in the public
_________________________________________
interest. The Act thus affords a
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reasonable accommodation between the
conflicting interests of contract
stability on the one hand and public
regulation on the other.
Id. at 344 (emphasis added).
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We make two observations. First, the obvious, that
the facts of Mobile are quite different from those in the
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case at bar. The issue here is not whether one party to a
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rate contract filed with FERC can effect a rate change
unilaterally, but the standard to be used by FERC in
examining electric power contracts filed with it. Our second
observation is that nowhere 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.
We next examine the other leg of the Mobile-Sierra
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doctrine, FPC v. Sierra Pacific Power Co., 350 U.S. 348
___ __________________________
(1956), which came down on the same day as Mobile and was
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also written by Justice Harlan. In Sierra, the Court, for
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the reasons given in Mobile, held that the filing of a new
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rate by an electric power utility (Pacific Power Gas &
Electric Company) and the finding of the Federal Power
Commission that such new rate was not unlawful, could not
change Pacific Gas' contract rate for supplying electricity
to Sierra Pacific Power Co. Id. at 352-53.
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The Court addressed a second question, not present
in Mobile, which directly involved the "public interest"
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doctrine. In its decision finding that the new rate was
lawful, the Commission held that the old contract rate was
unreasonable solely "because it yields less than a fair
return on the net invested capital." Id. at 354-55. The
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Court held:
But, while it may be that the Commission
may not normally impose upon a public
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utility a rate which would produce less
than a fair return, it does not follow
that the public utility may not itself
agree by contract to a rate affording
less than a fair return or that, if it
does so, it is entitled to be relieved of
its improvident bargain. In such circum-
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stances the sole concern of the
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Commission would seem to be whether the
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rate is so low as to adversely affect the
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public interest -- as where it might
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impair the financial ability of the
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public utility to continue its service,
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cast upon other consumers an excessive
_________________________________________
burden, or be unduly discriminatory.
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That the purpose of the power given the
Commission by 206(a) is the protection
of the public interest, as distinguished
from the private interests of the
utilities, is evidenced by the recital in
201 of the Act that the scheme of
regulation imposed "is necessary in the
public interest." When 206 (a) is read
in the light of this purpose, it is clear
that a contract may not be said to be
either "unjust" or "unreasonable" simply
because it is unprofitable to the public
utility.
Id. at 355 (citation omitted) (emphasis added).
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The holding of Sierra is clear; what justifies
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protective action in the public interest by the Commission
when it is considering whether a contract rate is too low is
__________________________________________________________
where the rate might impair the financial ability of the
utility to continue to supply electricity, force electricity
consumers to bear an excessive burden, or be unduly
discriminatory. This definition of what is necessary in the
public interest was formulated in the context of a low-rate
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case. It was not and could not be an across-the-board
definition of what constitutes the public interest in other
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types of cases. One of the orders at issue in the case at
bar is the submission by NUSCO to FERC of the cost of
decommissioning the Seabrook Power Plant. The other order
had to do with changing the rate of return-in-equity formula.
Neither were low-rateissues inthe context ofMobile andSierra.
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The next case directly implicated in our remand
order is Papago Tribal Authority v. FERC, 723 F.2d 950 (D.C.
_______________________ ____
Cir. 1983), cert. denied, 467 U.S. 1241 (1984). This was
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also a low-rate case. The facts may be summarized as
follows. The Commission approved an increase in electric
rates paid to the Arizona Public Service Company. The Papago
Tribal Utility Authority objected on the ground, inter alia,
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that its contract with Arizona did not permit unilaterally
proposed rate changes under 205 of the Federal Power Act,
16 U.S.C. 824(d). Id. at 951-52. At issue was the
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interpretation of the contract between Arizona and Papago and
the authority of the Commission to modify it. The contract
provided in pertinent part:
The rates hereinabove set out in this
Section 3 . . . are to remain in effect
for the initial one (1) year of the term
of this contract and thereafter unless
and until changed by the Federal Power
Commission or other lawful regulatory
authority, with either party hereto to be
free unilaterally to take appropriate
action before the Federal Power
Commission or other lawful regulatory
authority in connection with changes
which may be desired by such party.
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Id. at 953. Papago, like the case before us, was an appeal
___ ______
after a remand. In the first appeal the court held that the
contract did not permit unilaterally effected rate increases
under 205 of the Act. The Federal Power Commission held in
its Order on Remand that after its first year, the contract
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permitted changes under 206 of the Act on the basis of a
just and reasonable standard. The court agreed and
interpreted the contract as follows: "the restriction
envisioned during the first year of the contract must allow
rate changes required by the public interest. The scheme to
be in effect 'thereafter' -- obviously intended to be less
restrictive -- must therefore permit changes that are just
and reasonable." Papago, 723 F.2d at 954.
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During the course of its opinion the court quoted
the "public interest" standard from Sierra, 350 U.S. at 355.
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Papago, 723 F.2d at 953. The court then went on to say in
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dictum:
[S]pecific acknowledgment of the
possibility of future rate change is
virtually meaningless unless it envisions
a just-and-reasonable standard. The
public interest standard is practically
insurmountable; the Commission itself is
unaware of any case granting relief under
it. Future rate changes would be a dim
prospect, hardly worthy of recognition,
if the parties did not intend the just-
and-reasonable standard to govern.
Id. at 954 (citation omitted).
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Papago has unfortunately been identified with the
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notion that the "public interest" standard of review is
"practically insurmountable," regardless of the circumstances
of the case. This is the misreading that NUSCO presses upon
us as the law of the case. We do not think that Papago, read
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in context, means that the "public interest" standard is
practically insurmountable in all circumstances. It all
depends on whose ox is gored and how the public interest is
affected.
It should be noted that neither Mobile nor Sierra
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stated or intimated that the "public interest" doctrine was
"practically insurmountable." This was a gloss that the
court in Papago put on it. In Northeast I we said that the
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"public interest" standard was "a more difficult standard for
the Commission to meet than the statutory 'unjust and
unreasonable' standard," 993 F.2d at 960. We, however, did
not characterize the public interest standard as "practically
insurmountable."1
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1. Contrary to NUSCO's suggestion at oral argument, Boston
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Edison v. FERC, 856 F.2d 361 (1st Cir. 1988) is not
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controlling here. In Boston Edison, we relied in part on the
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Mobile-Sierra doctrine to enforce a claims limitation clause
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of a rate contract against customers who failed to timely
protest an overcharge. We found nothing "unconscionable,
overweening, or otherwise unreasonable" about the clause,
even with respect to the parties to the contract. Id. at 372
___
(noting that the clause "enhances economic equilibrium by
bringing certainty to the parties' dealings . . . ."). FERC
and the customers did not, and clearly could not, argue that
the claims limitation clause was contrary to the public
interest. See id. at 372 n.12 ("we leave for another day the
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Our opinion also recognized that "[t]he most
attractive case for affording additional protection [under
the public interest standard], despite the presence of a
contract, is where the protection is intended to safeguard
the interests of third parties . . . ." Northeast I, 993
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F.2d at 961. As we explained, the Mobile-Sierra doctrine
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allows FERC to modify the terms of a private contract when
third parties are threatened by possible "undu[e]
discrimination" or the imposition of an "excessive burden."
Id. We invited FERC to demonstrate such a threat upon
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remand. See id. at 961-62 (assuming without deciding that
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FERC's premise facts were correct, but remanding for
evaluation of the contract under the public interest
standard.)
Although our opinion questioned the significance of
the seller's market power and the lack of arms-length
bargaining, id. at 961, it left open the possibility that
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these factors may so affect third parties as to warrant
intervention even under the public interest standard. See
___
id. ("there would seem to be little justification for the
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Commission stepping in on behalf of the disfavored subsidiary
absent some threat to the public interest") (emphasis added).
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For all of these reasons, we reject NUSCO's argument that
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contours of any . . . exception" to claims limitation clauses
based upon "public necessity").
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under the law of the case the public interest standard should
be considered "practically insurmountable" in all
circumstances.
The Order on Remand
The Order on Remand
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We turn to FERC's explanation of how it applied the
"public interest" doctrine on remand.
We conclude that if the Commission is
to comply with both the Mobile-Sierra
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imperative to respect private contractual
arrangements, on the one hand, and our
statutory mandate to protect the public
interest and ensure that rates are just
and reasonable and not unduly
discriminatory or preferential, on the
other, the "public interest" standard of
review under the Mobile-Sierra doctrine
_____________
cannot be "practically insurmountable" in
all cases. In the "classic" Mobile-
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Sierra situation, for example -- when a
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seller utility unilaterally seeks an
increase from a fixed-rate contract
already on file with the Commission --
the public interest (as opposed to the
private interest of the party seeking the
rate increase) only rarely is served by
making the requested change (that is,
granting the requested increase), and a
strict standard is appropriate. In other
situations, however -- when, for example,
as here, the Commission is presented with
an agreement for the first time and
concludes that certain modifications to
material rate provisions are necessary to
protect the interests of non-parties --
the public interest is served by making
the modifications, and a more flexible
standard is therefore appropriate. Based
upon that understanding of the public
interest standard of review under the
Mobile-Sierra doctrine, we confirm our
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previously ordered modifications to the
Seabrook Power Contract.
66 F.E.R.C. 61,332 at 62,076 (1994) (footnotes omitted).
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In its order on remand, FERC has responded to our
concerns by explaining how the disputed contractual terms may
harm third parties to the contract. It no longer relies so
heavily upon the possibility that the contract may favor one
party over another. For example, the Commission found the
automatic rate-of-return-on-equity adjustment provision
unacceptable because third parties may ultimately bear the
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burden of a rate component that does not reflect actual
capital market conditions. Likewise, the "blank check" given
owners of the power plant to determine the decommissioning
costs for themselves under New Hampshire law is impermissible
because it may be cashed at the expense of non-parties to the
contract. See 66 F.E.R.C. 61,332 at 62,090-91. This new
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emphasis on harm to third parties suggests that FERC has done
more on remand than simply substitute the words "public
interest" for the forbidden phrase "just and reasonable."
We end by noting the decision in Mississippi Indus.
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v. FERC, 808 F.2d 1525 (D.C. Cir.), cert. denied 484 U.S. 985
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(1987), a post-Papago case similar to the case at bar, which
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shows that even the court that authored Papago does not take
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an unduly restrictive view of the public interest standard.
FERC had ordered that the four electric power companies
comprising the Middle South Utilities System share the cost
of the system's investment in nuclear energy in proportion to
their relative demand for energy generated by the system as a
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whole. FERC reallocated responsibility for investment costs
"associated with the catastrophically uneconomical Grand Gulf
I nuclear plant." Id. at 1528. The court turned back a
___
jurisdictional challenge based, inter alia, on the Mobile-
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Sierra doctrine. It held,
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that, in the instant case, this doctrine
does not bar the exercise of FERC's power
under section 206 of the FPA to reform a
practice or contract affecting a rate
charged by a public utility for wholesale
service in interstate commerce.
Id. at 1551. The court's discussion of the sweep of the
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Mobile-Sierra doctrine is instructive.
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Finally, even if the contracts fall
within the scope of the Mobile-Sierra
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decisions, the Supreme Court has
emphasized that the relevant agency, here
FERC, may always reform a contract found
to be "unlawful" or "contrary to the
public interest," i.e., that "contracts
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remain fully subject to the paramount
power of the Commission to modify them
when necessary in the public interest."
The Court stated in Sierra that the
______
Commission "has undoubted power under
206(a) to prescribe a change in contract
rates whenever it determines such rates
to be unlawful" and indicated three
circumstances under which the Commission
might conclude that a rate or a contract
term affecting a rate could be found
contrary to the public interest and
therefore subject to revision: "where it
might impair the financial ability of the
public utility to continue its service,
cast upon consumers an excessive burden,
or be unduly discriminatory." Here FERC
expressly adopted the findings of ALJ
Liebman who found the level of
discrimination in the [contract]
"profound" and agreed that its impact on
customers in Louisiana and Mississippi
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would be "dramatic[]." The Commission's
specific determination of unlawfulness
provides the "unequivocal public
necessity" for reformation of the
[contract] under section 206 of the FPA.
Id. at 1553 (footnotes omitted).
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We conclude that under the circumstances of this
case FERC, on remand, gave thoughtful consideration to the
public interest in reviewing its previously ordered
modification of the Seabrook Power contract. We, therefore,
deny NUSCO's petition for review and affirm FERC's order. We
go no further. Specifically, we are not in any way
suggesting the parameters of or limitations on the authority
of FERC to change the contract in future rate proceedings.
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