Wabash Valley Power Association, Inc. v. FERC ( 2022 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 14, 2021 Decided August 2, 2022
No. 20-1286
WABASH VALLEY POWER ASSOCIATION, INC.,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
TIPMONT RURAL ELECTRIC MEMBERSHIP COOPERATIVE,
INTERVENOR
Consolidated with 20-1348
On Petitions for Review of Orders
of the Federal Energy Regulatory Commission
Randolph Lee Elliott argued the cause for petitioner. With
him on the briefs were John Michael Adragna, William C.
Simmerson, and Randolph G. Holt.
Beth G. Pacella, Deputy Solicitor, Federal Energy
Regulatory Commission, argued the cause for respondent.
With her on the brief were Matthew R. Christiansen, General
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Counsel, David L. Morenoff, Deputy General Counsel, and
Robert H. Solomon, Solicitor.
Richard L. Roberts and Jennifer L. Key were on the brief
for intervenor Tipmont Rural Electric Member Cooperative in
support of respondent. David B. Raskin entered an
appearance.
Before: KATSAS and RAO, Circuit Judges, and
SILBERMAN, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge KATSAS.
KATSAS, Circuit Judge: This case presents a question of
how to determine the reasonableness of rates for the sale of
electricity from an energy cooperative to its individual member
utilities. The rates are fixed by majority vote of the utilities.
Contracts between the cooperative and certain members
purport to impose a presumption that the rates are just and
reasonable. In rejecting these contracts, the Federal Energy
Regulatory Commission concluded that the rates are not
entitled to a presumption of reasonableness under United Gas
Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332(1956), and FPC v. Sierra Pacific Power Co., 350 U.S. 348(1956). We uphold the Commission’s determination.
I
A
The Federal Power Act gives FERC jurisdiction over the
wholesale transmission of electricity in interstate commerce.
16 U.S.C. § 824(b). Utilities may set rates unilaterally, by
filing with the Commission tariffs setting forth the rates. Id.§ 824d(c). Utilities also may set rates bilaterally through
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contracts, which must also be filed with the Commission. Id.
Either way, FERC must receive advance notice before any rate
becomes effective. Id. § 824d(d).
The Act requires that all rates subject to FERC’s
jurisdiction be “just and reasonable.” 16 U.S.C. § 824d(a).
When a utility files a new rate, the Commission may suspend
the rate’s operation to determine whether it is just and
reasonable. Id. § 824d(e). The utility bears the burden of proof
on this question, and FERC may replace any rate that is not just
and reasonable with one that is. Id. The Commission also may
modify a rate after it has gone into effect if it affirmatively finds
that the rate is not just and reasonable. Id. § 824e(a); see Emera
Me. v. FERC, 854 F.3d 9, 24–25 (D.C. Cir. 2017).
In determining whether a unilaterally set tariff rate is just
and reasonable, FERC “is not bound to any one ratemaking
formula,” although it “must choose a method that entails an
appropriate balancing of the investor and the consumer
interests.” Morgan Stanley Cap. Grp. Inc. v. Pub. Util. Dist.
No. 1, 554 U.S. 527, 532 (2008) (cleaned up). FERC has
“traditionally reviewed and set tariff rates under the ‘cost-of-
service’ method, which ensures that a seller of electricity
recovers its costs plus a rate of return sufficient to attract
necessary capital.” Id. This standard of review is known as the
ordinary just-and-reasonable standard. Id. at 535.
On the other hand, FERC’s discretion to modify rates set
by contract is narrower. Under the Mobile-Sierra doctrine, the
Commission “must presume that the rate set out in a freely
negotiated wholesale-energy contract meets the ‘just and
reasonable’ requirement.” Morgan Stanley, 554 U.S. at 530;
see Mobile Gas Serv. Corp., 350 U.S. 332; Sierra Pac. Power
Co., 350 U.S. 348. The presumption “may be overcome only
if FERC concludes that the contract seriously harms the public
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interest.” Morgan Stanley, 554 U.S. at 530. This standard of
review is known as the public-interest standard. Id. at 535.
B
The Wabash Valley Power Association is an Indiana-
based cooperative established to generate and transmit
electricity. Wabash is composed of 25 members. It serves as
the exclusive provider of electricity to its 23 retail-serving
members, which sell power to customers in Indiana, Illinois,
and Missouri. Wabash’s bylaws give each member one seat on
its board of directors, which acts by majority vote.
Two sets of contracts, executed in 1977 and 2006
respectively, govern Wabash’s sale of power to its members.
The first set will remain in effect into 2028. The second set
will then replace the first and remain in effect through 2050.
For both sets, Wabash signed a separate contract with each
individual member. The contracts within each set are identical,
except for the name of the individual member and the delivery
points for the power. Both sets of contracts require members
to pay the rates set forth in Wabash’s Formulary Rate Tariff.
The contracts empower Wabash’s board of directors to revise
these rates to produce revenues sufficient to meet Wabash’s
costs, including the maintenance of reasonable reserves and
margins.
In 2020, Wabash executed new contracts with 21 of its 23
retail-serving members. The new contracts took effect
immediately, superseded the executing members’ earlier
contracts, and were to remain in effect through 2060. Like their
predecessors, these contracts are identical except for each
individual member’s name and points of delivery. The new
contracts continued to require members to pay the Formulary
Rate Tariff and to empower Wabash’s board to raise the rate to
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produce sufficient revenue to meet all of Wabash’s costs,
including the maintenance of reasonable reserves and margins.
This case centers on a provision newly added to the 2020
contracts. Section 22 of these contracts purports to subject any
changes to the Formulary Rate Tariff to the Mobile-Sierra
presumption of justness and reasonableness:
If … a modification or change to this Agreement,
including the Tariffs, is unilaterally proposed by a
Party, a non-Party, or FERC acting sua sponte, the
Parties expressly agree that the standard of review for
such changes shall be the “Public Interest” application
of the just and reasonable standard of review set forth
in [Mobile] and [Sierra], each standard as further set
forth in [Morgan Stanley] and NRG Power Mktg.,
LLC v. Me. Pub. Utils. Comm’n, 558 U.S. 165 (2010).
J.A. 30.
After Wabash submitted the new contracts to FERC,
Tipmont Rural Electric Membership Cooperative, one of the
two member utilities that did not sign, filed a protest arguing
that the Mobile-Sierra presumption should not apply to
changes to the Formulary Rate Tariff. The Commission
agreed. It ruled that the Formulary Rate Tariff is a “generally
applicable rate” rather than a contract rate, making section 22
“an unlawful attempt to apply the public interest presumption
to proposed changes to Wabash’s tariffs.” Wabash Valley
Power Ass’n, 171 FERC ¶ 61,073, P 12 (2020). Finding itself
not legally bound to accept the Mobile-Sierra presumption,
FERC rejected the contracts. Id.After FERC failed to act on an application for rehearing
within 30 days, Wabash filed a petition for review. See 16
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U.S.C. § 825l(a); Allegheny Def. Project v. FERC, 964 F.3d 1(D.C. Cir. 2020) (en banc).
FERC then denied rehearing. It again concluded that the
Formulary Rate Tariff is not entitled to a presumption of
reasonableness under the Mobile-Sierra doctrine. The
Commission reasoned that the rate “is generally applicable to
all Wabash members and is not negotiated between Wabash
and its Executing Members on an individualized basis. Rather,
the Wabash Board of Directors determines the rates provided
in the Formulary Rate Tariff.” Wabash Valley Power Ass’n,
172 FERC ¶ 61,177, P 15 (2020) (Rehearing Order) (footnote
omitted) (citing Tri-State Generation & Transmission Ass’n,
170 FERC ¶ 61,221, PP 41–50 (2020)). The Commission
recognized that it was free to apply the Mobile-Sierra
presumption as a matter of discretion, but it declined to do so.
Id. P 16; see also New Eng. Power Generators Ass’n, Inc. v.
FERC, 707 F.3d 364, 370–71 (D.C. Cir. 2013).
Wabash then filed a second petition for review. We have
jurisdiction over both petitions under 16 U.S.C. § 825l(b).
II
We review FERC orders under the Administrative
Procedure Act, which requires us to set aside decisions that are
“arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with law.” 5 U.S.C. § 706(2)(A); see La. Pub.
Serv. Comm’n v. FERC, 10 F.4th 839, 845 (D.C. Cir. 2021).
We defer to the Commission’s reasonable interpretation of
ambiguous contracts within its jurisdiction. Seminole Elec.
Coop., Inc. v. FERC, 861 F.3d 230, 234 (D.C. Cir. 2017).
FERC’s decision to reject the 2020 contracts rested on its
conclusion that rates established under the contracts are not
entitled to the Mobile-Sierra presumption and its refusal to
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apply the presumption as a matter of discretion. Before us,
Wabash challenges only the former conclusion. “Whether
[the] Mobile-Sierra doctrine applies” to a given rate “is a
question of contract interpretation.” Union Pac. Fuels, Inc. v.
FERC, 129 F.3d 157, 161 (D.C. Cir. 1997). So we will uphold
the Commission’s decision as long as it reflects a reasonable
view of the contracts.
The Mobile-Sierra doctrine applies to “contractually
negotiated rates,” not “prescriptions of general applicability.”
NRG Power, 558 U.S. at 176 (cleaned up). To trigger the
presumption, a contract must “set firm rates or establish a
specific methodology for setting the rates for service.”
Dominion Transmission, Inc. v. FERC, 533 F.3d 845, 852–53
(D.C. Cir. 2008) (cleaned up). Thus, a contract requiring the
purchaser to pay a utility’s “going rate” on file with FERC,
without more, does not eliminate review under the ordinary
just-and-reasonable standard. See United Gas Pipe Line Co. v.
Memphis Light, Gas & Water Div., 358 U.S. 103, 110–13
(1958).
The 2020 contracts purport to require the Mobile-Sierra
presumption to apply to any changes to the Formulary Rate
Tariff. If its rates count as contractually negotiated, then FERC
had no basis to reject contracts for invoking the presumption.
On the other hand, if its rates count as generally applicable,
then FERC was not required to apply the presumption.
FERC reasonably determined that the 2020 contracts do
not set a contractually negotiated rate. Under the Mobile-
Sierra doctrine, the key question is whether rates are set
bilaterally or unilaterally. Morgan Stanley, 554 U.S. at 532.
Here, the governing contracts give the Wabash board broad
discretion to raise rates unilaterally: The board may approve
rates that it believes are necessary to cover Wabash’s expenses
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and to maintain a reasonable profit margin, which is what any
utility filing a unilateral tariff rate may seek to do. See id.Moreover, because the board acts by simple majority, it may
approve rates over the objections of dissenting members. Each
member controls only four percent of the votes of Wabash’s
board; as Wabash acknowledges, that leaves them with “very
small bargaining power relative to the joint venture.” Oral Arg.
Audio 6:49. Furthermore, Wabash’s contracts with individual
members are virtually identical. These considerations suggest
that individual members face a “binary,” take-it-or-leave-it
choice. See Tri-State, 170 FERC ¶ 61,221, P 48. In contrast,
the Mobile-Sierra doctrine assumes that wholesale buyers and
sellers enjoy “presumptively equal bargaining power” and thus
may be “expected to negotiate a just and reasonable rate as
between the two of them.” Morgan Stanley, 554 U.S. at 545(cleaned up). For these reasons, FERC reasonably concluded
that rates set under the 2020 contracts would be more akin to a
generally applicable going rate than to a contractual rate freely
negotiated between individual parties with comparable
bargaining power.
Wabash objects that its rate changes are not unilateral
because member utilities control the board. But as explained
above, FERC could reasonably conclude that no one member
has significant bargaining power vis-à-vis the entire
cooperative. Moreover, as this dispute illustrates, the interests
of individual members may diverge. And if anything, the
distinctive features of the relationship between a cooperative
and its members warrant more scrutiny in this context, not less.
Individual members collectively own the cooperative. As
owners, they stand to benefit from higher prices charged by
Wabash and then passed on to retail customers. The individual
utilities thus lack the same incentive as a buyer negotiating with
an unrelated seller for the lowest possible prices. In other
words, the utilities are effectively on both sides of the
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transaction. And the Mobile-Sierra presumption applies only
to rates that are “the product of adversarial negotiations
between sophisticated parties pursuing independent interests.”
Okla. Gas & Elec. Co. v. FERC, 827 F.3d 75, 79–80 (D.C. Cir.
2016).
Wabash further argues that contracts freely negotiated are
entitled to the Mobile-Sierra presumption even if they contain
no individually negotiated terms. But as we have explained,
the absence of individual terms tends to support FERC’s
conclusion that the buyers here lacked the degree of bargaining
power necessary to trigger the presumption. On rehearing,
FERC invoked administrative precedents broadly stating that a
contract must contain individualized terms to enjoy the
presumption. See 172 FERC ¶ 61,177, P 14 n.25. However,
we do not read FERC’s decision as resting on a per se rule that
the presumption can never apply to form contracts, and we do
not opine on such a sweeping rule. We simply conclude that,
in this case, the small bargaining power of any individual
member relative to the cooperative plus the highly standardized
nature of the governing contracts supports FERC’s conclusion
that the contracts impose a unilateral tariff rate as opposed to a
freely negotiated bilateral contract rate.
III
The Commission reasonably rejected Wabash’s new
contracts. We therefore deny the petitions for review.
So ordered.