Standard of Review for Modifications to Jurisdictional Agreements

AGENCY:

Federal Energy Regulatory Commission, DOE.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

The Federal Energy Regulatory Commission (Commission) is issuing a notice of proposed rulemaking to propose a general rule regarding the standard of review applicable to proposed modifications to Commission-jurisdictional agreements under the Federal Power Act and Natural Gas Act. The intent of the proposed rulemaking is to promote the sanctity of contracts, recognize the importance of providing certainty and stability in competitive electric energy markets, and provide adequate protection of energy customers. The Commission is inviting comments on the notice of proposed rulemaking.

DATES:

Comments are due February 3, 2006.

ADDRESSES:

Comments may be filed electronically via the eFiling link on the Commission's Web site at http://www.ferc.gov. Commenters unable to file comments electronically must send an original and fourteen (14) copies of their comments to: Federal Energy Regulatory Commission, Secretary of the Commission, 888 First Street, NE., Washington, DC 20426. Refer to the Comment Procedures section of the preamble for additional information on how to file comments.

FOR FURTHER INFORMATION CONTACT:

Hadas Kozlowski, Office of the General Counsel, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-8030. Shaheda Sultan, Office of the General Counsel, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-8845.

Richard Howe, Office of the General Counsel, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-8289.

SUPPLEMENTARY INFORMATION:

I. Introduction

1. The Commission is proposing to amend its regulations to provide a general rule regarding the standard of review that must be met to justify proposed modifications to Commission-jurisdictional agreements under the Federal Power Act (FPA) and the Natural Gas Act (NGA) that are not agreed to by the signatories (or their successors). Specifically, the Commission proposes to repeal its regulation at 18 CFR 35.1(d).

2. In its place, the Commission proposes a regulation which provides that, in the absence of prescribed contractual language enabling the Commission to review proposed modification to agreements that are not agreed to by the signatories (or their successors) under a just and reasonable standard, the Commission will review such agreements under a public interest standard, in accordance with the Mobile-Sierra doctrine. However, this regulation will not apply to transmission service agreements executed under an open access transmission tariff as provided for under Order No. 888 and agreements for the transportation of natural gas (to the extent that they are executed pursuant to the standard form of service agreements in pipeline tariffs), as these forms of service agreement already mandate the use of the just and reasonable standard of review.

3. This regulation will be applied on a prospective basis, i.e., it will become effective for all Commission-jurisdictional contracts under the FPA or the NGA executed 30 days or more after the final rule is published in the Federal Register.

II. Background

4. The FPA and the NGA require that rates, terms, and conditions of service must be “just and reasonable” and not unduly discriminatory or preferential. The seller can propose rates, terms, and conditions of service and the Commission can approve them if it finds they meet the just and reasonable standard. The Commission can also on its own motion or on the filing of a complaint of a third party investigate existing rates, terms, and conditions of jurisdictional service and alter them prospectively, if it finds that such rates are no longer just and reasonable. The FPA and the NGA also provide that contracts between individual parties can be used to set rates, terms, and conditions. In such contracts, sellers may agree to voluntarily restrict some or all of their freedom to change the contract rates, terms, and conditions, and buyers may agree to restrict their right to request the Commission to change the rate, terms, and conditions. Additionally, sometimes the parties to the contract may attempt to restrict not only themselves but also the Commission from changing the contract provisions under the “just and reasonable” standard. In some cases, the seller and buyer have contracted for a particular rate, and not expressly reserved their rights to propose contractual changes, the contract has been filed with the Commission, and the Commission has permitted the rate to become effective. In these cases, the courts have differed on the applicable standard of review when a seller seeks, over the objections of the buyer, to file a new rate (under section 205 of the FPA or section 4 of the NGA), or the buyer or the Commission seeks (under section 206 of the FPA or section 5 of the NGA) to change the existing contract rate. In particular, courts have differed on whether the “just and reasonable” or the “public interest” standard of review should apply in that situation. Although not clearly defined, the “public interest” standard of review has been held to be higher or stricter than the “just and reasonable” standard of review.

5. In 1958, in United Gas Pipeline Co. v. Memphis Light, Gas and Water Division, the Supreme Court held that the Mobile-Sierra public interest standard of review does not apply to service agreements entered into pursuant to the “tariff-and-service agreement” system used by natural gas pipelines. That system is currently implemented through section 154.110 of the Commission's regulations, which requires interstate pipelines to include in their tariffs pro forma service agreements. Since Memphis, the Commission and the industry as a whole have consistently interpreted pipeline forms of service agreements as permitting changes in pipelines' tariff and service agreements to be made pursuant to the just and reasonable standard of review, rather than the public interest standard of review. This is true whether the change is initiated by the pipeline under section 4 of the NGA or by a shipper or the Commission under section 5.

6. In the electric industry, Order No. 888 adopted a “tariff and service agreement” contracting system for open access electric transmission service very similar to the system used by interstate pipelines for their open access transportation service. Thus, as is the case with natural gas pipeline service agreements, when an electric transmission provider negotiates a service agreement with a customer, the issue of what standard of review the Commission will apply when acting on proposed tariff or contract modifications is generally not a matter for negotiation between the parties. The just and reasonable standard of review must apply, since it is provided for in the OATT and in the mandatory form of service agreement in the Transmission Provider's tariff.

III. Discussion

7. A great deal of time and expense is incurred, and much uncertainty is engendered, when the parties involved in contract disputes and the Commission attempt to resolve the issues of whether the parties intended to invoke a public interest standard of review, and whether this standard binds only one party, both parties, third parties, and/or the Commission.

8. Moreover, courts have been divided as to whether to apply the public interest or the just and reasonable standard in the face of contractual silence. As the (First Circuit) court said in Boston Edison, “cases even within the D.C. Circuit * * * do not form a completely consistent pattern.” The Boston Edison court also stated that these issues would remain in a state of confusion until the Commission “squarely confronted the underlying issues,” and if the Commission “wanted to eliminate much of the existing uncertainly regarding the parties” intent, it might prescribe prospectively the terms that parties would have to use to invoke Mobile-Sierra protection.”

9. Upon review of the case law, we conclude that the weight of precedent supports the conclusion that the public interest standard applies in the case of contractual silence. See, e.g., Texaco Inc. v. FERC, 148 F.3d 1091, 1096 (D.C. Cir. 1998) (“absent contractual language ‘susceptible to the construction that the rate may be altered while the contract[] subsists,' the Mobile-Sierra doctrine applies,” quoting Appalachian Power Co., 529 F.2d 342, 348 (D.C. Cir. 1976)). Moreover, we note that, in the initial cases, the Supreme Court interpreted silence as requiring the public interest standard of review. See Sierra, 350 U.S. at 355 (“while it may be that the Commission may not normally impose upon a public 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”).

10. Thus, rather than prescribe specific terms for invoking Mobile-Sierra, as suggested by Boston Edison, the Commission believes that, in keeping with precedent, recognizing the importance of providing certainty and stability in energy markets, and to promote the sanctity of contracts, it is preferable to interpret contractual silence on this issue as the intent to invoke a Mobile-Sierra standard of review. Stated differently, parties seeking to reserve the contractual right to seek modification under a just and reasonable standard of review must do so clearly and explicitly. Accordingly, we propose to prescribe terms parties must use to evidence an intent to have the Commission review modifications to jurisdictional agreements that are not agreed to by the signatories (or their successors) under the just and reasonable standard. In the absence of such prescribed language, we propose to review modifications to jurisdictional agreements that are not agreed to by all signatories (or their successors) under the public interest standard. New agreements and modifications to jurisdictional agreements that are agreed to by all signatories (or their successors), however, will continue to be reviewed under the just and reasonable standard. As we have explained with regard to the former, we are not bound to employ a public interest standard of review when we undertake our initial review of an agreement.

IV. Information Collection Statement

11. The Commission is not imposing an information collection requirement upon the public. Therefore, this proposed rule is not subject to review by the Office of Management and Budget.

V. Environmental Analysis

12. The Commission is required to prepare an Environmental Assessment or an Environmental Impact Statement for any action that may have a significant adverse effect on the human environment. The Commission concludes that neither an Environmental Assessment nor an Environmental Impact Statement is required for this NOPR pursuant to § 380.4(a)(2)(ii) of the Commission regulations, which provides a “categorical exclusion” for rules that do not substantively change the effect of legislation.

VI. Regulatory Flexibility Act Certification

13. The Regulatory Flexibility Act of 1980 (RFA) requires that a rulemaking contain either a description and analysis of the effect that the proposed rule will have on small entities or a certification that the rule will not have a significant economic impact on a substantial number of small entities. However, the RFA does not define “significant” or “substantial” instead leaving it up to an agency to determine the impact of its regulations on small entities.

14. In drafting this rule, the Commission has followed the provisions of both the RFA and the Paperwork Reduction Act to consider the potential impact of regulations on small business and other small entities. The cost of compliance with the rule proposed herein, if finalized, will be minimal. Accordingly, pursuant to § 605(b) of the RFA, the Commission hereby certifies the rule proposed herein, if finalized, will not have a “significant economic impact on a substantial number of small entities.”

VII. Comment Procedures

15. The Commission invites interested persons to submit comments on the matters and issues proposed in this notice to be adopted, including any related matters or alternative proposals that commenters may wish to discuss. Comments are due February 3, 2006. Comments must refer to Docket No. RM05-35-000, and must include the commenter's name, the organization represented, if applicable, and the commenter's address. Comments may be filed either in electronic or paper format.

16. Comments may be filed electronically via the eFiling link on the Commission's Web site at http://www.ferc.gov. The Commission accepts most standard word processing formats and commenters may attach additional files with supporting information in certain other file formats. Commenters filing electronically do not need to make a paper filing. Commenters that are not able to file comments electronically must send an original and fourteen (14) copies of their comments to: Federal Energy Regulatory Commission, Secretary of the Commission, 888 First Street, NE., Washington, DC 20426.

17. All comments will be placed in the Commission's public files and may be viewed, printed, or downloaded remotely as described in the Document Availability section below. Commenters on this proposal are not required to serve copies of their comments on other commenters.

VIII. Document Availability

18. In addition to publishing the full text of this document in the Federal Register, the Commission provides all interested persons an opportunity to view and/or print the contents of this document via the Internet through FERC's Home Page ( http://www.ferc.gov ) and in FERC's Public Reference Room during normal business hours (8:30 a.m. to 5 p.m. Eastern time) at 888 First Street, NE., Room 2A, Washington, DC 20426.

19. From the Commission's Home Page on the Internet, this information is available in the Commission's document management system, eLibrary. The full text of this document is available on eLibrary in PDF and Microsoft Word format for viewing, printing, and/or downloading. To access this document in eLibrary, type the docket number excluding the last three digits of this document in the docket number field.

20. User assistance is available for eLibrary and the FERC's Web site during normal business hours. For assistance, please contact FERC Online Support at 1-866-208-3676 (toll free) or 202-502-6652 (e-mail at FERCOnlineSupport@FERC.gov), or the Public Reference Room at 202-502-8371, TTY 202-502-8659 (e-mail at public.referenceroom@ferc.gov).

List of Subjects

18 CFR Part 35

• Electric power rates
• Electric utilities
• Reporting and recordkeeping requirements

18 CFR Part 370

• Electric power; Natural gas; Pipelines

In consideration of the foregoing, the Commission proposes to amend Chapter I, Title 18, Code of Federal Regulations, as follows:

PART 35—FILING OF RATE SCHEDULES AND TARIFFS

1. The authority citation for part 35 continues to read as follows:

Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42 U.S.C. 7101-7252.

Subchapter V—Standard of Review

PART 370—STANDARD OF REVIEW FOR MODIFICATIONS TO JURISDICTIONAL AGREEMENTS

Authority: 15 U.S.C. 717-717w, 3301-3432; 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42 U.S.C. 7101-7252.