DC Circuit Affirms FERC Order Finding that Mobile-Sierra Does Not Prevent Order No. 1000’s Elimination of Rights of First Refusal

On July 1, 2016 the U.S. Court of Appeals for the District of Columbia denied a petition to review two FERC orders determining that the so-called “Mobile-Sierra” presumption does not preserve “right of first refusal” provisions that are otherwise required to be removed from tariffs and agreements following Order 1000. Although the D.C. Circuit did not hold that the presumption could be generally applied to contract provisions other than rates, the court agreed with FERC that “the doctrine does not extend to anti-competitive measures that were not arrived at through arms-length bargaining.”

The right of first refusal is a contract provision that allows utilities the option to construct new transmission facilities even if a third party first proposes to undertake such construction. In 2011, FERC determined that those option rights were anti-competitive in nature, and in Order 1000, the Commission required utilities to remove such provisions from their tariffs and agreements. The D.C. Circuit Court of Appeals upheld this mandate in South Carolina Public Service Authority v. FERC, 762 F.3d 41, 72 (D.C. Cir. 2014). Both FERC and the D.C. Circuit deferred until the Order 1000 compliance stage the question of whether rights of first refusal could nonetheless be preserved through the Supreme Court’s Mobile-Sierra precedent. Under this line of cases, “FERC must presume a contract rate for wholesale energy is just and reasonable and cannot set aside the rate unless it is contrary to the public interest.”

In its compliance filings, the utility-petitioner, Oklahoma Gas and Electric Company (OG&E), raised this issue again and argued that the right of first refusal in their SPP membership agreement was part of a “valid, freely negotiated contract” and therefore automatically presumed “just and reasonable” under the Mobile-Sierra line of cases. FERC disagreed, and stated that the Mobile-Sierra presumption applies only to “individualized rates, terms and conditions negotiated freely at arm’s length,” as opposed to general tariff provisions that are not a product of such negotiations. Southwest Power Pool, Inc., Order on Compliance Filings, Docket No ER13-366-000, et al., 144 FERC ¶ 61,059, at ¶ 130-35 (July 18, 2013), on reh’g, 149 FERC ¶ 61,048 (Oct. 16, 2014). According to the Commission, the right of first refusal in the SPP membership agreement failed this arm’s-length test because not only is there little room for negotiating the agreement upon becoming a SPP member, but the provision also “does not provide the assurance of justness and reasonableness” since it was negotiated among incumbent transmission owners with the common interest of curbing competition.

OG&E challenged FERC’s decisions, and several other utility-members of the Southwest Power Pool intervened in support. Thus, on review, the question before the D.C. Circuit boiled down to essentially whether a pro-competition line of Supreme Court cases could to save a contract provision that FERC and the courts have deemed anti-competitive in nature. The court held that the Mobile-Sierra presumption did not apply to rights of first refusal, but based its holding on narrower grounds than FERC.

The court began its analysis by reviewing Mobile and Sierra, two cases in which the Supreme Court analyzed nearly identical provisions in, respectively, the Natural Gas Act and Federal Power Act. See United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332 (1956) (Mobile), and Fed. Power Comm’n v. Sierra Pac. Power Co., 350 U.S. 348 (1956) (Sierra). As the D.C. Circuit summarized, the Supreme Court held that “[w]hen evaluating whether a contract rate is just and reasonable, ‘the sole concern of the Commission would seem to be whether the rate is so low as to adversely affect the public interest – as where it might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory.’” Sierra, 350 U.S. at 355. In later cases examining FERC’s ability to review negotiated contract rates, the Court has held that Mobile-Sierra’s “just and reasonable” presumption will not apply to rates resulting from fraud or duress, Morgan Stanley Capital Grp. Inc. v. Pub. Util. Dist. No. 1, 554 U.S. 527, 554 (2008), and has held that presumption can be applicable to rates in suits brought by non-parties. NRG Power Marketing, LLC v. Maine Public Utilities Commission, 558 U.S. 165, 176 (2010).

In no instance, however, has the Supreme Court applied the Mobile-Sierra presumption outside the realm of rates, and on review, the D.C. Circuit declined to make such a determination. Rather, as the court reasoned, even assuming that Mobile-Sierra could be extended to non-rate-based practices, the case law supports FERC’s determination that the doctrine is nonetheless inapplicable to measures that are both anti-competitive in nature and not the product of arms-length bargaining. The court agreed with FERC and a recent Seventh Circuit decision that right of first refusal provisions are “self-protective and anti-competitive.” (slip op at 10, citing MISO Transmission Owners v. FERC, 819 F.3d 329, 335 (7th Cir. 2016)).  “All of this means,” the court concluded, “that the Commission arrived at a legally valid outcome without requiring us to decide the propriety of its assumption that Mobile-Sierra applies outside the context of rates and procedures for setting rates.” (slip op. at 10).

The full court opinion can be found here.

A shorter version of this post can be found here.

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