United States Court of Appeals
For the First Circuit
No. 00-1055
BOSTON EDISON COMPANY,
Petitioner,
v.
FEDERAL ENERGY REGULATORY COMMISSION,
Respondent.
__________
NEW ENGLAND POWER COMPANY,
Intervenor.
ON PETITION FOR REVIEW OF ORDERS OF
THE FEDERAL ENERGY REGULATORY COMMISSION
Before
Torruella, Chief Judge,
Wallace,* Senior Circuit Judge,
and Boudin, Circuit Judge.
Carmen L. Gentile with whom James H. McGrew, David Martin
Connelly, Bruder, Gentile & Marcoux, L.L.P. and Neven Rabadjija,
Associate General Counsel, Legal Department, Boston Edison
Company, were on brief for petitioner.
John H. Conway, Acting Solicitor, with whom Douglas W.
Smith, General Counsel, Timm L. Abendroth and Judith A. Albert
were on brief for respondent.
Marvin T. Griff with whom Isaac D. Benkin and Winthrop,
Stimson, Putnam & Roberts were on brief for intervenor.
*Of the Ninth Circuit, sitting by designation.
December 1, 2000
BOUDIN, Circuit Judge. Before us are two petitions for
review filed by Boston Edison Company concerning contracts
allocating output from, and costs associated with, operation of
its Pilgrim nuclear power station in Plymouth, Massachusetts.
In one case, Boston Edison seeks review of Federal Energy
Regulatory Commission ("FERC") orders reducing its rate of
return on common equity in the Pilgrim plant and directing
refunds to Montaup and Commonwealth Electric Companies. In the
other, Boston Edison claims that amendments terminating its
contracts with Montaup and Commonwealth upon the recent sale of
the Pilgrim plant have extinguished any rights to these refunds.
1. The pertinent facts track the life cycle of the
Pilgrim plant. On August 1, 1972, four months before the unit
became operational, Boston Edison entered into virtually
identical "entitlement" contracts with Montaup and with
Commonwealth, then known as the New Bedford Gas and Edison Light
Company. Each was "entitled" to 11 percent of Pilgrim's output
in return for bearing 11 percent of costs and expenses,
including, as part of "total financing and income tax" expenses,
a return of 13.5 percent on common equity--35 percent of the
original capital for the plant. Boston Edison promptly filed
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both contracts with FERC as Rate Schedules No. 68 (Commonwealth)
and No. 69 (Montaup).
Midway in the Pilgrim's progress from birth to
projected retirement, Boston Edison and Montaup amended their
contract, assertedly to allay Boston Edison's concerns about its
ability to recover its full actual costs and to provide for the
possibility that the plant might outlive the contract's 28-year
term. Effective January 1, 1985, the amendment added
decommissioning pre-charges as an allocable expense and altered
Boston Edison's chargeable return on common equity from 13.5
percent to the return "allowed by the [Massachusetts] Department
of Public Utilities in [Boston Edison's] most recent retail rate
decision."2
The Department of Public Utilities, later renamed the
Department of Telecommunications and Energy, was already
responsible for approving the permissible rates of return on
common equity for the 74.27 percent of Pilgrim's output that
2 Generally, sales of wholesale (i.e., between generating
companies and distributors) electric energy in interstate
commerce are subject to FERC regulation, 16 U.S.C. § 824 (1994),
while retail sales (i.e., between distributors and local
customers) are subject to state regulation, Mass. Gen. Laws ch.
164, §§ 93-94E (1997). See also Town of Norwood v. FERC, 202
F.3d 392, 396 (1st Cir. 2000), petition for cert. filed, 68
U.S.L.W. 3756 (U.S. May 30, 2000) (No. 99-1914). Boston Edison
engaged in both kinds of sales and thus was subject to dual
regulation. [Throughout this opinion cites to 16 U.S.C. are to
the 1994 edition unless indicated otherwise.]
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Boston Edison retailed directly; the 1985 amendment in the
Montaup contract, and similar modifications in Boston Edison's
other entitlement contracts, sought to make the state's
decisions binding as to the remaining 25.73 percent that Boston
Edison sold wholesale.3 The amendment in Commonwealth's
contract, made in 1989, kept its return on equity at 13.5
percent until a pending docket before the state utility
commission set a new rate, or until the next retail decision if
no rate was set in that docket. The Montaup and Commonwealth
amendments, which also made other changes not pertinent here,
were filed with FERC.
As initially filed, the amendments bound Montaup and
Commonwealth to whatever rate the Massachusetts agency approved
for Boston Edison's retail customers, with no upper limit. Each
amendment, however, was followed by Boston Edison's filing with
FERC of a "rate schedule supplement," establishing a specific
ceiling on common equity rates of return. Each supplement said
that if the state agency were to approve a retail rate of return
above the ceiling, Boston Edison "may file" an application with
3In addition to the 22 percent of Pilgrim's output allocated
to Montaup and to Commonwealth, Boston Edison also contracted
with 14 Massachusetts municipal utilities which, in the
aggregate, accounted for an additional 3.73 percent of Pilgrim's
power. Boston Edison Co. v. FERC, 856 F.2d 361, 362 (1st Cir.
1988); see also Boston Edison Co., 62 F.E.R.C. ¶ 61010, at
61,031-32 (Jan. 12, 1993) (listing the municipal systems).
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FERC "pursuant to terms of Section 205 of the Federal Power Act
[16 U.S.C. § 824d(d)] . . . to temporarily modify said ceiling."
Absent such an application, the 1985 supplement fixed
the ceiling for Montaup at 15.25 percent, and the 1989
supplement set the ceiling for Commonwealth at 13.5 percent,
which was also the original and interim contractual rate for
Commonwealth. According to Boston Edison, the state agency
never established a retail rate higher than 12.0 percent; thus
that rate applied to Montaup's contract until its termination in
1999. Similarly, because no new rate resulted from the state
docket pending in 1989, Commonwealth, under its amended
contract, continued to pay at the 13.5 percent rate. The use of
section 205 to lift these ceilings, therefore, remained a moot
issue.
In November 1992, anticipating the substantial costs
of dismantling the Pilgrim nuclear power plant, Boston Edison
filed a petition under section 205 for an increase in
decommissioning expenses. Boston Edison Co., 62 F.E.R.C. ¶
61,010, at 61,029 (Jan. 12, 1993). FERC accepted the increased
charges for filing, but suspended them pending a hearing based
on a preliminary judgment that they might not be just and
reasonable. Id. at 61,030; see 16 U.S.C. § 824d(e). At the
same time, believing that the rates of return being collected on
common equity might be similarly suspect, FERC began an
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investigation into existing rates under section 206(a) of the
Act, 16 U.S.C. § 824e(a).
After a five-day hearing in September 1993, a FERC
administrative law judge ("ALJ") found the additional
decommissioning charges just and reasonable (subject to an
adjustment not here at issue), but the 12.0 and 13.5 percent
returns (applicable, respectively, to Montaup and to
Commonwealth) on common equity "unjust and unreasonable within
the meaning of section 206." Boston Edison Co., 66 F.E.R.C. ¶
63,013, at 65,086 (Mar. 25, 1994) ("Initial Decision"). The ALJ
recommended a new return on common equity of 10.71 percent,
effective from March 20, 1993. In so doing, the ALJ rejected
Boston Edison's argument that, under the so-called Mobile-Sierra
doctrine, the agency could modify the contractual rates only if
they "adversely affect the public interest," Federal Power
Comm'n v. Sierra Pacific Power Co., 350 U.S. 348, 355 (1956);
accord United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350
U.S. 332, 345 (1956).
On December 19, 1996, FERC released its own decision
on review of the ALJ order. Boston Edison Co., 77 F.E.R.C. ¶
61,272, at 62,172-73 (Dec. 19, 1996) (Opinion No. 411). FERC
summarily affirmed the ALJ's conclusion that the just and
reasonable standard pertained, and applying his recommended rate
of 10.71 percent for the period from March 20, 1993, to June 20,
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1994, ordered refunds for that 15-month period pursuant to 16
U.S.C. § 824e(b). FERC also directed Boston Edison to file a
new schedule using a rate of 11.22 percent prospectively (to
reflect a rise in U.S. Treasury Bond yields since the ALJ's
recommendation was made).
FERC subsequently denied Boston Edison's petition for
rehearing. Boston Edison Co., 88 F.E.R.C. ¶ 61,267, at 61,841-
42 (Sept. 20, 1999) (Opinion No. 411-A). The rehearing order is
important, however, because in it FERC provided a new and
distinct rationale for its earlier conclusion that the use of
the just and reasonable standard was consistent with the Mobile-
Sierra doctrine. The overall effect of FERC's two orders was to
require a reduction in Boston Edison rates for Montaup and
Commonwealth and refunds amounting to almost $5 million.
The events bearing on the present case include one
other transaction and separate FERC proceedings. Earlier in
1999 before Opinion No. 411-A issued, FERC in separate dockets
approved Boston Edison's sale of the Pilgrim plant to Entergy.
Boston Edison Co. & Entergy Nuclear Generation Co., 87 F.E.R.C.
¶ 61,034 (Apr. 5, 1999) ("Order on Sale of Facilities, Rate
Filings, and Petition for Declaratory Order"); Boston Edison Co.
& Entergy Nuclear Generation Co., 87 F.E.R.C. ¶ 61,053 (Apr. 7,
1999) ("Order Conditionally Authorizing Sale of Jurisdictional
Facilities"). In these dockets, FERC accepted agreed-to
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"termination amendments" to Boston Edison's entitlement
contracts with Montaup and Commonwealth which stated that the
contracts would be terminated upon Pilgrim's sale, to be
replaced by new arrangements with Entergy. Boston Edison
transferred the Pilgrim plant to Entergy on July 13, 1999.
In its compliance filing made in response to Opinion
No. 411, and in a petition for rehearing of Opinion No. 411-A,
Boston Edison argued that the FERC-approved termination
amendments had extinguished Montaup's and Commonwealth's rights
to the refunds mandated in those opinions. FERC concluded
otherwise and, in a single order, rejected Boston Edison's
compliance filing and request for rehearing. Boston Edison Co.,
90 F.E.R.C. ¶ 61,039, at 61,188 (Jan. 14, 2000) ("Order Denying
Rehearing and Rejecting Compliance Filing").
Boston Edison has now petitioned this court for review
of the orders reflected in Opinions No. 411 and 411-A, and for
review of the January 14, 2000, order. See 16 U.S.C. § 825l(b).
Its central claim is that FERC has no authority to alter the
contract rates, or to order refunds based on such an alteration,
unless FERC first finds that the existing contracts are contrary
to the public interest under Mobile-Sierra. In the alternative,
Boston Edison argues that any refund claims that Montaup and
Commonwealth had under the two opinions were extinguished by the
termination amendments on the sale of the Pilgrim plant. FERC
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and Montaup support the orders under review; Commonwealth, which
is now an affiliate of Boston Edison, stands silent.
2. To understand Mobile-Sierra requires a brief step
back to the regulatory scheme. In regulating electricity rates,
the Federal Power Act follows (with variations) a well-developed
model: 4 the utility sets the rates in the first instance, 16
U.S.C. § 824d(a), subject to a basic statutory obligation that
rates be just and reasonable and not unduly discriminatory or
preferential, id. §§ 824d(a)-(b). FERC, which inherited the
powers of its predecessor (the Federal Power Commission), can
investigate a newly filed rate (section 205, id. § 824d(e)), or
an existing rate (section 206, id. § 824e(a)), and, if the rate
is inconsistent with the statutory standard, order a change in
the rate to make it conform to that standard, id. §§ 824d(e),
824e(a)-(b).
The procedural incidents and FERC's ability to provide
refunds vary depending on whether the proceeding is one to
investigate a new rate filing or an existing rate. For example,
4The first of the major federal rate-regulation statutes was
the Interstate Commerce Act of 1887, 24 Stat. 379. Although now
effectively supplanted as to railroad rates, it provided the
model successively for the regulation of interstate electrical
transmission in the Federal Power Act of 1920, 41 Stat. 1063;
interstate telephone service in the Communications Act of 1934,
48 Stat. 1064; natural gas transmission in the Natural Gas Act
of 1938, 52 Stat. 821; and interstate airline service in the
Civil Aeronautics Act of 1938, 52 Stat. 973.
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in the former case, the burden is on the utility to show that
its rate is lawful, 16 U.S.C. § 824d(e), and, in the latter, the
burden is on the FERC staff or the customer to show that the
rate is unlawful, id. § 824e(b). In both circumstances,
however, the statutory test of lawfulness is phrased in the same
terms. What the Mobile-Sierra decisions did, in certain of the
cases where the utility and its customer have made a contract
governing the rates to be charged, was to drive a wedge between
the two sections, and vary the statutory standard in a way that
no one can discern from the statutory language alone. See
Sierra, 350 U.S. at 355.
Traditionally, contracts fixing utility or carrier
rates have been anathema to the courts because, almost by
definition, they suggest different treatment of similarly-
situated customers in contravention of the basic principle of
non-discrimination. See, e.g., New York v. United States, 331
U.S. 284, 296-97 (1947). But the customers in interstate sales
of electricity and natural gas sales have tended to be big
companies, and negotiated contracts formed a useful means of
allocating risks. When Congress imposed rate regulation in the
Federal Power Act, and then again in the Natural Gas Act, it
acknowledged--in contrast to its initially pure tariff-based
regulation of railroads and telephone companies--that contracts
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between individual parties could also be used to set rates.
See, e.g., 16 U.S.C. §§ 824d(d), 824e(a).
In the Mobile and Sierra decisions, the Supreme Court
sought to mesh this new respect for contracts under the Federal
Power and Natural Gas Acts with the traditional scheme of
regulation. It held that where the electrical utility (or
natural gas company) and its customer have contracted for a
particular rate, and the agency has accepted the contract for
filing and then allowed the rate to become effective, (1) the
utility cannot unilaterally (i.e., without the customer’s
consent) file a new rate under section 205 to supersede the
agreed-upon rate; and (2) the agency’s power under section 206
to alter the existing contract rate under the just and
reasonable standard is also curtailed. Sierra, 350 U.S. at 352-
55; accord Mobile, 350 U.S. at 347 (same as to sections 4 and 5
of the Natural Gas Act). For example, FERC cannot order an
increase in a contracted-for rate merely by finding that the
rate is unreasonably low in the traditional sense that it is
insufficient to produce a reasonable return on capital for the
seller. Sierra, 350 U.S. at 354-55; accord Northeast Utils.
Serv. Co. v. FERC, 55 F.3d 686, 690 (1st Cir. 1995).
Instead, importing a term that does not appear in the
rate regulation provisions of the Federal Power Act or the
Natural Gas Act, the Supreme Court said that the contract rate
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could be raised only if it offended the "public interest"; and
the example given was of a rate so low that it threatened the
survival of the utility, excessively burdened other consumers,
or imposed undue discrimination. Sierra, 350 U.S. at 355. This
solution based on a public interest standard, although created
out of whole cloth,5 makes practical sense when one understands
the facts out of which Mobile and Sierra arose, namely, blatant
attempts to raise rates by sellers in violation of their
contracts. But it left open several further problems, such as
when the contract should be read as setting a binding rate and
what circumstances might justify FERC supplanting a contract
rate as contrary to the public interest.
It is easy enough to understand why Boston Edison
invoked the Mobile-Sierra doctrine. Its original contracts, as
modified by the 1985 and 1989 supplements, initially agreed to
specified rates of return on equity (12 percent to be paid by
Montaup and 13.5 percent for Commonwealth)--rates that, in the
end, were never changed.6 FERC ordered future rate reductions
5The public interest standard is often used in public
utility statutes for deciding whether new facilities may be
built, or a sale or merger approved. E.g., Federal Power Act,
§ 203, 16 U.S.C. § 824b. In these contexts, but not in rate
regulation, practice and precedent supply a measure of content
to the concept.
6Rates of return are not themselves rates in the statutory
sense (e.g., dollars per kilowatt hour) but can be used to
determine the rates. Cf. Richmond Power & Light v. Federal
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for Boston Edison and refunds for the two customers on the
premise that the just and reasonable rates of return were less
than those provided for in the contracts and actually charged.
See 77 F.E.R.C. ¶ 61,272, at 62,171-72. And FERC never found
that the higher rates of return fixed by contract were contrary
to the public interest.
The ALJ's basic answer to Mobile-Sierra, summarily
adopted by FERC in its initial order (Opinion No. 411), was
straightforward. He reasoned that the contractual intent to
disable FERC from using the just and reasonable standard must be
clear, 66 F.E.R.C. ¶ 63,013, at 65,075; that "the rate of return
provision of the Pilgrim contracts contain no restrictions on
changes to the rates for any period of time," id.; that the
agreements contain a general "[Laws,] Regulations and Approvals"
clause making them subject to on-going agency regulation, id.;
and that this clause "[c]learly . . . contemplates review of the
rate of return at any time as the Commission deems necessary"
under the just and reasonable standard, id.
FERC is entitled to some deference in construing
contracts where the sales are subject to FERC regulation.
United Gas Pipe Line Co. v. Memphis Light, Gas & Water Div., 358
Power Comm'n, 481 F.2d 490, 497 (D.C. Cir.), cert. denied sub
no. Indiana & Mich. Elec. v. Anderson Power & Light, 414 U.S.
1068 (1973).
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U.S. 103, 114 (1958); see also Boston Edison Co. v. FERC, 856
F.2d 361, 363 (1st Cir. 1988). But no one reading these
contracts at the time they were written would doubt that the
parties had bargained for a specific rate of return at the
outset or, under the amendments, for a formula or method of
fixing those rates of return. Cf. Richmond Power, 481 F.2d at
497. And the period of time was obviously the duration of the
contract, unless the parties agreed to changes themselves, as
they did in the 1985 and 1989 amendments, or unless FERC
overrode the contracts with a public interest finding.
The Mobile-Sierra doctrine has hung over the electric
power and natural gas industries since 1956, and the two cases
are probably among the dozen best-known public utility decisions
by the Supreme Court in this century. At least until recently,
anyone bargaining in the shadow of the doctrine would assume
that a contract unconditionally setting a fixed rate, or a fixed
rate of return, would be governed by Mobile-Sierra. See, e.g.,
66 F.E.R.C. ¶ 63,013, at 65,073. This was certainly so in 1972
when the Pilgrim plant contract framework was constructed; and
the 1985 and 1989 amendments only varied the method for
identifying the proper rate of return in that formula. Nothing
in the amendments suggests that the parties had a later intent
to enlarge FERC's authority to reduce the contracted-for rates.
The only aspect of the contractual relationship that suggests
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the parties intended any FERC involvement beyond Mobile-Sierra
may be found in the amendment supplements, but those merely give
FERC an option to increase those rates if the state agency
adopts ones above the cap.
In 1972, as today, the parties could negate the
protection afforded by Mobile-Sierra by providing that a
contract rate initially fixed by the parties and filed with FERC
could be overridden by FERC at any time under the just and
reasonable standard. See Memphis Light, 358 U.S. at 112; see
also Papago Tribal Utility Auth. v. FERC, 723 F.2d 950, 953
(D.C. Cir. 1983), cert. denied, 467 U.S. 1241 (1984); Kansas
Cities v. FERC, 723 F.2d 82, 87 (D.C. Cir. 1983). The ALJ said
that the parties had effectively done just this by the "Laws,
Regulations and Approvals" clause. It reads as follows (to make
clear his reasoning, we add the emphasis supplied by the ALJ):
This Agreement is made subject to present
and future Federal, State and local laws and
to present and future regulations and orders
properly issued by Federal, State and local
bodies having jurisdiction; and performance
hereunder is conditioned upon securing and
retaining such Federal, State and local
governmental and regulatory approvals,
grants and permits as may from time to time
be necessary.
66 F.E.R.C. ¶ 63,013, at 65,075.
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The opening portion of the clause ("made subject to")
is the standard boilerplate inserted by lawyers to protect
against lawful supervening directives. It is very hard to read
it either as adopting the just and reasonable standard for rate
review or as making lawful a FERC rate order that would be
unlawful under Mobile-Sierra. The closing ("performance
hereunder") portion of the clause, which contains the language
underscored by the ALJ, clearly pertains to regulatory actions
such as the grant of a construction or operating license and not
to rate decisions. In short, the rationale of the ALJ, which
FERC initially adopted by cross-reference, is not persuasive.
Our view of the matter accords with the most recent
decision of the D.C. Circuit on both points, namely, that the
specification of a rate or formula by itself implicates Mobile-
Sierra (unless the parties negate the implication) and that a
generally framed boilerplate clause (like the "Laws, Regulations
and Approvals" clause here) does not constitute such a negation.
Texaco, Inc. v. FERC, 148 F.3d 1091, 1096 (D.C. Cir. 1998); cf.
Appalachian Power Co. v. Federal Power Comm'n, 529 F.2d 342, 348
(D.C. Cir.), cert. denied, 429 U.S. 816 (1976). Texaco arguably
impairs the D.C. Circuit's earlier decision in Kansas Cities,
723 F.2d at 86-87, here relied upon by FERC; but that case is
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distinguishable in any event.7 The truth is that the cases, even
within the D.C. Circuit itself, do not form a completely
consistent pattern. Compare, e.g., Texaco, 148 F.3d at 1096,
with Union Pac. Fuels, Inc. v. FERC, 129 F.3d 157, 161-62 (D.C.
Cir. 1997).
On rehearing, FERC reaffirmed its support for the ALJ's
rationale but, understandably uneasy ( Texaco had been decided in
the meantime), offered a new rationale for avoiding Mobile-
Sierra. Reverting to a staff argument mentioned but not relied
on by the ALJ, FERC's rehearing order noted that in the 1985 and
1989 contract amendments, Boston Edison had consented to
numerical caps on the rate of return that governed under the
contracts, even if the state authorized a retail rate above the
cap levels; but the utility had also reserved a right to ask
FERC under section 205 to approve the state-approved, above-cap
rates under a just and reasonable standard. 88 F.E.R.C. ¶
61,267, at 61,841. In short, the contract provided a cap but
also a safety valve.
7
The pertinent contract in Kansas Cities had specified that
one set of rates could not be changed without a public interest
finding and the court inferred by negative implication that the
other set of rates in the contract could be changed without such
a finding, although the court also cited the general purpose
boilerplate clause to shore up its conclusion. Kansas Cities,
723 F.2d at 88-90.
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FERC said that because this cap and safety valve regime
employed the just and reasonable standard to protect Boston
Edison, it made sense--both as a matter of contract
interpretation and regulatory policy--to employ the same
standard in reviewing rates below the cap. 88 F.E.R.C. ¶
61,267, at 61,841. In reality, it makes sense under neither
criterion, and FERC should not be resorting to such an argument;
it fosters the impression that the agency will say anything it
needs to achieve its ends, ends that could probably be achieved
prospectively with a modicum of forethought, effort, and candor.
Starting with contract interpretation, the cap and
safety valve is a self-contained regime patently designed to
protect interstate purchasers from paying an excessive rate of
return that might be fixed by the state agency in consideration
of local purchasers. Thus a cap was imposed at the top, with no
corresponding minimum floor; but since the cap itself might
prove to be too confining under certain economic conditions, the
safety valve was added to allow Boston Edison to escape the cap
assuming FERC approved. Nothing in this balanced solution
suggests that, in agreeing that the state rate should otherwise
be binding, the parties intended to negate the ordinary, default
rule that Mobile-Sierra governed FERC-proposed changes, Texaco,
148 F.3d at 1096.
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As to the supposed policy grounds invoked by FERC, FERC
says that Boston Edison is attempting to bind FERC to a
"stricter [public interest] standard than that to which the
party is itself bound," 88 F.E.R.C. ¶ 61,267 at 61,841, the
latter obviously referring to Boston Edison's option to seek to
exceed the cap under the just and reasonable standard. This is
rhetoric rather than policy. Mobile-Sierra's premise is that
the parties can nullify FERC's authority to make changes in
private contracts except when required in the public interest;
if this is so, it is not a further infringement of FERC's
authority for the parties to reserve an area within which FERC
retains limited authority under a different standard (here, just
and reasonable) to police one area of special concern.
Whether and when Mobile-Sierra applies in varying
contexts is going to remain in confusion unless and until FERC
makes up its mind and squarely confronts the underlying issues.
It is not at all clear to us that FERC, which is now becoming
hostile to Mobile-Sierra, needs to tolerate it at all. FERC has
reasonably broad powers to regulate the substantive terms of
filings that it accepts and allows to become effective, whether
they are ordinary tariffs or contracts, see In re Permian Basin
Area Rate Cases, 390 U.S. 747, 777-80 (1968); and such powers
may include the power to require prospectively, by regulation,
that all contracts set their rates subject to FERC's just and
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reasonable standard. Obviously, we do not decide the point, and
whether it would be good policy is a very different question.8
Alternatively, if FERC were neutral toward or opposed
to such clauses but wanted to eliminate much of the existing
uncertainty as to the parties' intent, it might prescribe
prospectively the terms that parties would have to use to invoke
Mobile-Sierra protection. This would at least be a more winning
approach than efforts to impose such requirements ad hoc, and,
as here, after contracts have been drafted, signed, accepted for
filing by FERC, and implemented. See, e.g., San Diego Gas &
Elec. Co. v. Public Serv. Co., 91 F.E.R.C. ¶ 61,233 (June 1,
2000); Florida Power & Light Co., 67 F.E.R.C. ¶ 61,141 (May 3,
1994); Southern Co. Servs., Inc., 67 F.E.R.C. ¶ 61,080 (Apr. 19,
1994). Arguably, such regulations as to form would more easily
survive judicial scrutiny than a general ban on contract
provisions seeking to invoke Mobile-Sierra.
FERC is not entirely to be blamed for the present
confusion: some of the problems arise from the failure of the
8Utility regulation is normally justified to offset market
or monopoly power, which may or may not be present in
transactions such as the ones before us. Where it is not,
private ordering by contract may be superior to regulation--a
view increasingly reflected in Congressional reforms. See,
e.g., 49 U.S.C. §§ 10707, 10709 (Supp. II 1996) (railroad
regulation); see generally, Western Coal Traffic League v.
United States, 719 F.2d 772, 776-77 (5th Cir. 1983) (en banc),
cert. denied, 466 U.S. 953 (1984).
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parties to be clear about their intentions, see, e.g., Memphis
Light, 358 U.S. at 109; some from changing attitudes of the
courts and the agency, see, e.g., Kansas Cities, 723 F.2d at 87;
and some from wholesale confusion about just what concrete
circumstances would allow a contract to be overridden under
Mobile-Sierra, see, e.g., Transmission Access Policy Study Group
v. FERC, 2000 WL 762706, at *35-*39 (D.C. Cir. 2000). But FERC
should stop trying to re-write deals that the parties have
already made under the aegis of Mobile-Sierra--unless it
properly invokes the public interest standard--and instead take
the longer view and decide what it wants or does not want in new
contracts.
Even though we conclude that Mobile-Sierra applies in
this case, FERC might still override the contract rates in
question on remand by determining that they are contrary to the
public interest. Sierra, 350 U.S. at 355; Mobile, 350 U.S. at
345. Admittedly, the rates are too high for the period in
question to be just and reasonable (or at least Boston Edison
has chosen not to contest this ruling); but are they so high as
to be contrary to the public interest--and what would this mean
anyway? See generally Northeast Utils. Serv. Co. v. FERC, 993
F.2d 937, 961 (1st Cir. 1993). Very little useful precedent
exists; FERC has made no findings and offered no interpretation
of the concept in this case; and the parties have not briefed
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the issue on appeal. Certainly, we have no interest in
anticipating it.
On remand, the parties are free to litigate the public
interest issue before FERC, but it is worth suggesting that this
is a case best resolved by settlement. Boston Edison has sold
Pilgrim, and new contracts are in force between the new owner
(Entergy) and Montaup and Commonwealth. As to refunding past
payments, the only issue is money, and the parties are likely to
waste much of it on lawyers' fees by litigating the public
interest issue which, being terra incognita as to rate
reductions, promises further appellate strife however it might
be resolved by FERC.
3. There remains Boston Edison's alternative claim on
appeal that, even if it owed refunds as determined by FERC,
Montaup and Commonwealth surrendered their rights when they
signed the termination agreements. If we thought this argument
were correct, it would waste everyone's time to remand the case
to see whether refunds could be justified by analyzing the rates
under the public interest standard: the termination amendments
would waive any refund claims regardless of the standard used to
invalidate the rates actually charged. We conclude, however,
that Boston Edison's waiver argument fails on the merits.
At the outset, FERC says that Boston Edison's waiver
argument should be rejected because not properly preserved. It
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relies upon a provision of the Federal Power Act that says: "No
proceeding to review any order of the Commission shall be
brought by any person unless such person shall have made
application to the Commission for a rehearing thereon." 16
U.S.C. § 825l(a). This is in substance an exhaustion-of-
remedies provision but, being statutory in character, it is
somewhat less susceptible to the implied exceptions, which
courts have liberally devised where the exhaustion requirement
is created by the courts rather than Congress. E.g., McCarthy
v. Madigan, 503 U.S. 140, 144 (1992); Coit Independence Joint
Venture v. Federal Sav. and Loan Ins. Corp., 489 U.S. 561, 579
(1989).
What happened here is that the termination amendments
were filed in April 1999 and became effective in July 1999, more
than two years after Boston Edison had petitioned for rehearing
of the refunds ordered in Opinion No. 411. Once FERC denied
rehearing of that decision in September 1999 in Opinion No. 411-
A, Boston Edison invoked the termination amendments as a
separate defense to refunds; first in early October by including
the argument in its Opinion No. 411-compelled compliance filing,
and then again later in October (in more abbreviated form) in a
petition for rehearing of Opinion No. 411-A. The parties then
exchanged arguments on the issue in briefs addressed to the
compliance filing.
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In its January 2000 order, FERC resolved the dispute
by ruling that the termination amendments did not cut off the
refunds it had ordered. 90 F.E.R.C. ¶ 61,039, at 61,188. On
this basis, FERC found that Boston Edison's compliance filing
was insufficient and that the petition for rehearing of Opinion
No. 411-A should be denied. Id. at 61,191. FERC's present
threshold argument is that Boston Edison cannot challenge this
interpretation of the termination amendments in court because it
did not first seek a rehearing by FERC of its January 2000,
order. Such a position, however, stretches the exhaustion
doctrine beyond its limits and makes no sense in relation to the
doctrine's rationale.
Boston Edison had already raised its objection to the
refunds, based on the termination agreements, by petition for
rehearing, namely, the petition addressed to Order No. 411-A.
FERC directly addressed this argument in its January 2000,
order. Thus, the gist of the relevant argument that Boston
Edison wants to make on appeal was in fact presented to FERC on
rehearing and rejected on the merits. The idea that Boston
Edison was compelled to repeat the same arguments in a second
petition for rehearing makes no sense and is at odds with
settled authority. See Boston Gas Co. v. FERC, 575 F.2d 975,
978 (1st Cir. 1978); see also Southern Natural Gas Co. v. FERC,
877 F.2d 1066, 1072-73 (D.C. Cir. 1989).
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Turning to the termination agreements themselves, each
contains a section, entitled "Termination of Remaining Rights
and Obligations Under Power Sale Agreement," that specifies:
"To the extent that continuation or survival of the rights and
obligations of Boston Edison and [Montaup and Commonwealth]
under the Power Sale Agreement are not expressly provided for in
this Amendment, they are hereby extinguished." Boston Edison's
argument, in a nut shell, is that nothing else in the amendments
specifically preserved the buyers' rights to the refunds ordered
by FERC and that therefore those rights were extinguished.
FERC concluded that this provision (section 7) standing
alone is "ambiguous," but it pointed to two other sections--6
and 15--that it read as preserving the buyers' rights to the
FERC-ordered refunds. 90 F.E.R.C. ¶ 61,039, at 61,190-91. FERC
says that its reading of the amendments is entitled to deference
while Boston Edison offers a different reading of those sections
and says that FERC's reading is unreasonable. We are ourselves
doubtful about the agency's reasoning, but we do not rely upon
it in arriving at the same result. The interpretation of
private contracts is, of course, ultimately a matter for the
courts although the agency's views may be entitled to a measure
of deference. Boston Edison Co. v. FERC, 856 F.2d 361, 363-64
(1st Cir. 1988).
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By its terms, section 7 is addressed to extinguishing,
except as elsewhere preserved, rights and obligations "under the
Power Sale Agreement," i.e., rights and obligations created by
or pursuant to the agreement. But the refunds awarded to the
buyers by FERC are not rights under the agreement at all;
indeed, if the agreements were respected, there would be no
refunds. It is only because FERC has overridden the agreements
and awarded refunds "under" the statute that refund claims might
exist. Cf. Union Dry Goods Co. v. Georgia Pub. Serv. Corp., 248
U.S. 372, 376-77 (1919). On this reading, section 7 does not
address such claims at all.
This reading is bolstered by sections 6 and 15 which
also, by their terms, are directed to rights, obligations and
the like "pursuant to" the power sale agreement (section 6) or
termination amendment (section 15). Thus, both the
extinguishing section and the two reservation sections are
basically addressed to contract claims, not to FERC-ordered
refunds based on the statute. Boston Edison makes this very
point to distinguish the reference to "refunds" in section 6,
apparently without realizing that the argument also serves to
distinguish section 7 (to its disadvantage).
Boston Edison says that if the termination amendments
are deemed ambiguous, then it should have been allowed to rely
on extrinsic evidence. We do not view the amendments standing
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alone as ambiguous,9 but neither do we think that the extrinsic
evidence relied on by Boston Edison would alter the result even
if fully considered. In urging that the compliance filing be
rejected, Montaup said that Boston Edison had originally drafted
the termination amendment to make clear that FERC-ordered refund
claims were not extinguished, that this language had been
omitted from the final version drafted by Boston Edison, but
that Montaup had assumed that no change in meaning was intended.
By contrast, Boston Edison would have us interpret the omission
as manifesting an intent to exclude any refund rights.
This would be a closer case if Boston Edison had
claimed before FERC to have evidence of actual discussions
between its own negotiators and those of Montaup in which the
parties discussed the FERC refunds and concluded that the
termination agreement should extinguish rather than reserve
rights thereto. But Boston Edison did not, and does not, make
such a claim. Absent a timely proffer of extrinsic evidence at
least this compelling, we have no reason to worry about whether
anything outside the language of the agreement could properly be
consulted in construing it. Boston Edison relies upon two other
9FERC said the amendments were ambiguous but, in context, it
seems rather to have meant that section 7 viewed alone was
ambiguous but that sections 6 and 15 resolved the uncertainty.
However, because our own reasoning is different than that of
FERC, what FERC's reference to ambiguity means is beside the
point.
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items, both filings made by Montaup in which it referred to or
employed the 12 percent rate of return in making calculations
instead of using the FERC-determined rate. The inferences from
these filing are too weak to merit further discussion.
The orders reflected in Opinions No. 411 and 411-A are
vacated to the extent that they hold that Boston Edison's rates
of return on common equity were unlawfully high under the just
and reasonable standard and to the extent that they order
refunds on that premise. The matter is remanded to FERC for
further proceedings on the rate of return and refunds issues
consistent with this decision.
It is so ordered.
--Concurrence and Dissent by Judge Wallace Follows--
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WALLACE, Circuit Judge, concurring and dissenting. I
write separately to express my disagreement with the majority
opinion’s analysis of the effect the termination agreements
between Boston Edison and Montaup have on refunds ordered by
FERC.
I
The majority opinion states, "the refunds awarded to
the buyers by FERC are not rights under the agreement at all;
indeed, if the agreements were respected, there would be no
refunds. It is only because FERC has overridden the agreements
and awarded refunds ‘under’ the statute that refund claims might
exist." [Majority Opinion 22] However, it is equally clear that
without the original contractual relationship between Boston
Edison and Montaup, the refund obligation would not exist. It
is true that the original contracts between Boston Edison and
Montaup did not contain a provision stating, "FERC-ordered
refunds shall be considered as a right or obligation under the
contract," but they did contain language stating, "This
Agreement is made subject to present and future Federal, State
and local laws and to present and future regulations and orders
properly issued by Federal, State and local bodies having
jurisdiction . . ." [Majority Opinion 13 (emphasis added)]
While the majority rightly holds that this provision does not
assist FERC in its argument that the "just and reasonable"
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standard should apply, we must not overlook the fact that this
language was drafted with the knowledge of FERC's authority over
the contracts. Thus, it does indicate an intent by the parties
to be bound by any properly issued FERC order involving their
contractual relations, including FERC-directed refunds.
I am further troubled by the majority’s analysis
because all of the parties, including FERC, proceeded under the
assumption, until we ordered supplemental briefing on the issue,
that Section 7 of the termination agreement’s reference to
"rights and obligations" encompassed the refunds ordered by
FERC. Instead, the parties focused on whether the termination
agreement reserved or extinguished Montaup’s right to a FERC-
ordered refund, not on whether such a refund constituted a right
under the original contracts. Indeed, FERC wrote in its
supplemental brief, "It cannot be said with certainty whether
the Commission would agree or disagree with the [majority’s]
suggested reading or, alternatively, find it to be a permissible
alternative, because the Commission simply was not presented
with it and has not addressed it." I respectfully point out
that a "court ordinarily must review a decision of an
administrative agency on the basis of the agency’s own
rationale; unlike the situation involving appellate review of
judicial decisions, it cannot affirm the agency on a theory
that, although supported by the record, was not the basis of the
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agency’s ruling." Bivings v. United States Dep't. of
Agriculture, 225 F.3d 1331, 1335 (Fed. Cir. 2000) (referencing
SEC v. Chenery Corp., 318 U.S. 80, 87-88 (1943). I would,
therefore, reach the question of whether the termination
agreement extinguished or reserved Montaup’s right to FERC-
ordered refunds.
II
Section 7 of the termination agreement provides, "To
the extent that continuation or survival of the rights and
obligations of Boston Edison and Montaup under the Power Sale
Agreement are not expressly provided for in this Amendment, they
are hereby extinguished." FERC (and Montaup as amicus) argue
that sections 6 and 15 of the termination agreements support its
position that FERC-ordered refunds were expressly reserved
rather than extinguished.
Section 15 of the termination agreement provides:
Montaup reserves all rights and defenses
that exist pursuant to the Power Sale
Agreement and prior settlements between the
Parties with respect to any amount paid by
Montaup pursuant to this Amendment,
including but not limited to such costs that
are incurred by reason of Boston Edison’s
negligence, willful misconduct, or violation
of any law or regulation.
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(Emphasis added). Boston Edison does not charge return on
equity "pursuant to this Amendment;" return on equity is fixed
in the base entitlement contracts. Thus, since Montaup is not
making return on equity payments "pursuant to this Amendment,"
section 15 cannot reserve any rights with respect to such
payments.
Section 6 of the termination agreement provides:
Billing and Accounting. The Parties’
respective rights and obligations associated
with billing, payment, accounting and
refunds for charges incurred by Montaup
pursuant to the Power Sale Agreement prior
to the Effective Date shall be determined in
accordance with Section C-8 of the Power
Sale Agreement.
(Emphasis added). Standing alone, the first part of this
provision seems broad enough to encompass FERC-ordered refunds;
however, the section unambiguously provides that any refund-
associated right can only be determined pursuant to the
procedures of section C-8 of the Power Sale Agreement.
Section C-8 of the Power Sales Agreement discusses
billing procedures. For example, C-8.3 states:
Buyer shall not have the right to challenge
any monthly bill, to invoke arbitration of
the same or to bring any court or
administrative action of any kind
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questioning the propriety of said bill after
a period of one (1) year from the date the
bill is rendered. In the case of a bill
containing estimates, the Buyer shall not
have the right to challenge the accuracy of
said bill after a period of one (1) year
from the date the bill is adjusted to
reflect the actual amount.
Paragraph C-8 contains no provision explicitly authorizing
Montaup to challenge the contractual rate of the return on
equity by using its procedures. Moreover, it is unlikely that
section C-8 implicitly gives Montaup such a right since the rate
of return on equity was already explicitly established
elsewhere in the contracts. The contracts also contain a
provision requiring that amendments to the contract reflect the
mutual agreement of the parties. It would nullify these
amendment provisions if section C-8 were interpreted as giving
Montaup the ability to challenge the return on equity provisions
by mounting an attack through the provisions of section C-8. In
addition, section C-8, during the life of the original
contracts, was used only for the purpose of challenging the
mathematical accuracy of bills and not as a mechanism for
achieving unilateral change of the contract.
I would hold that the termination agreements
extinguished Montaup’s right to FERC-ordered refunds. Further,
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since such an interpretation is determinative of Montaup’s
rights, there is no need to address whether FERC applied the
correct standard, although I agree with the majority’s
discussion of that issue.
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Boston Edison Co. v. Federal Energy Regulatory Commission
Court: Court of Appeals for the First Circuit
Date filed: 2000-12-01
Citations: 233 F.3d 60
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