On November 5, 1975, and on February 12, 1976, the Potomac Edison Co. filed proposed rate increases for the 1976 calendar year with the Federal Power Commission (the Commission).1 Joint Appendix (J.A.) at 81-93. On March 12, 1976, the Commission suspended these rates and set the matter for a hearing. Id. Potomac Edison, the Town of Front Royal, Virginia, and the Old Dominion Electric Cooperative reached a settlement on September 3, 1976, according to which Potomac Edison's rates would rise only to approximately 70% Of its proposed rate increases. Id. at 296. Since Front Royal had a fixed rate contract2 that was not due to expire until 1980, its rate increase would occur in two steps, 50% On June 1, 1977, and 50% On May 31, 1978. Id. The Old Dominion Electric Cooperative, on the other hand, had a going rate contract3 with Potomac Edison, and consequently it would be charged the full negotiated rate increase as of April 14, 1976. Id.

On September 21, 1976, petitioners in Nos. 76-1506, 77-1081 and 77-1481, the Boroughs of Chambersburg and Mont Alto, Pennsylvania, and the cities of Hagerstown, Thurmont and Williamsport, Maryland, (hereinafter termed petitioners), filed a motion requesting to be included "on an equal basis" in this settlement. J.A. at 285. The Commission, having determined that none of the petitioners except Chambersburg had fixed rate contracts, Id. at 186-92, concluded that the negotiated rate increase for all the petitioners other than Chambersburg would become effective April 14, 1976, and that the rate increases for Chambersburg would go into effect in stages, 50% On June 1, 1977, and 50% On March 16, 1978, when Chambersburg's fixed rate contract was due to expire. Since the Commission also determined that Chambersburg's fixed rate contract was effective only for service up to 25,000 Kw, all of the negotiated price increases for service above that level would go into effect on April 14, 1976.4 J.A. at 297; supplemental initial brief for petitioners at 3.

Petitioners objected to the timing of the rate increases, arguing that there net effect would constitute an "unreasonable difference in rates, . . . either as between localities or as between classes of service" in violation of § 205(b) of the Federal Power Act.5 They relied on two early Commission cases construing § 205(b). In Gulf States Utilities Co., 1 FPC 522 (1938), a power company had informed the Commission of its intent to offer a lower rate to its customers as their respective contracts expired over an approximately three year interval. The Commission had found that this procedure violated § 205(b), and it stated that

It is obvious that to deny . . . customers the benefit of the lower rate until their respective rate contracts expire will unduly prolong the present discriminations. Proper practice and the avoidance of undue discrimination requires, except in unusual cases, that once a new rate is adopted by a company it be made available and applied uniformly to all customers of the same class at the same time.

Id. at 524. In Otter Tail Power Co., 2 FPC 134 (1940), a power company had sought to justify the different rates charged its municipal customers on the basis of their population sizes and the results of "individual negotiation and bargaining between the (company) and the municipality . . . involved." Id. at 142. The Commission had found that since there was "no substantial variation in the service conditions or in the characteristics of the delivery and sale of energy to these customers," Id. at 141, and since there was "no evidence in the record whatever indicating that the cost per kilowatt-hour to respondent of producing and delivering energy to any one of these customers differs from the cost per kilowatt-hour of producing and delivering energy to any other one of these customers," Id., the company had been in violation of § 205(b).

Distinguishing these early decisions the Commission rejected petitioners' argument, stating that Gulf States Utility Co. and Otter Tail Power Co. had been qualified by subsequent decisions of the Supreme Court. In FPC v. Sierra Pacific Power Co., 350 U.S. 348, 76 S. Ct. 368, 100 L. Ed. 388 (1956), the Court had determined that a supplier of power subject to regulation under the Federal Power Act could not depart from a contract obligation to deliver power at a firm price by unilaterally filing proposed rate increases with the Commission under § 205(d) of the Act. Absent an exercise of the Commission's power under § 206(a) "to prescribe a change in contract rates whenever it determines such rates to be unlawful." Id. at 353, 76 S.Ct. at 371, the contract rates would remain binding. In its construction of the Act, the Court relied upon its interpretation of the Natural Gas Act in the companion case of United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332, 76 S. Ct. 373, 100 L. Ed. 373 (1956). In that case the Court had analyzed the policies underlying parallel provisions of the Natural Gas Act:

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. . . . On the other hand, denying to natural gas companies the power unilaterally to change their contracts in no way impairs the regulatory powers of the Commission, for the contracts remain fully subject to the paramount power of the Commission to modify them when necessary in the public interest. The Act thus affords a reasonable accommodation between the conflicting interests of contract stability on the one hand and public regulation on the other.

350 U.S. at 344, 76 S. Ct. at 380. Two years later, in United Gas Pipe Line Co. v. Memphis Light, Gas and Water Div., 358 U.S. 103, 79 S. Ct. 194, 3 L. Ed. 2d 153 (1958), the Court held that where a public utility's going rate contract with a customer permitted the utility "to change its rates from time to time," Id. at 110, 79 S.Ct. at 198, such changes could become effective upon unilateral filing with the Commission. The Court emphasized

the legitimate interests of natural gas companies in whose financial stability the gas-consuming public has a vital stake. Business reality demands that natural gas companies should not be precluded by law from increasing the prices of their product whenever that is the economically necessary means of keeping the intake and outgo of their revenues in proper balance; otherwise procurement of the vast sums necessary for the maintenance and expansion of their systems through equity and debt financing would become most difficult, if not impossible.

Id. at 113,6 79 S.Ct. at 200.

The Commission reasoned that Sierra and Memphis, taken together, would inevitably create a situation where various customers would be charged different rates, depending upon whether their contracts were of the Mobile-Sierra or Memphis variety. See Municipal Electric Utility Ass'n v. FPC, 158 U.S.App.D.C. 188, 485 F.2d 967 (1973). It concluded, therefore, that these decisions would require modification of its earlier holdings in Gulf States Utilities Co. and Otter Tail Power Co.7 The Commission ruled that a difference in rates due solely to the operation of the Mobile-Sierra doctrine would not constitute "undue preference" under the Act:

It has never been held by this Commission nor the courts that customers who do not have fixed rate contracts are still entitled to the benefits of the Mobile-Sierra rule because a similar customer does have a fixed rate contract. This is consistent with the result reached by the Supreme Court in United Gas Pipe Line Company v. Memphis Light Gas and Water Division, 358 U.S. 103 (, 79 S. Ct. 194, 3 L. Ed. 2d 153) (1958) wherein the court allowed unilateral filings for the customers who did not have fixed rate. The fact that one customer, Front Royal, has a fixed rate contract and the other customers do not is not an adequate basis for giving all of the other customers the benefits of Front Royal's contract.

J.A. at 298. In denying petitioners' motion for a rehearing, the Commission reiterated this holding:

On March 21, 1977, in this proceeding this Commission issued an order accepting a proposed settlement with a rate increase filing by Potomac Edison Company for service to various wholesale customers. We also found that where one of the customers had a fixed rate contract and therefore the increase should be deferred to that customer, the other customers who did not have fixed rate contracts where not entitled to the benefits of a deferred rate increase simply because the one customer did have a contract preventing an increase under the Sierra-Mobile doctrine.

J.A. at 310. The municipalities petition for review pursuant to 16 U.S.C. § 825L (1970). See 42 U.S.C.A. § 7192(a) (West Supp. Nov. 1977).

We recognize the tension that exists between the Supreme Court's decision in Mobile, Sierra and Memphis, and the Commission's early interpretations of § 205(b). The Court's decisions rest on "the need . . . for individualized arrangements between natural gas companies and distributors," 350 U.S. at 339, 76 S.Ct. at 378, while the Commission's decisions were based on the ever-present possibility of discrimination "when the sole power to determine rates is left within the hands of the utility which has a monopoly of the service and when, in addition, the utility has the power to discriminate against customers in a weak bargaining position." 2 FPC at 145. We note, however, that the Commission's ruling in this case is not logically required by Mobile, Sierra, or Memphis, since the Court did not consider any claims of "undue preference" in those decisions,8 and since unilateral rate increases, even if permitted by contract, might be limited by the factors set out in Gulf States Utilities Co. and Otter Tail Power Co.

Nevertheless, the Commission was correct in applying the underlying reasoning of the Supreme Court. In Memphis the Court emphasized the requirement "that natural gas companies should not be precluded by law from increasing the prices of their product whenever that is the economically necessary means of keeping the intake and outgo of their revenues in proper balance." 358 U.S. at 113, 79 S.Ct. at 200. If a fixed rate contract with one of its customers were to prevent a public utility from changing the rates of its other customers, even though it had bargained in arm's length negotiations for the right to do so, this necessary flexibility would disappear. Section 205(b) does not require absolute uniformity, but proscribes only "any Unreasonable difference in rates" and "any Undue preference or advantage." We therefore affirm the order of the Commission.

We emphasize, however, the narrowness of our holding. Throughout these proceedings, the Commission has found that the temporary difference in rates caused by the settlement was due Solely to the fact that Front Royal and Chambersburg were protected by the Mobile-Sierra doctrine, whereas, Thurmont, Hagerstown, Williamsport and Mont Alto were not.9 See J.A. at 191, 297-98, 310. When counsel for petitioners was asked at oral argument whether he was seeking a remand to develop further facts upon which to base a claim of undue preference, he responded in the negative.10 We therefore intimate no view whatever concerning the additional factors necessary to constitute a violation of § 205(b). We decide only that if it is shown that a rate differential exists which stems from the fact that a public utility is free to file for unilateral rate increases with respect to some of its customers while the rates it charges to the remainder are frozen under the Mobile-Sierra doctrine, and if Nothing else is demonstrated, then that rate differential does not violate § 205(b) of the Federal Power Act.

The decision of the Commission is affirmed.