Morgan Stanley Capital Group Inc. v. Public Util. Dist. No. 1 of Snohomish Cty.

(Slip Opinion) OCTOBER TERM, 2007 1
Syllabus
NOTE: Where it is feasible, a syllabus (headnote) will be released, as is
being done in connection with this case, at the time the opinion is issued.
The syllabus constitutes no part of the opinion of the Court but has been
prepared by the Reporter of Decisions for the convenience of the reader.
See United States v. Detroit Timber & Lumber Co., 200 U.S. 321, 337.
SUPREME COURT OF THE UNITED STATES
Syllabus
MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTILITY DISTRICT NO. 1 OF SNOHOMISH COUNTY
ET AL.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR
THE NINTH CIRCUIT
No. 06–1457. Argued February 19, 2008—Decided June 26, 2008*
Under the Mobile-Sierra doctrine, the Federal Energy Regulatory
Commission (FERC) must presume that the electricity rate set in a
freely negotiated wholesale-energy contract meets the “just and rea-
sonable” requirement of the Federal Power Act (FPA), see 16 U.S. C.
§824d(a), and the presumption may be overcome only if FERC con-
cludes that the contract seriously harms the public interest. See
United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332;
FPC v. Sierra Pacific Power Co., 350 U.S. 348. Under FERC’s cur-
rent regulatory regime, a wholesale electricity seller may file a “mar-
ket-based” tariff, which simply states that the utility will enter into
freely negotiated contracts with purchasers. Those contracts are not
filed with FERC before they go into effect. In 2000 and 2001, there
was a dramatic increase in the price of electricity in the western
United States. As a result, respondents entered into long-term con-
tracts with petitioners that locked in rates that were very high by
historical standards. Respondents subsequently asked FERC to mod-
ify the contracts, contending that the rates should not be presumed
just and reasonable under Mobile-Sierra. The Administrative Law
Judge concluded that the presumption applied and that the contracts
did not seriously harm the public interest. FERC affirmed, but the
Ninth Circuit remanded. The court held that contract rates are pre-
——————
* Together with No. 06–1462, American Electric Power Service Corp.
et al. v. Public Utility District No. 1 of Snohomish County et al., also on
certiorari to the same court.
2 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
Syllabus
sumptively reasonable only where FERC has had an initial opportu-
nity to review the contracts without applying the Mobile-Sierra pre-
sumption and therefore that the presumption should not apply to
contracts entered into under “market-based” tariffs. The court alter-
natively held that there is a different standard for overcoming the
Mobile-Sierra presumption when a purchaser challenges a contract:
whether the contract exceeds a “zone of reasonableness.”
Held:
1. The Commission was required to apply the Mobile-Sierra pre-
sumption in evaluating the contracts here. Sierra held that a rate set
out in a contract must be presumed to be just and reasonable absent
serious harm to the public interest, regardless of when the contract is
challenged. FPC v. Texaco Inc., 417 U.S. 380, distinguished. Also,
the Ninth Circuit’s rule requiring FERC to ask whether a contract
was formed in an environment of market “dysfunction” is not sup-
ported by this Court’s cases and plainly undermines the role of con-
tracts in the FPA’s statutory scheme. Pp. 15–19.
2. The Ninth Circuit’s “zone of reasonableness” test fails to accord
an adequate level of protection to contracts. The standard for a
buyer’s rate-increase challenge must be the same, generally, as the
standard for a seller’s challenge: The contract rate must seriously
harm the public interest. The Ninth Circuit misread Sierra in hold-
ing that the standard for evaluating a high-rate challenge and setting
aside a contract rate is whether consumers’ electricity bills were
higher than they would have been had the contract rates equaled
“marginal cost.” Under the Mobile-Sierra presumption, setting aside
a contract rate requires a finding of “unequivocal public necessity,”
Permian Basin Area Rate Cases, 390 U.S. 747, 822, or “extraordinary
circumstances,” Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571,
582. Pp. 19–23.
3. The judgment below is nonetheless affirmed on alternative
grounds, based on two defects in FERC’s analysis. First, the analysis
was flawed or incomplete to the extent FERC looked simply to
whether consumers’ rates increased immediately upon conclusion of
the relevant contracts, rather than determining whether the con-
tracts imposed an excessive burden “down the line,” relative to the
rates consumers could have obtained (but for the contracts) after
elimination of the dysfunctional market. Sierra’s “excessive burden”
on customers was the current burden, not just the burden imposed at
the contract’s outset. See 350 U.S., at 355. Second, it is unclear
from FERC’s orders whether it found respondents’ evidence inade-
quate to support their claim that petitioners engaged in unlawful
market manipulation that altered the playing field for contract nego-
tiations. In such a case, the Commission should not presume that a
Cite as: 554 U. S. ____ (2008) 3
Syllabus
contract is just and reasonable. Like fraud and duress, unlawful
market activity directly affecting contract negotiations eliminates the
premise on which the Mobile-Sierra presumption rests: that the con-
tract rates are the product of fair, arms-length negotiations. On re-
mand, FERC should amplify or clarify its findings on these two
points. Pp. 23–26.
471 F.3d 1053, affirmed and remanded.
SCALIA, J., delivered the opinion of the Court, in which KENNEDY,
THOMAS, and ALITO, JJ., joined, and in which GINSBURG, J., joined as to
Part III. GINSBURG, J., filed an opinion concurring in part and concur-
ring in the judgment. STEVENS, J., filed a dissenting opinion, in which
SOUTER, J., joined. ROBERTS, C. J., and BREYER, J., took no part in the
consideration or decision of the cases.
Cite as: 554 U. S. ____ (2008) 1
Opinion of the Court
NOTICE: This opinion is subject to formal revision before publication in the
preliminary print of the United States Reports. Readers are requested to
notify the Reporter of Decisions, Supreme Court of the United States, Wash­
ington, D. C. 20543, of any typographical or other formal errors, in order
that corrections may be made before the preliminary print goes to press.
SUPREME COURT OF THE UNITED STATES
_________________
Nos. 06–1457 and 06–1462
_________________
MORGAN STANLEY CAPITAL GROUP INC.,
PETITIONER
06–1457 v.
PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH
COUNTY, WASHINGTON, ET AL.
AMERICAN ELECTRIC POWER SERVICE
CORPORATION, ET AL., PETITIONERS
06–1462 v.
PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH
COUNTY, WASHINGTON, ET AL.
ON WRITS OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE NINTH CIRCUIT
[June 26, 2008]
JUSTICE SCALIA delivered the opinion of the Court.
Under the Mobile-Sierra doctrine, the Federal Energy
Regulatory Commission (FERC or Commission) must
presume that the rate set out in a freely negotiated whole­
sale-energy contract meets the “just and reasonable”
requirement imposed by law. The presumption may be
overcome only if FERC concludes that the contract seri­
ously harms the public interest. These cases present two
questions about the scope of the Mobile-Sierra doctrine:
First, does the presumption apply only when FERC has
had an initial opportunity to review a contract rate with­
out the presumption? Second, does the presumption im­
2 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
Opinion of the Court
pose as high a bar to challenges by purchasers of whole­
sale electricity as it does to challenges by sellers?
I
A
Statutory Background
The Federal Power Act (FPA), 41 Stat. 1063, as
amended, gives the Commission1 the authority to regulate
the sale of electricity in interstate commerce—a market
historically characterized by natural monopoly and there­
fore subject to abuses of market power. See 16 U.S. C.
§824 et seq. Modeled on the Interstate Commerce Act, the
FPA requires regulated utilities to file compilations of
their rate schedules, or “tariffs,” with the Commission,
and to provide service to electricity purchasers on the
terms and prices there set forth. §824d(c). Utilities wish­
ing to change their tariffs must notify the Commission 60
days before the change is to go into effect. §824d(d).
Unlike the Interstate Commerce Act, however, the FPA
also permits utilities to set rates with individual electric­
ity purchasers through bilateral contracts. §824d(c), (d).
As we have explained elsewhere, the FPA “departed from
the scheme of purely tariff-based regulation and acknowl­
edged that contracts between commercial buyers and
sellers could be used in ratesetting.” Verizon Communica­
tions Inc. v. FCC, 535 U.S. 467, 479 (2002). Like tariffs,
contracts must be filed with the Commission before they
go into effect. 16 U.S. C. §824d(c), (d).
The FPA requires all wholesale-electricity rates to be
“just and reasonable.” §824d(a). When a utility files a
new rate with the Commission, through a change to its
tariff or a new contract, the Commission may suspend the
rate for up to five months while it investigates whether
——————
1 We also use “Commission” to refer to the Federal Power Commis­
sion, FERC’s predecessor.
Cite as: 554 U. S. ____ (2008) 3
Opinion of the Court
the rate is just and reasonable. §824d(e). The Commis­
sion may, however, decline to investigate and permit the
rate to go into effect—which does not amount to a deter­
mination that the rate is “just and reasonable.” See 18
CFR §35.4 (2007). After a rate goes into effect, whether or
not the Commission deemed it just and reasonable when
filed, the Commission may conclude, in response to a
complaint or on its own motion, that the rate is not just
and reasonable and replace it with a lawful rate. 16
U.S. C. §824e(a) (2000 ed., Supp. V).
The statutory requirement that rates be “just and rea­
sonable” is obviously incapable of precise judicial defini­
tion, and we afford great deference to the Commission in
its rate decisions. See FPC v. Texaco Inc., 417 U.S. 380,
389 (1974); Permian Basin Area Rate Cases, 390 U.S. 747,
767 (1968). We have repeatedly emphasized that the
Commission is not bound to any one ratemaking formula.
See Mobil Oil Exploration & Producing Southeast, Inc. v.
United Distribution Cos., 498 U.S. 211, 224 (1991); Per­
mian Basin, supra, at 776–777. But FERC must choose a
method that entails an appropriate “balancing of the
investor and the consumer interests.” FPC v. Hope Natu­
ral Gas Co., 320 U.S. 591, 603 (1944). In exercising its
broad discretion, the Commission 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.
See J. McGrew, Federal Energy Regulatory Commission
152, 160–161 (2003) (hereinafter McGrew).
In two cases decided on the same day in 1956, we ad­
dressed the authority of the Commission to modify rates
set bilaterally by contract rather than unilaterally by
tariff. In United Gas Pipe Line Co. v. Mobile Gas Service
Corp., 350 U.S. 332, we rejected a natural-gas utility’s
argument that the Natural Gas Act’s requirement that it
file all new rates with the Commission authorized it to
4 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
Opinion of the Court
abrogate a lawful contract with a purchaser simply by
filing a new tariff, see id., at 336–337. The filing require­
ment, we explained, is merely a precondition to changing a
rate, not an authorization to change rates in violation of a
lawful contract (i.e., a contract that sets a just and reason­
able rate). See id., at 339–344.
In FPC v. Sierra Pacific Power Co., 350 U.S. 348, 352–
353 (1956), we applied the holding of Mobile to the analo­
gous provisions of the FPA, concluding that the complain­
ing utility could not supersede a contract rate simply by
filing a new tariff. In Sierra, however, the Commission
had concluded not only (contrary to our holding) that the
newly filed tariff superseded the contract, but also that
the contract rate itself was not just and reasonable, “solely
because it yield[ed] less than a fair return on the net
invested capital” of the utility. Id., at 355. Thus, we were
confronted with the question of how the Commission may
evaluate whether a contract rate is just and reasonable.
We answered that question in the following way:
“[T]he Commission’s conclusion appears on its face to
be based on an erroneous standard. . . . [W]hile 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 af­
fording less than a fair return or that, if it does so, it
is entitled to be relieved of its improvident bar­
gain. . . . In such circumstances 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 pub­
lic utility to continue its service, cast upon other con­
sumers an excessive burden, or be unduly discrimina­
tory.” Id., at 354–355 (emphasis deleted).
As we said in a later case, “[t]he regulatory system created
Cite as: 554 U. S. ____ (2008) 5
Opinion of the Court
by the [FPA] is premised on contractual agreements vol­
untarily devised by the regulated companies; it contem­
plates abrogation of these agreements only in circum­
stances of unequivocal public necessity.” Permian Basin,
supra, at 822.
Over the past 50 years, decisions of this Court and the
Courts of Appeals have refined the Mobile-Sierra pre­
sumption to allow greater freedom of contract. In United
Gas Pipe Line Co. v. Memphis Light, Gas and Water Div.,
358 U.S. 103, 110–113 (1958), we held that parties could
contract out of the Mobile-Sierra presumption by specify­
ing in their contracts that a new rate filed with the Com­
mission would supersede the contract rate. Courts of
Appeals have held that contracting parties may also agree
to a middle option between Mobile-Sierra and Memphis
Light: A contract that does not allow the seller to super­
sede the contract rate by filing a new rate may nonethe­
less permit the Commission to set aside the contract rate
if it results in an unfair rate of return, not just if it vio­
lates the public interest. See, e.g., Papago Tribal Util.
Auth. v. FERC, 723 F.2d 950, 953 (CADC 1983); Louisi­
ana Power & Light Co. v. FERC, 587 F.2d 671, 675–676
(CA5 1979). Thus, as the Mobile-Sierra doctrine has
developed, regulated parties have retained broad author­
ity to specify whether FERC can review a contract rate
solely for whether it violates the public interest or also for
whether it results in an unfair rate of return. But the
Mobile-Sierra presumption remains the default rule.
Moreover, even though the challenges in Mobile and
Sierra were brought by sellers, lower courts have con­
cluded that the Mobile-Sierra presumption also applies
where a purchaser, rather than a seller, asks FERC to
modify a contract. See Potomac Elec. Power Co. v. FERC,
210 F.3d 403, 404–405, 409–410 (CADC 2000); Boston
Edison Co. v. FERC, 856 F.2d 361, 372 (CA1 1988). This
Court has seemingly blessed that conclusion, explaining
6 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
Opinion of the Court
that under the FPA, “[w]hen commercial parties . . . avail
themselves of rate agreements, the principal regulatory
responsibility [is] not to relieve a contracting party of an
unreasonable rate.” Verizon, 535 U.S., at 479 (citing
Sierra, supra, at 355).
Over the years, the Commission began to refer to the two
modes of review—one with the Mobile-Sierra presumption
and the other without—as the “public interest standard”
and the “just and reasonable standard.” See, e.g., Southern
Co. Servs., Inc. Gulf States Utils. Co. v. Southern Co.
Servs., Inc., 39 FERC ¶63,026, pp. 65,134, 65,141 (1987).
Decisions from the Courts of Appeals did likewise. See,
e.g., Kansas Cities v. FERC, 723 F.2d 82, 87–88 (CADC
1983); Northeast Utils. Serv. Co. v. FERC, 993 F.2d 937,
961 (CA1 1993). We do not take this nomenclature to
stand for the obviously indefensible proposition that a
standard different from the statutory just-and-reasonable
standard applies to contract rates. Rather, the term “pub­
lic interest standard” refers to the differing application of
that just-and-reasonable standard to contract rates. See
Philadelphia Elec. Co., 58 F. P. C. 88, 90 (1977). (It would
be less confusing to adopt the Solicitor General’s terminol­
ogy, referring to the two differing applications of the just­
and-reasonable standard as the “ordinary” “just and rea­
sonable standard” and the “public interest standard.” See
Reply Brief for Respondent FERC 6.)
B
Recent FERC Innovations; Market-Based Tariffs
In recent decades, the Commission has undertaken an
ambitious program of market-based reforms. Part of the
impetus for those changes was technological evolution.
Historically, electric utilities had been vertically inte­
grated monopolies. For a particular geographic area, a
single utility would control the generation of electricity, its
transmission, and its distribution to consumers. See
Cite as: 554 U. S. ____ (2008) 7
Opinion of the Court
Midwest ISO Transmission Owners v. FERC, 373 F.3d
1361, 1363 (CADC 2004). Since the 1970’s, however,
engineering innovations have lowered the cost of generat­
ing electricity and transmitting it over long distances,
enabling new entrants to challenge the regional generat­
ing monopolies of traditional utilities. See generally New
York v. FERC, 535 U.S. 1, 7–8 (2002); Public Util. Dist.
No. 1 of Snohomish Cty. v. FERC, 272 F.3d 607, 610
(CADC 2001).
To take advantage of these changes, the Commission
has attempted to break down regulatory and economic
barriers that hinder a free market in wholesale electricity.
It has sought to promote competition in those areas of the
industry amenable to competition, such as the segment
that generates electric power, while ensuring that the
segment of the industry characterized by natural monop­
oly—namely, the transmission grid that conveys the gen­
erated electricity—cannot exert monopolistic influence
over other areas. See New York, supra, at 9–10; Snoho­
mish, supra. To that end, FERC required in Order No.
888 that each transmission provider offer transmission
service to all customers on an equal basis by filing an
“open access transmission tariff.” Promoting Wholesale
Competition Through Open Access Non-Discriminatory
Transmission Services by Public Utilities, 61 Fed. Reg.
21540 (1996); see New York, supra, at 10–12. That re­
quirement prevents the utilities that own the grid from
offering more favorable transmission terms to their own
affiliates and thereby extending their monopoly power to
other areas of the industry.
To further pry open the wholesale-electricity market
and to reduce technical inefficiencies caused when differ­
ent utilities operate different portions of the grid inde­
pendently, the Commission has encouraged transmission
providers to establish “Regional Transmission Organiza­
tions”—entities to which transmission providers would
8 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
Opinion of the Court
transfer operational control of their facilities for the pur­
pose of efficient coordination. Order No. 2000, 65 Fed.
Reg. 810, 811–812 (2000); see Midwest ISO, supra, at
1364. It has encouraged the management of those entities
by “Independent System Operators,” not-for-profit entities
that operate transmission facilities in a nondiscriminatory
manner. See Midwest ISO, supra. In addition to coordi­
nating transmission service, Regional Transmission Or­
ganizations perform other functions, such as running
auction markets for electricity sales and offering contracts
for hedging against potential grid congestion. See Blum­
sack, Measuring the Benefits and Costs of Regional Elec­
tric Grid Integration, 28 Energy L. J. 147, 147 (2007).
Against this backdrop of technological change and mar-
ket-based reforms, the Commission over the past two
decades has begun to permit sellers of wholesale electric­
ity to file “market-based” tariffs. These tariffs, instead of
setting forth rate schedules or rate-fixing contracts, simply
state that the seller will enter into freely negotiated con­
tracts with purchasers. See generally Market-Based
Rates For Wholesale Sales Of Electric Energy, Capacity
And Ancillary Services By Public Utilities, Order No. 697,
72 Fed. Reg. 39904 (2007) (hereinafter Market-Based
Rates); McGrew 160–167. FERC does not subject the
contracts entered into under these tariffs (as it subjected
traditional wholesale-power contracts) to §824d’s require­
ment of immediate filing, apparently on the theory that
the requirement has been satisfied by the initial filing of
the market-based tariffs themselves. See Brief for Re­
spondent FERC 28–29 (hereinafter Brief for FERC).
FERC will grant approval of a market-based tariff only
if a utility demonstrates that it lacks or has adequately
mitigated market power, lacks the capacity to erect other
barriers to entry, and has avoided giving preferences to its
affiliates. See Market-Based Rates, ¶7, 72 Fed. Reg. 39907.
In addition to the initial authorization of a market-based
Cite as: 554 U. S. ____ (2008) 9
Opinion of the Court
tariff, FERC imposes ongoing reporting requirements. A
seller must file quarterly reports summarizing the con­
tracts that it has entered into, even extremely short-term
contracts. See California ex rel. Lockyer v. FERC, 383
F.3d 1006, 1013 (CA9 2004). It must also demonstrate
every four months that it still lacks or has adequately
mitigated market power. See ibid. If FERC determines
from these filings that a seller has reattained market
power, it may revoke the authority prospectively. See
Market-Based Rates, ¶5, 72 Fed. Reg. 39906. And if the
Commission finds that a seller has violated its Regional
Transmission Organization’s market rules, its tariff, or
Commission orders, the Commission may take appropriate
remedial action, such as ordering refunds, requiring dis­
gorgement of profits, and imposing civil penalties. See
ibid.
Both the Ninth Circuit and the D. C. Circuit have gen­
erally approved FERC’s scheme of market-based tariffs.
See Lockyer, supra, at 1011–1013; Louisiana Energy &
Power Auth. v. FERC, 141 F.3d 364, 365 (CADC 1998).
We have not hitherto approved, and express no opinion
today, on the lawfulness of the market-based-tariff sys­
tem, which is not one of the issues before us. It suffices for
the present cases to recognize that when a seller files a
market-based tariff, purchasers no longer have the option
of buying electricity at a rate set by tariff and contracts no
longer need to be filed with FERC (and subjected to its
investigatory power) before going into effect.
C
California’s Electricity Regulation and
Its Consequences
In 1996, California enacted Assembly Bill 1890 (AB
1890), which massively restructured the California elec­
tricity market. See 1996 Cal. Stat. ch. 854 (codified at Cal.
Pub. Util. Code Ann. §§330–398.5 (West 2004 and Supp.
10 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
Opinion of the Court
2008)); see generally Cudahy, Whither Deregulation: A
Look at the Portents, 58 N. Y. U. Annual Survey of Am.
Law 155, 172–185 (2001) (hereinafter Cudahy). The bill
transferred operational control of the transmission facili­
ties of California’s three largest investor-owned utilities to
an Independent Service Operator (Cal-ISO). See Pacific
Gas & Elec. Co. v. FERC, 464 F.3d 861, 864 (CA9 2006).
It also established the California Power Exchange
(CalPX), a nonprofit entity that operated a short-term
market—or “spot market”—for electricity. The bill re­
quired California’s three largest investor-owned utilities to
divest most of their electricity-generation facilities. It
then required those utilities to purchase and sell the bulk
of their electricity from and to the CalPX’s spot market,
permitting only limited leeway for them to enter into long-
term contracts. See Public Util. Dist. No. 1 of Snohomish
Cty. v. FERC, 471 F.3d 1053, 1068 (CA9 2006) (case
below).
In 1997, FERC approved the Cal-ISO as consistent with
the requirements for an Independent Service Operator
established in Order No. 888. FERC also approved the
CalPX and the investor-owned utilities’ authority to make
sales at market-based rates in the CalPX, finding that, in
light of the divesture of their generation units and other
conditions imposed under the restructuring plan, those
utilities had adequately mitigated their market power.
See Pacific Gas & Elec. Co., 81 FERC ¶61,122, pp. 61,435,
61,435–61,436, 61,537–61,548 (1997).
The CalPX opened for business in March 1998. In the
summer of 1999, it expanded to include an auction for
sales of electricity under “forward contracts”—contracts in
which sellers promise to deliver electricity more than one
day in the future (sometimes many years). But the par­
ticipation of California’s large investor-owned utilities in
that forward market was limited because, as we have said,
AB 1890 strictly capped the amount of power that they
Cite as: 554 U. S. ____ (2008) 11
Opinion of the Court
could purchase outside of the spot market. See 471 F.3d,
at 1068.
That diminishment of the role of long-term contracts in
the California electricity market turned out to be one of
the seeds of an energy crisis. In the summer of 2000, the
price of electricity in the CalPX’s spot market jumped
dramatically—more than fifteenfold. See ibid. The in­
crease was the result of a combination of natural, eco­
nomic, and regulatory factors: “flawed market rules; in­
adequate addition of generating facilities in the preceding
years; a drop in available hydropower due to drought
conditions; a rupture of a major pipeline supplying natural
gas into California; strong growth in the economy and in
electricity demand; unusually high temperatures; an
increase in unplanned outages of extremely old generating
facilities; and market manipulation.” CAlifornians for
Renewable Energy, Inc. v. Sellers of Energy and Ancillary
Servs., 119 FERC ¶61,058, pp. 61,243, 61,246 (2007).
Because California’s investor-owned utilities had for the
most part been forbidden to obtain their power through
long-term contracts, the turmoil in the spot market hit
them hard. See Cudahy 174. The high prices led to roll­
ing blackouts and saddled utilities with mounting debt.
In late 2000, the Commission took action. A central
plank of its emergency effort was to eliminate the utilities’
reliance on the CalPX’s spot market and to shift their
purchases to the forward market. To that end, FERC
abolished the requirement that investor-owned utilities
purchase and sell all power through the CalPX and en­
couraged them to enter into long-term contracts. See San
Diego Gas & Electric Co. v. Sellers of Energy and Ancillary
Servs., 93 FERC ¶61,294, pp. 61,980, 61,982 (2000); see
also 471 F.3d, at 1069. The Commission also put price
caps on wholesale electricity. See San Diego Gas & Elec.
Co. v. Sellers of Energy and Ancillary Servs., 95 FERC
¶61,418, p. 62,545 (2001). By June 2001, electricity prices
12 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
Opinion of the Court
began to decline to normal levels. Id., at 62,456.
D
Genesis of These Cases
The principal respondents in these cases are western
utilities that purchased power under long-term contracts
during that tumultuous period in 2000 and 2001. Al­
though they are not located in California, the high prices
in California spilled over into other Western States. See
471 F.3d, at 1069. Petitioners are the sellers that entered
into the contracts with respondents.
The contracts between the parties included rates that
were very high by historical standards. For example,
respondent Snohomish signed a 9-year contract to pur­
chase electricity from petitioner Morgan Stanley at a rate
of $105/megawatt hour (MWh), whereas prices in the
Pacific Northwest have historically averaged $24/MWh.
The contract prices were substantially lower, however,
than the prices that Snohomish would have paid in the
spot market during the energy crisis, when prices peaked
at $3,300/MWh. See id., at 1069–1070.
After the crisis had passed, buyer’s remorse set in and
respondents asked FERC to modify the contracts. They
contended that the rates in the contracts should not be
presumed to be just and reasonable under Mobile-Sierra
because, given the sellers’ market-based tariffs, the
contracts had never been initially approved by the Com­
mission without the presumption. See Nevada Power Co.
v. Enron Power Marketing, Inc., 103 FERC ¶61,353,
pp. 62,382, 62,387 (2003). Respondents also argued that
contract modification was warranted even under the Mo­
bile-Sierra presumption because the contract rates were so
high that they violated the public interest. See 103 FERC,
at 62,383, 62,387–62,395.
In a preliminary order, the Commission instructed the
Administrative Law Judge (ALJ) to consider 12 different
Cite as: 554 U. S. ____ (2008) 13
Opinion of the Court
factors in deciding whether the presumption could be
overcome for the contracts, such as the terms of the con­
tracts, the available alternatives at the time of sale, the
relationship of the rates to Commission benchmarks, the
effect of the contracts on the financial health of the pur­
chasers, and the impact of contract modification on na­
tional energy markets. After a hearing, the ALJ con­
cluded that the Mobile-Sierra presumption should apply to
the contracts and that the contracts did not seriously
harm the public interest. In fact, according to the ALJ,
even if the Mobile-Sierra presumption did not apply,
respondents would not be entitled to have the contracts
modified. 103 FERC, at 62,390–62,394.
Between the ALJ’s decision and the Commission’s rul­
ing, the Commission’s staff issued a report (Staff Report)
concluding that unlawful activities of various sellers in the
spot market had affected prices in the forward market.
See id., at 62,396. Respondents raised the report at oral
argument before the Commission, and some of them ar­
gued that petitioners “were unlawfully manipulating
market prices, thereby engaging in fraud and deception in
violation of their market-based rate tariffs.” Ibid. Peti­
tioners contended, however, that the Staff Report demon­
strated only a correlation between rates in the spot and
forward markets, not a causal connection. See ibid.
FERC affirmed the ALJ. The Commission first held
that the Mobile-Sierra presumption did apply to the con­
tracts at issue. Although agreeing with respondents that
the presumption applies only where FERC has had an
initial opportunity to review a contract rate, the Commis­
sion relied on the somewhat metaphysical ground that the
grant of market-based authority to petitioners qualified as
that initial opportunity. See 103 FERC, at 62,388–62,389.
The Commission then held that respondents could not
overcome the Mobile-Sierra presumption. It recognized
that the Staff Report had “found that spot market distor­
14 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
Opinion of the Court
tions flowed through to forward power prices,” 103 FERC,
at 62,396–62,397, but concluded that this finding, even if
true, was not “determinative” because:
“a finding that the unjust and unreasonable spot mar­
ket caused forward bilateral prices to be unjust and
unreasonable would be relevant to contract modifica­
tion only where there is a ‘just and reasonable’ stan­
dard of review. . . . Under the ‘public interest’ stan­
dard, to justify contract modification it is not enough
to show that forward prices became unjust and unrea­
sonable due to the impact of spot market dysfunctions;
it must be shown that the rates, terms and conditions
are contrary to the public interest.” Id., at 62,397.
The Commission determined that under the factors
identified in Sierra, as well as under a totality-of-the­
circumstances test, respondents had not demonstrated
that the contracts threatened the public interest. See 103
FERC, at 62,397–62,399. On rehearing, respondents
reiterated their complaints, including their charge that
“their contracts were the product of market manipulation
by Enron, Morgan Stanley and other [sellers].” 105 FERC
¶61,185, pp. 61,979, 61,989 (2003). The Commission an­
swered that there was “no evidence to support a finding of
market manipulation that specifically affected the con­
tracts at issue.” Ibid.
Respondents filed petitions for review in the Ninth
Circuit, which granted the petitions and remanded to the
Commission, finding two flaws in the Commission’s analy­
sis.2 First, the court agreed with respondents that rates
set by contract (whether pursuant to a market-based tariff
——————
2 In a holding not challenged before this Court, the Ninth Circuit con­
cluded that the contracts at issue did not contain “Memphis clause[s],”
471 F.3d 1053, 1079 (2006) (citing United Gas Pipe Line Co. v. Memphis
Light, Gas and Water Div., 358 U.S. 103 (1958)), see supra, at 5, that
would have precluded application of the Mobile-Sierra presumption.
Cite as: 554 U. S. ____ (2008) 15
Opinion of the Court
or not) are presumptively reasonable only where FERC
has had an initial opportunity to review the contracts
without applying the Mobile-Sierra presumption. To
satisfy that prerequisite under the market-based tariff
regime, the court said, the Commission must promptly
review the terms of contracts after their formation and
must modify those that do not appear to be just and rea­
sonable when evaluated without the Mobile-Sierra pre­
sumption (rather than merely revoking market-based
authority prospectively but leaving pre-existing contracts
intact). See 471 F.3d, at 1075–1077, 1079–1085. This
initial review must include an inquiry into “the market
conditions in which the contracts at issue were formed,”
and market “dysfunction” is a ground for finding a con­
tract not to be just and reasonable. Id., at 1085–1087.
Second, the Ninth Circuit held that even assuming that
the Mobile-Sierra presumption applied, the standard for
overcoming that presumption is different for a purchaser’s
challenge to a contract, namely, whether the contract rate
exceeds a “zone of reasonableness.” 471 F.3d, at 1088–
1090.
We granted certiorari. See 551 U. S. ___ (2007).
II
A
Application of Mobile-Sierra Presumption to
Contracts Concluded under Market-Based
Rate Authority
As noted earlier, the FERC order under review here
agreed with the Ninth Circuit’s premise that the Commis­
sion must have an initial opportunity to review a contract
without the Mobile-Sierra presumption, but maintained
that the authorization for market-based rate authority
qualified as that initial review. Before this Court, how­
ever, FERC changes its tune, arguing that there is no such
prerequisite—or at least that FERC could reasonably
16 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
Opinion of the Court
conclude so and therefore that Chevron deference is in
order. See Brief for FERC 20–21, 33–34; Chevron U. S. A.
Inc. v. Natural Resources Defense Council, Inc., 467 U.S.
837 (1984). We will not uphold a discretionary agency
decision where the agency has offered a justification in
court different from what it provided in its opinion. See
SEC v. Chenery Corp., 318 U.S. 80, 94–95 (1943). But
FERC has lucked out: The Chenery doctrine has no appli­
cation to these cases, because we conclude that the Com­
mission was required, under our decision in Sierra, to
apply the Mobile-Sierra presumption in its evaluation of
the contracts here. That it provided a different rationale
for the necessary result is no cause for upsetting its ruling.
“To remand would be an idle and useless formality. Chen­
ery does not require that we convert judicial review of
agency action into a ping-pong game.” NLRB v. Wyman-
Gordon Co., 394 U.S. 759, 766–767, n. 6 (1969) (plurality
opinion).
We are in broad agreement with the Ninth Circuit on a
central premise: There is only one statutory standard for
assessing wholesale electricity rates, whether set by con­
tract or tariff—the just-and-reasonable standard. The
plain text of the FPA states that “[a]ll rates . . . shall be
just and reasonable.” 16 U.S. C. §824d(a); see also
§824e(a) (2000 ed., Supp. V). But we disagree with the
Ninth Circuit’s interpretation of Sierra as requiring (con­
trary to the statute) that the Commission apply the stan­
dard differently, depending on when a contract rate is
challenged. In the Ninth Circuit’s view, Sierra was prem­
ised on the idea that “as long as the rate was just and
reasonable when the contract was formed, there would be
a presumption. . .that the reasonableness continued
throughout the term of the contract.” 471 F.3d, at 1077.
In other words, so long as the Commission concludes
(either after a hearing or by allowing a rate to go into
effect) that a contract rate is just and reasonable when
Cite as: 554 U. S. ____ (2008) 17
Opinion of the Court
initially filed, the rate will be presumed just and reason­
able in future proceedings.
That is a misreading of Sierra. Sierra was grounded in
the commonsense notion that “[i]n wholesale markets, the
party charging the rate and the party charged [are] often
sophisticated businesses enjoying presumptively equal
bargaining power, who could be expected to negotiate a
‘just and reasonable’ rate as between the two of them.”
Verizon, 535 U.S., at 479. Therefore, only when the mu­
tually agreed-upon contract rate seriously harms the
consuming public may the Commission declare it not to be
just and reasonable.3 Sierra thus provided a definition of
what it means for a rate to satisfy the just-and-reasonable
standard in the contract context—a definition that applies
regardless of when the contract is reviewed. The Ninth
Circuit, by contrast, essentially read Sierra “as the equiva­
lent of an estoppel doctrine,” whereby an initial Commis­
sion opportunity for review prevents the Commission from
modifying the rates absent serious future harm to the
public interest. Tewksbury & Lim, Applying the Mobile-
Sierra Doctrine to Market-Based Rate Contracts, 26 En­
ergy L. J. 437, 457–458 (2005). But Sierra said nothing of
the sort. And given that the Commission’s passive per­
mission for a rate to go into effect does not constitute a
finding that the rate is just and reasonable, it would be
odd to treat that initial “opportunity for review” as curtail­
ing later challenges.
The Ninth Circuit found support for its prerequisite in
our decision in FPC v. Texaco Inc., 417 U.S. 380 (1974).
In that case, we warned that the Commission’s attempt to
rely solely on market forces to evaluate rates charged by
——————
3 We do not say, as the dissent alleges, post, at 7 (opinion of
STEVENS, J.), that the public interest is not also relevant in a challenge
to unilaterally set rates. But it is the “ ‘sole concern’ ” in a contract case.
See FPC v. Sierra Pacific Power Co., 350 U.S. 348, 355 (1956).
18 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
Opinion of the Court
small natural-gas producers was inconsistent with the
Natural Gas Act’s insistence that rates be just and rea­
sonable. See id., at 397. The Ninth Circuit apparently
took this to mean that all initially filed contracts must be
subject to review without the Mobile-Sierra presumption.
But Texaco had nothing to do with that doctrine. It held
that the Commission had improperly implemented a
scheme of total deregulation by applying no standard of
review at all to small-producer rates. See 417 U.S., at
395–397. It did not cast doubt on the proposition that in a
proper regulatory scheme, the ordinary mode for evaluat­
ing contractually set rates is to look to whether the rates
seriously harm the public interest, not to whether they are
unfair to one of the parties that voluntarily assented to
the contract. Cf. id., at 391, n. 4.
Nor do we agree with the Ninth Circuit that FERC must
inquire into whether a contract was formed in an envi­
ronment of market “dysfunction” before applying the
Mobile-Sierra presumption. Markets are not perfect, and
one of the reasons that parties enter into wholesale-power
contracts is precisely to hedge against the volatility that
market imperfections produce. That is why one of the
Commission’s responses to the energy crisis was to remove
regulatory barriers to long-term contracts. It would be a
perverse rule that rendered contracts less likely to be
enforced when there is volatility in the market. (Such a
rule would come into play, after all, only when a contract
formed in a period of “dysfunction” did not significantly
harm the consuming public, since contracts that seriously
harm the public should be set aside even under the Mo­
bile-Sierra presumption.) By enabling sophisticated par­
ties who weathered market turmoil by entering long-term
contracts to renounce those contracts once the storm has
passed, the Ninth Circuit’s holding would reduce the
incentive to conclude such contracts in the future. Such a
rule has no support in our case law and plainly under­
Cite as: 554 U. S. ____ (2008) 19
Opinion of the Court
mines the role of contracts in the FPA’s statutory scheme.
To be sure, FERC has ample authority to set aside a
contract where there is unfair dealing at the contract
formation stage—for instance, if it finds traditional
grounds for the abrogation of the contract such as fraud or
duress. See 103 FERC, at 62,399–62,400 (“[T]here is no
evidence of unfairness, bad faith, or duress in the original
negotiations”). In addition, if the “dysfunctional” market
conditions under which the contract was formed were
caused by illegal action of one of the parties, FERC should
not apply the Mobile-Sierra presumption. See Part III,
infra. But the mere fact that the market is imperfect, or
even chaotic, is no reason to undermine the stabilizing
force of contracts that the FPA embraced as an alternative
to “purely tariff-based regulation.” Verizon, 535 U.S., at
479. We may add that evaluating market “dysfunction” is
a very difficult and highly speculative task—not one that
the FPA would likely require the agency to engage in
before holding sophisticated parties to their bargains.
We reiterate that we do not address the lawfulness of
FERC’s market-based-rates scheme, which assuredly has
its critics. But any needed revision in that scheme is
properly addressed in a challenge to the scheme itself, not
through a disfigurement of the venerable Mobile-Sierra
doctrine. We hold only that FERC may abrogate a valid
contract only if it harms the public interest.
B
Application of “Excessive Burden”
Exception to High-Rate Challenges
We turn now to the Ninth Circuit’s second holding: that
a “zone of reasonableness” test should be used to evaluate
a buyer’s challenge that a rate is too high. In our view
that fails to accord an adequate level of protection to
contracts. The standard for a buyer’s challenge must be
the same, generally speaking, as the standard for a seller’s
20 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
Opinion of the Court
challenge: The contract rate must seriously harm the
public interest. That is the standard that the Commission
applied in the proceedings below.
We are again in agreement with the Ninth Circuit on a
starting premise: It is clear that the three factors we
identified in Sierra—“where [a rate] might impair the
financial ability of the public utility to continue its service,
cast upon other consumers an excessive burden, or be
unduly discriminatory,” 350 U.S., at 355—are not all
precisely applicable to the high-rate challenge of a pur­
chaser (where, for example, the relevant question is not
whether “other customers” [of the utility] would be exces­
sively burdened, but whether any customers of the pur­
chaser would be); and that those three factors are in any
event not the exclusive components of the public interest.
In its decision below, the Commission recognized both
these realities. See 103 FERC, at 62,397 (“Nevada Com­
panies failed to show that the contract terms at issue
impose an excessive burden on their customers” (emphasis
added)); id., at 62,398 (“The record also demonstrates that
Snohomish presented no evidence that its contract with
Morgan Stanley adversely affected Snohomish or its rate­
payers” (emphasis added)); id., at 62,398–62,399 (evaluat­
ing the “totality of circumstances”); see also Brief for
FERC 41–42.4
Where we disagree with the Ninth Circuit is on the
——————
4 Thedissent criticizes the Commission’s decision because it took into
account under the heading “totality of the circumstances” only the
circumstances of the contract formation, not “circumstances exogenous
to contract negotiations, including natural disasters and market
manipulation by entities not parties to the challenged contract.” Post,
at 13. Those considerations are relevant to whether the contracts
impose an “excessive burden” on consumers relative to what they would
have paid absent the contracts. It is precisely our uncertainty whether
the Commission considered those “circumstances exogenous to contract
negotiations,” discussed in Part III of our opinion, that causes us to
approve the remand to FERC.
Cite as: 554 U. S. ____ (2008) 21
Opinion of the Court
overarching “zone of reasonableness” standard it estab­
lished for evaluating a high-rate challenge and setting
aside a contract rate: whether consumers’ electricity bills
“are higher than they would otherwise have been had the
challenged contracts called for rates within the just and
reasonable range,” i.e., rates that equal “marginal cost.”5
471 F.3d, at 1089. The Ninth Circuit derived this test
from our statement in Sierra that a contract rate would
have to be modified if it were so low that it imposed an
“excessive burden” on other wholesale purchasers. The
Ninth Circuit took “excessive burden” to mean merely the
burden caused when one set of consumers is forced to pay
above marginal cost to compensate for below-marginal­
——————
5 Elsewhere the Ninth Circuit softened this standard somewhat, say­
ing that “[e]ven if a particular rate exceeds marginal cost . . . it may
still be within this reasonable range—or ‘zone of reasonableness’—if
that higher-than-cost-based price results from normal market forces
and is part of a general trend toward rates that do reflect cost.” 471
F.3d, at 1089. We are not sure (and we think no one can be sure)
precisely what this means. It has no basis in our opinions, and is in
any event wrong because its point of departure (the general principle
that rates cannot exceed marginal cost) contradicts Mobile-Sierra.
The Ninth Circuit purported to find support for its “zone of reason­
ableness” test in the case law of the District of Columbia Circuit. But
the cited case stands only for the proposition that a market-based
scheme must assure that market forces will, “over the long pull,” cause
rates to approximate marginal cost. Interstate Natural Gas Assn. of
Am. v. FERC, 285 F.3d 18, 31 (2002). Nowhere does the opinion
suggest that the standard for reforming a particular contract validly
entered into under a market-based scheme is whether the rates ap­
proximate marginal cost.
By the same token, our approval of FERC’s decision not to set pro­
spective area rates solely with reference to pre-existing contract prices,
Permian Basin Area Rate Cases, 390 U.S. 747, 792–793 (1968), does
not support, as the dissent thinks, post, at 8, n. 2, the view that the
standard for abrogating an existing, valid contract is anything less than
the Mobile-Sierra standard. That is the standard Permian Basin
applied when actually confronted with the issue of contract modifica­
tion. See 390 U.S., at 781–784, 821–822.
22 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
Opinion of the Court
cost rates charged other consumers. See 471 F.3d, at
1088. And it proceeded to apply a similar notion of “exces­
sive burden” to high-rate challenges (where all the burden
of the above-marginal-cost contract rate falls on the pur­
chaser’s own customers, and does not affect the customers
of third parties). Id., at 1089. That is a misreading of
Sierra and our later cases. A presumption of validity that
disappears when the rate is above marginal cost is no
presumption of validity at all, but a reinstitution of cost-
based rather than contract-based regulation. We have
said that, under the Mobile-Sierra presumption, setting
aside a contract rate requires a finding of “unequivocal
public necessity,” Permian Basin, 390 U.S., at 822, or
“extraordinary circumstances,” Arkansas Louisiana Gas
Co. v. Hall, 453 U.S. 571, 582 (1981). In no way can these
descriptions be thought to refer to the mere exceeding of
marginal cost.
The Ninth Circuit’s standard would give short shrift to
the important role of contracts in the FPA, as reflected in
our decision in Sierra, and would threaten to inject more
volatility into the electricity market by undermining a key
source of stability. The FPA recognizes that contract
stability ultimately benefits consumers, even if short-term
rates for a subset of the public might be high by historical
standards—which is why it permits rates to be set by
contract and not just by tariff. As the Commission has
recently put it, its “first and foremost duty is to protect
consumers from unjust and unreasonable rates; however,
. . . uncertainties regarding rate stability and contract
sanctity can have a chilling effect on investments and a
seller’s willingness to enter into long-term contracts and
this, in turn, can harm customers in the long run.” Mar-
ket-Based Rates, ¶6, 72 Fed. Reg. 33906–33907.
Besides being wrong in principle, in its practical effect
the Ninth Circuit’s rule would impose an onerous new
burden on the Commission, requiring it to calculate the
Cite as: 554 U. S. ____ (2008) 23
Opinion of the Court
marginal cost of the power sold under a market-based
contract. Assuming that FERC even ventured to under­
take such an analysis, rather than reverting to the ancien
régime of cost-of-service ratesetting, the regulatory costs
would be enormous. We think that the FPA intended to
reserve the Commission’s contract-abrogation power for
those extraordinary circumstances where the public will
be severely harmed.6
III
Defects in FERC’s Analysis Supporting Remand
Despite our significant disagreement with the Ninth
——————
6 The dissent claims that we have misread the FPA because its provi­
sions “do not distinguish between rates set unilaterally by tariff and
rates set bilaterally by contract.” Post, at 2. But the dissent’s interpre­
tation, whatever plausibility it has as an original matter, cannot be
squared with Sierra, which plainly distinguished between unilaterally
and bilaterally set rates, and said that the only relevant consideration
for the Commission in the latter case is whether the public interest is
harmed. And the circumstances identified in Sierra as implicating the
public interest refer to something more than a small dent in the con­
sumer’s pocket, which is why our subsequent cases have described the
standard as a high one.
At the end of the day, the dissent simply argues against the settled
understanding of the FPA that has prevailed in this Court, lower
courts, and the Commission for half a century. Although the dissent is
correct that we have never used the phrase “Mobile-Sierra doctrine” in
our cases, that is probably because the understanding of it was so
uniform that no circuit split concerning its meaning arose until the
Ninth Circuit’s erroneous decision in these cases. If one searches the
Commission’s reports, over 600 decisions since 2000 alone have cited
the doctrine, see Brief for Electric Power Supply Association et al. as
Amici Curiae 15, and the Courts of Appeals have used the term “Mo­
bile-Sierra doctrine” (or “Sierra-Mobile” doctrine) over 75 times since
1974. If there were ever a context where long-settled understanding
should be honored it is here, where a statutory decision (subject to
revision by Congress) has been understood the same way for many
years by lower courts, by this Court, by the federal agency the statute
governs, and hence surely by the private actors trying to observe the
law.
24 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
Opinion of the Court
Circuit, we find two errors in the Commission’s analysis,
and we therefore affirm the judgment below on alternative
grounds.
First, it appears, as the Ninth Circuit concluded, see 471
F.3d, at 1090, that the Commission may have looked
simply to whether consumers’ rates increased immediately
upon the relevant contracts’ going into effect, rather than
determining whether the contracts imposed an excessive
burden on consumers “down the line,” relative to the rates
they could have obtained (but for the contracts) after
elimination of the dysfunctional market. For example, the
Commission concluded that two of the respondents would
experience “rate decreases of approximately 20 percent for
retail service” during the period covered by the contracts.
103 FERC, at 62,397. But the baseline for that computa­
tion was the rate they were paying before the contracts
went into effect. That disparity is certainly a relevant
consideration; but so is the disparity between the contract
rate and the rates consumers would have paid (but for the
contracts) further down the line, when the open market
was no longer dysfunctional. That disparity, past a cer­
tain point, could amount to an “excessive burden.” That is
what was contemplated by Sierra, which involved a chal­
lenge 5 years into a 15-year contract. The “excessive
burden” on other customers to which the opinion referred
was assuredly the current burden, and not only the bur­
den imposed at the very outset of the contract. See 350
U.S., at 355. The “unequivocal public necessity” that
justifies overriding the Mobile-Sierra presumption does
not disappear as a factor once the contract enters into
force. Thus, FERC’s analysis on this point was flawed—or
at least incomplete. As the Ninth Circuit put it, “[i]t is
entirely possible that rates had increased so high during
the energy crises because of dysfunction in the spot mar­
ket that, even with the acknowledged decrease in rates,
consumers still paid more under the forward contracts
Cite as: 554 U. S. ____ (2008) 25
Opinion of the Court
than they otherwise would have.” 471 F.3d, at 1090. If
that is so, and if that increase is so great that, even taking
into account the desirability of fostering market-
stabilizing long-term contracts, the rates impose an exces­
sive burden on consumers or otherwise seriously harm the
public interest, the rates must be disallowed.
Second, respondents alleged before FERC that some of
the petitioners in these cases had engaged in market
manipulation in the spot market. See, e.g., 105 FERC, at
61,989 (“Snohomish and Nevada Companies argue that
their contracts were the product of market manipulation
by Enron, Morgan Stanley and other Respondents, which,
as established by the Commission Staff, engaged in mar­
ket manipulation”). The Staff Report concluded, as we
have said, that the abnormally high prices in the spot
market during the energy crisis influenced the terms of
contracts in the forward market. But the Commission
dismissed the relevance of the Staff Report on the ground
that it had not demonstrated that forward market prices
were so high as to overcome the Mobile-Sierra presump­
tion. We conclude, however, that if it is clear that one
party to a contract engaged in such extensive unlawful
market manipulation as to alter the playing field for con­
tract negotiations, the Commission should not presume
that the contract is just and reasonable. Like fraud and
duress, unlawful market activity that directly affects
contract negotiations eliminates the premise on which the
Mobile-Sierra presumption rests: that the contract rates
are the product of fair, arms-length negotiations. The
mere fact that the unlawful activity occurred in a different
(but related) market does not automatically establish that
it had no effect upon the contract—especially given the
Staff Report’s (unsurprising) finding that high prices in
the one market produced high prices in the other. We are
unable to determine from the Commission’s orders
whether it found the evidence inadequate to support the
claim that respondents’ alleged unlawful activities af­
26 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
Opinion of the Court
fected the contracts at issue here. It said in its order on
rehearing, 105 FERC, at 61,989, that “[w]e . . . found no
evidence to support a finding of market manipulation [by
respondents] that specifically affected the contracts at
issue.” But perhaps that must be read in light of the
Commission’s above described rejection of the Staff Report
on the ground that high spot market prices caused by
manipulation are irrelevant unless the forward market
prices fail the Mobile-Sierra standard; and in light of the
statement in its initial order, in apparent response to the
claim of spot-market manipulation by respondents, 103
FERC, at 62,397, that “a finding that the unjust and
unreasonable spot market prices caused forward bilateral
prices to be unjust and unreasonable would be relevant to
contract modification only where there is a ‘just and rea­
sonable’ standard of review.”
We emphasize that the mere fact of a party’s engaging
in unlawful activity in the spot market does not deprive its
forward contracts of the benefit of the Mobile-Sierra pre­
sumption. There is no reason why FERC should be able to
abrogate a contract on these grounds without finding a
causal connection between unlawful activity and the
contract rate. Where, however, causality has been estab­
lished, the Mobile-Sierra presumption should not apply.
On remand, the Commission should amplify or clarify
its findings on these two points. The judgment of the
Court of Appeals is affirmed, and the cases are remanded
for proceedings consistent with this opinion.
It is so ordered.
THE CHIEF JUSTICE and JUSTICE BREYER took no part in
the consideration or decision of these cases.
Cite as: 554 U. S. ____ (2008) 1
Opinion of GINSBURG, J.
SUPREME COURT OF THE UNITED STATES
_________________
Nos. 06–1457 and 06–1462
_________________
MORGAN STANLEY CAPITAL GROUP INC.,
PETITIONER
06–1457 v.
PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH
COUNTY, WASHINGTON, ET AL.
AMERICAN ELECTRIC POWER SERVICE
CORPORATION, ET AL., PETITIONERS
06–1462 v.
PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH
COUNTY, WASHINGTON, ET AL.
ON WRITS OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE NINTH CIRCUIT
[June 26, 2008]
JUSTICE GINSBURG, concurring in part and concurring in
the judgment.
Recommending denial of the petition for certiorari in
these cases, the Federal Energy Regulatory Commission
urged that review “would be premature” given “the inter-
locutory nature of th[e] issues.” Brief for Respondent
Federal Energy Regulatory Commission in Opposition 22,
25. In this regard, the Commission called our attention to
“new measures” it had taken, as well as recent enactments
by Congress, bearing on “the evaluation of contracts under
Mobile-Sierra.” Id., at 14–16. In view of these develop-
ments, the Commission suggested, this Court should await
“the better-developed record that would be produced by
FER[C] . . . on remand.” Id., at 22. I agree that the Court
would have been better informed had it awaited the Com-
2 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
Opinion of GINSBURG, J.
mission’s decision on remand. I think it plain, however,
that the Commission erred in the two respects identified
by the Court. See ante, at 24–26. I therefore concur in the
Court’s judgment and join Part III of the Court’s opinion.
Cite as: 554 U. S. ____ (2008) 1
STEVENS, J., dissenting
SUPREME COURT OF THE UNITED STATES
_________________
Nos. 06–1457 and 06–1462
_________________
MORGAN STANLEY CAPITAL GROUP INC.,
PETITIONER
06–1457 v.
PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH
COUNTY, WASHINGTON, ET AL.
AMERICAN ELECTRIC POWER SERVICE
CORPORATION, ET AL., PETITIONERS
06–1462 v.
PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH
COUNTY, WASHINGTON, ET AL.
ON WRITS OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE NINTH CIRCUIT
[June 26, 2008]
JUSTICE STEVENS, with whom JUSTICE SOUTER joins,
dissenting.
The basic question presented by these complicated cases
is whether “the Federal Energy Regulatory Commission
(FERC or Commission) must presume that the rate set out
in a freely negotiated wholesale-energy contract meets the
‘just and reasonable’ requirement imposed by law.” Ante,
at 1. The opening sentence of the Court’s opinion tells us
that the “Mobile-Sierra doctrine”—a term that makes its
first appearance in the United States Reports today—
mandates an affirmative answer. This holding finds no
support in either case that lends its name to the doctrine.
Nevertheless, in the interest of guarding against “disfig-
urement of the venerable Mobile-Sierra doctrine,” ante, at
19, the Court mangles both the governing statute and
2 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
STEVENS, J., dissenting
precedent.
I
Under the Federal Power Act (FPA), 41 Stat. 1063, 16
U.S. C. §791a et seq., wholesale electricity prices are
established in the first instance by public utilities, either
via tariffs or in contracts with purchasers. §824d(c).
Whether set by tariff or contract, all rates must be filed
with the Commission. See ibid. Section 205(a) of the FPA
provides, “All rates and charges . . . shall be just and
reasonable, and any such rate or charge that is not just
and reasonable is hereby declared to be unlawful.” 16
U.S. C. §824d(a). Pursuant to §206(a), if FERC deter-
mines “that any rate . . . or that any rule, regulation,
practice, or contract affect[ing] such rate . . . is unjust [or]
unreasonable . . . , the Commission shall determine the
just and reasonable rate, . . . rule, regulation, practice, or
contract to be thereafter observed and in force, and shall
fix the same by order.” 16 U.S. C. §824e(a). These provi-
sions distinguish between the rate-setting roles of utilities
(which initially set rates) and the Commission (which may
override utility-set rates that are not just and reasonable),
but they do not distinguish between rates set unilaterally
by tariff and rates set bilaterally by contract. However the
utility sets its prices, the standard of review is the same—
rates must be just and reasonable.
The Court purports to acknowledge that “[t]here is only
one statutory standard for assessing wholesale electricity
rates, whether set by contract or tariff—the just-and-
reasonable standard.” Ante, at 16. Unlike rates set by
tariff, however, the Court holds that any “freely negoti-
ated” contract rate is presumptively just and reasonable
unless it “seriously harms” the public interest. Ante, at 1.
According to the Court, this presumption represents a
“differing application of [the] just-and-reasonable stan-
dard,” but not a different standard altogether. Ante, at 6.
Cite as: 554 U. S. ____ (2008) 3
STEVENS, J., dissenting
I disagree. There is no significant difference between
requiring a heightened showing to overcome an otherwise
conclusive presumption and imposing a heightened stan-
dard of review. I agree that applying a separate standard
of review to contract rates is “obviously indefensible,”
ibid., but that is also true with respect to the Court’s
presumption.
Even if the “Mobile-Sierra presumption” were not tan-
tamount to a separate standard, nothing in the statute
mandates “differing application” of the statutory standard
to rates set by contract. Ibid. Section 206(a) of the FPA
provides, “without qualification or exception,” that FERC
may replace any unjust or unreasonable contract with a
lawful contract. Permian Basin Area Rate Cases, 390
U.S. 747, 783–784 (1968) (construing identical language
in the Natural Gas Act, 15 U.S. C. §717d(a)). The statute
does not say anything about a mandatory presumption for
contracts, much less define the burden of proof for over-
coming it or delineate the circumstances for its nonappli-
cation. Cf. ante, at 1, 19. Nor does the statute prohibit
FERC from considering marginal cost when reviewing
rates set by contract. Cf. ante, at 20–22, and n. 5.
If Congress had intended to impose such detailed con-
straints on the Commission’s authority to review contract
rates, it would have done so itself in the FPA. Congress
instead used the general words “just and reasonable”
because it wanted to give FERC, not the courts, wide
latitude in setting policy. As we explained in Chevron
U. S. A. Inc. v. Natural Resources Defense Council, Inc.,
467 U.S. 837, 843–844 (1984):
“ ‘The power of an administrative agency to admin-
ister a congressionally created . . . program necessar-
ily requires the formulation of policy and the making
of rules to fill any gap left, implicitly or explicitly, by
Congress.’ Morton v. Ruiz, 415 U.S. 199, 231 (1974).
4 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
STEVENS, J., dissenting
If Congress has explicitly left a gap for the agency to
fill, there is an express delegation of authority to the
agency to elucidate a specific provision of the statute
by regulation. Such legislative regulations are given
controlling weight unless they are arbitrary, capri-
cious, or manifestly contrary to the statute. Some-
times the legislative delegation to an agency on a par-
ticular question is implicit rather than explicit. In
such a case, a court may not substitute its own con-
struction of a statutory provision for a reasonable in-
terpretation made by the administrator of an agency.”
(Footnote omitted.)
Consistent with this understanding of administrative
law, our cases interpreting the FPA have invariably “em-
phasized that courts are without authority to set aside any
rate adopted by the Commission which is within a ‘zone of
reasonableness.’ ” Permian Basin, 390 U.S., at 797. But
see ante, at 19 (asserting that “a ‘zone of reasonableness’
test . . . fails to accord an adequate level of protection to
contracts”). This deference makes eminent sense because
“rate-making agencies are not bound to the service of any
single regulatory formula; they are permitted, unless their
statutory authority otherwise plainly indicates, ‘to make
the pragmatic adjustments which may be called for by
particular circumstances.’ ” Permian Basin, 390 U.S., at
776–777. Despite paying lipservice to this principle, see
ante, at 3, the Court binds the Commission to a rigid
formula of the Court’s own making.
Having found no statutory text that supports its vision
of the Mobile-Sierra doctrine, the Court invokes the “im-
portant role of contracts in the FPA.” Ante, at 22. But
contracts play an “important role” in the FPA only insofar
as the statute “departed from the scheme of purely tariff-
based regulation.” Verizon Communications Inc. v. FCC,
535 U.S. 467, 479 (2002). In allowing parties to establish
Cite as: 554 U. S. ____ (2008) 5
STEVENS, J., dissenting
rates by contract, Congress did not intend to immunize
such rates from just-and-reasonable review. Both 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), the supposed progenitors of the “Mobile-Sierra
presumption,” make this point in no uncertain terms. See
Sierra, 350 U.S., at 353 (“The Commission has undoubted
power under §206(a) to prescribe a change in contract
rates whenever it determines such rates to be unlawful”);
Mobile, 350 U.S., at 344 (“[C]ontracts remain fully subject
to the paramount power of the Commission to modify
them when necessary in the public interest”).1 Accord-
ingly, the fact that the FPA tolerates contracts does not
make it subservient to contracts.
II
Neither of the eponymous cases in the “Mobile-Sierra
presumption,” nor any of our subsequent decisions, sub-
stantiates the Court’s atextual reading of §§205 and 206.
As the Court acknowledges, Mobile itself says nothing
about what standard of review applies to rates established
by contract. See ante, at 3–4. Rather, Mobile merely held
that utilities cannot unilaterally abrogate contracts with
purchasers by filing new rate schedules with the Commis-
sion. See 350 U.S., at 339–341. The Court neglects to
mention, however, that although Mobile had no occasion to
comment on the standard of review, it did imply that
Congress would not have permitted parties to establish
rates by contract but for “the protection of the public
——————
1 See also, e.g., Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571,
582 (1981) (Arkla) (“[T]he clear purpose of the congressional scheme”
for rate filing is to “gran[t] the Commission an opportunity in every
case to judge the reasonableness of the rate”); Permian Basin Area Rate
Cases, 390 U.S. 747, 784 (1968) (“[T]he Commission has plenary
authority to limit or to proscribe contractual arrangements that contra-
vene the relevant public interests”).
6 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
STEVENS, J., dissenting
interest being afforded by supervision of the individual
contracts, which to that end must be filed with the Com-
mission and made public.” Id., at 339.
In Sierra, a public utility entered into a long-term con-
tract to sell electricity “at a special low rate” in order to
forestall potential competition. See 350 U.S., at 351–352.
Several years later the utility complained that the rate
provided too little profit and was therefore not “just and
reasonable.” The Commission agreed and set aside the
rate “solely because it yield[ed] less than a fair return on
the net invested capital.” See id., at 354–355. The Court
vacated and remanded on the ground that the Commission
had applied an erroneous standard. “[W]hile it may be
that the Commission may not normally impose upon a
public utility a rate which would produce less than a fair
return,” the Court reasoned, “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.” Id., at
355. When the seller has agreed to a rate that it later
challenges as too low, “the sole concern of the Commission
would seem to be whether the rate is so low as to ad-
versely affect the public interest—as where it might im-
pair the financial ability of the public utility to continue
its service, cast upon other consumers an excessive bur-
den, or be unduly discriminatory.” Ibid. The Court fur-
ther elaborated on what it meant by the “public interest”:
“That the purpose of the power given the Commission
by §206(a) is the protection of the public interest, as
distinguished from the private interests of the utili-
ties, is evidenced by the recital in §201 of the Act that
the scheme of regulation imposed ‘is necessary in the
public interest.’ When §206(a) is read in the light of
this purpose, it is clear that a contract may not be
said to be either ‘unjust’ or ‘unreasonable’ simply be-
Cite as: 554 U. S. ____ (2008) 7
STEVENS, J., dissenting
cause it is unprofitable to the public utility.” Ibid.
Sierra therefore held that, in accordance with the
statement of policy in the FPA, 16 U.S. C. §824(a),
whether a rate is “just and reasonable” is measured
against the public interest, not the private interests of
regulated sellers. Contrary to the opinion of the Court,
see ante, at 23, n. 6, Sierra instructs that the public inter-
est is the touchstone for just-and-reasonable review of all
rates, not just contract rates. Sierra drew a distinction
between the Commission’s authority to impose low rates
on utilities and its authority to abrogate low rates agreed
to by utilities because these actions impact the public
interest differently, not because the public interest gov-
erns rates set bilaterally but not rates set unilaterally.
When the Commission imposes rates that afford less than
a fair return, it compromises the public’s interest in at-
tracting necessary capital. The impact is different, how-
ever, if a utility has agreed to a low rate because investors
recognize that the utility, not the regulator, is responsible
for the unattractive rate of return.
Sierra used “public interest” as shorthand for the inter-
est of consumers in paying “ ‘the lowest possible reason-
able rate consistent with the maintenance of adequate
service in the public interest.’ ” Permian Basin, 390 U.S.,
at 793 (quoting Atlantic Refining Co. v. Public Serv.
Comm’n of N. Y., 360 U.S. 378, 388 (1959)). Whereas
high rates directly implicate this interest, low rates do so
only indirectly, such as when the rate is so low that it
“might impair the financial ability of the public utility to
continue its service, cast upon other consumers an exces-
sive burden, or be unduly discriminatory.” Sierra, 350
U.S., at 355. Nothing in Sierra purports to mandate a
“serious harm” standard of review, or to require any as-
sumption that high rates and low rates impose symmetric
burdens on the public interest. Cf. ante, at 19–20. As we
8 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
STEVENS, J., dissenting
later explained in FPC v. Texaco Inc., 417 U.S. 380, 399
(1974), the Commission cannot ignore even “a small dent
in the consumer’s pocket” because “the Act makes unlaw-
ful all rates which are not just and reasonable, and does
not say a little unlawfulness is permitted.”
Brushing aside the text of the FPA, as well as the hold-
ings in Mobile and Sierra themselves, the Court cherry
picks language from Verizon, Arkla, and Permian Basin.
Both Verizon and Arkla mentioned the Mobile-Sierra line
of cases only in passing, and neither case had anything to
do with just-and-reasonable review of rates. See Verizon,
535 U.S., at 479; Arkla, 453 U.S. 571, 582 (1981). Fur-
thermore, the statement in Permian Basin about “un-
equivocal public necessity,” 390 U.S., at 822, speaks to the
difficulty of establishing injury to the public interest in the
context of a low-rate challenge, not a high-rate challenge.2
——————
2 The Court repeatedly quotes the following snippet from the 75-page
opinion in Permian Basin: “The regulatory system created by the Act is
premised on contractual agreements voluntarily devised by the regu-
lated companies; it contemplates abrogation of these agreements only
in circumstances of unequivocal public necessity.” 390 U.S., at 822
(cited ante, at 5, 22, 24). Like FPC v. Sierra Pacific Power Co., 350
U.S. 348 (1956), however, Permian Basin made this statement in the
course of rejecting a low-rate challenge. Read in context, the Court’s
reference to “unequivocal public necessity” is a loose restatement of
Sierra, which required “evidence of injury to the public interest,” and
which underscored how rarely a utility will be able to demonstrate that
a “contract price is so ‘low as to adversely affect the public interest.’ ”
390 U.S., at 820–821 (quoting Sierra, 350 U.S., at 355). The Court’s
expansive reading of the “unequivocal public necessity” statement
cannot be squared with Permian Basin’s discussion of the Commission’s
authority to review rates set by contract: “Although the Natural Gas
Act is premised upon a continuing system of private contracting, the
Commission has plenary authority to limit or to proscribe contractual
arrangements that contravene the relevant public interests.” 390 U.S.,
at 784 (citation omitted). Nor can it be reconciled with Permian Basin’s
rejection of the producers’ arguments (1) that the Commission “wrongly
invalidated existing contracts” by imposing a ceiling on rates, see id., at
781–784, and (2) that the Commission was compelled to adopt contract
Cite as: 554 U. S. ____ (2008) 9
STEVENS, J., dissenting
The Court’s reliance on these few stray sentences calls to
mind our admonishment in Permian Basin: “The Commis-
sion’s exercise of its regulatory authority must be assessed
in light of its purposes and consequences, and not by
references to isolated phrases from previous cases.” Id., at
791, n. 60.
III
Lacking any grounding in the FPA or precedent, the
Court concludes, as a matter of policy, that the Mobile-
Sierra presumption is necessary to ensure stability in
volatile energy markets and to reduce regulatory costs.
See ante, at 22–23. Of course, “the desirability of fostering
market-stabilizing long-term contracts,” ante, at 25, plays
into the public interest insofar as the “Commission’s re-
sponsibilities include the protection of future, as well as
present, consumer interests,” Permian Basin, 390 U.S., at
798; see also United Gas Pipe Line Co. v. Memphis Light,
Gas and Water Div., 358 U.S. 103, 113 (1958) (“It seems
plain that Congress . . . was not only expressing its convic-
tion that the public interest requires the protection of
consumers from excessive prices for natural gas, but was
also manifesting its concern for the legitimate interests of
natural gas companies in whose financial stability the gas-
consuming public has a vital stake”). But under the FPA,
Congress has charged FERC, not the courts, with balanc-
ing the short-term and long-term interests of consumers.
See Permian Basin, 390 U.S., at 792 (“The court’s respon-
sibility is not to supplant the Commission’s balance of
these interests with one more nearly to its liking, but
instead to assure itself that the Commission has given
reasoned consideration to each of the pertinent factors”).
Moreover, not even FERC has the authority to endorse
the rule announced by the Court today. The FPA does not
——————
prices as the basis for computing area rates, see id., at 792–795. 10 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
STEVENS, J., dissenting
indulge, much less require, a “practically insurmountable”
presumption, see Papago Tribal Util. Auth. v. FERC, 723
F.2d 950, 954 (CADC 1983) (opinion for the court by
Scalia, J.), that all rates set by contract comport with the
public interest and are therefore just and reasonable.
Congress enacted the FPA precisely because it concluded
that regulation was necessary to protect consumers from
deficient markets. It follows, then, that “the Commission
lacks the authority to place exclusive reliance on market
prices.” Texaco, 417 U.S., at 400; see also id., at 399 (“In
subjecting producers to regulation because of anticompeti-
tive conditions in the industry, Congress could not have
assumed that ‘just and reasonable’ rates could conclu-
sively be determined by reference to market price”). For
this reason, we have already rejected the policy rationale
proffered by the Court today:
“It may be, as some economists have persuasively ar-
gued, that the assumptions of the 1930’s about the
competitive structure of the natural gas industry, if
true then, are no longer true today. It may also be
that control of prices in this industry, in a time of
shortage, if such there be, is counterproductive to the
interests of the consumer in increasing the production
of natural gas. It is not the Court’s role, however, to
overturn congressional assumptions embedded into
the framework of regulation established by the Act.
This is a proper task for the Legislature where the
public interest may be considered from the multifac-
eted points of view of the representational process.”
Id., at 400 (footnote omitted).
Balancing the short-term and long-term interests of
consumers entails difficult judgment calls, and to the
extent FERC actually engages in this balancing, its rea-
soned determination is entitled to deference. But FERC
cannot abdicate its statutory responsibility to ensure just
Cite as: 554 U. S. ____ (2008) 11
STEVENS, J., dissenting
and reasonable rates through the expedient of a heavy-
handed presumption. This is not to say that the Commis-
sion should abrogate any contract that increases rates, but
to underscore that the agency is “obliged at each step of its
regulatory process to assess the requirements of the broad
public interests entrusted to its protection by Congress.”
Permian Basin, 390 U.S., at 791.
IV
Even if, as the Court holds today, the “Mobile-Sierra
presumption” is merely a “differing application” of the
statutory just-and-reasonable standard, FERC’s orders
must be set aside because they were not decided on this
basis.
The FERC orders repeatedly aver that the agency is
applying a “public interest” standard different from and
distinctly more demanding than the statutory standard.
See, e.g., App. 1198a (“[T]he burden of showing that a
contract is contrary to the public interest is a higher bur-
den than showing that a contract is not just and reason-
able. . . . The fact that a contract may be found to be un-
just and unreasonable under [§§205 and 206] does not in
and of itself demonstrate that the contract is contrary to
the public interest under the Supreme Court cases”).
Indeed, the Commission’s misunderstanding of our cases
is so egregious that the sellers, concerned that the orders
would be overturned, asked the Commission for “clarifica-
tion that the public interest standard of review does not
authorize unjust and unreasonable rates.” Id., at 1506a,
1567a. FERC clarified as follows:
“[I]f rates . . . become unjust and unreasonable and
the contract at issue is subject to the Mobile-Sierra
standard of review, the Commission under court
precedent may not change the contract simply because
it is no longer just and reasonable. If parties’ market-
based rate contracts provide for the public interest
12 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
STEVENS, J., dissenting
standard of review, the Commission is bound to a
higher burden to support modification of such con-
tracts.” Id., at 1506a, 1567a.
Whereas in Texaco we faulted the Commission for failing
to “expressly mention the just-and-reasonable standard,”
417 U.S., at 396, in these cases FERC refused outright to
apply that standard.3
In addition to misrepresenting FERC’s understanding of
the Mobile-Sierra doctrine as a presumption rather than a
separate standard, the Court overstates the extent to
which FERC considered the lawfulness of the rates. The
Court recognizes, as it must, that the three factors identi-
fied in Sierra are neither exclusive nor “precisely applica-
ble to the high-rate challenge of a purchaser.” See ante, at
20; Brief for Respondent FERC 41–42. Although FERC
applied what it termed the “Sierra Three-Prong Test,”
App. 1276a, the Court contends the agency did not err
because it also evaluated the “ ‘totality of the circum-
stances,’ ” see ante, at 20. But FERC’s totality-of-the-
circumstances review was infected by its misapprehension
of the standard “dictated by the U. S. Supreme Court
under the Mobile-Sierra doctrine.” App. 1229a.
Whereas the focus of §§205(a) and 206(a) is on the rea-
sonableness of the rates charged, not the conduct of the
contracting parties, FERC restricted its review to the
contracting parties’ behavior around the time of formation.
See id., at 1280a–1284a. FERC seems to have thought it
was powerless to conduct just-and-reasonable review
unless the contract was already subject to abrogation
——————
3 The Court contends that FERC’s application of the Mobile-Sierra
doctrine “should be honored” because it represents the “settled under-
standing of the FPA.” Ante, at 23, n. 6. As explained above, however,
FERC’s interpretation of the FPA (and of our cases construing the FPA)
is “ ‘obviously indefensible,’ ” supra, at 3 (quoting ante, at 6), and is
therefore not entitled to any deference.
Cite as: 554 U. S. ____ (2008) 13
STEVENS, J., dissenting
based on contract defenses such as fraud or duress. By
including contracts within the scope of §206(a), however,
Congress must have concluded that contract defenses are
insufficient to protect the public interest. But see ante, at
19 (holding that the “Mobile-Sierra presumption” applies
in all circumstances absent “traditional grounds for . . .
abrogation” or “illegal action” by a contracting party).4
Indeed, nothing in the FPA or this Court’s cases precludes
FERC from considering circumstances exogenous to con-
tract negotiations, including natural disasters and market
manipulation by entities not parties to the challenged
contract.5 FERC’s error is obvious from the face of the
orders, which repeatedly state the Commission’s belief
that it could not consider evidence relevant to the reason-
ableness of the contract rates.6
——————
4 The Court quite sensibly instructs FERC that “if it is clear that one
party to a contract engaged in such extensive unlawful market manipu-
lation as to alter the playing field for contract negotiations, the Com-
mission should not presume that the contract is just and reasonable”;
and that the “mere fact that the unlawful activity occurred in a differ-
ent (but related) market does not automatically establish that it had no
effect upon the contract—especially given the Staff Report’s (unsurpris-
ing) finding that high prices in the one market produced high prices in
the other.” Ante, at 25. I disagree, however, with the Court’s sugges-
tion that the FPA restricts FERC’s review of contract rates to these
limited criteria.
5 The FPA does not specify how market deficiencies should weigh in
FERC’s review of contract rates. Depending on the circumstances and
how one balances the short-term and long-term interests of consumers,
evidence of “market turmoil” may, as the Court argues, support rather
detract from a finding that contract rates are just and reasonable. See
ante, at 18. Whether any given contract rate “ultimately benefits
consumers,” ante, at 22, however, is a determination that Congress has
vested in FERC, not this Court.
6 See, e.g., App. 1275a (“[A] finding that the unjust and unreasonable
spot market prices caused forward bilateral prices to be unjust and
unreasonable would be relevant to contract modification only where
there is a ‘just and reasonable’ standard of review. As we have previ-
ously concluded, the contracts at issue in this proceeding do not provide
14 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
STEVENS, J., dissenting
Although the Court and the Commission attempt to
recast FERC’s orders as applying the statutory standard,
see ante, at 13–14; Brief for Respondent FERC 21, under
the doctrine set forth in SEC v. Chenery Corp., 318 U.S.
80 (1943), “we cannot accept appellate counsel’s post hoc
rationalizations for agency action; for an agency’s order
must be upheld, if at all, on the same basis articulated in
the order by the agency itself,” Texaco, 417 U.S., at 397
(internal quotation marks omitted). Furthermore, even
assuming FERC subjectively believed that it was applying
the just-and-reasonable standard despite its repeated
declarations to the contrary, each order must be deemed
“so ambiguous that it falls short of that standard of clarity
that administrative orders must exhibit.” Id., at 395–396.
In order to get around the Chenery doctrine, the Court
not only mischaracterizes FERC’s orders, but also takes a
more radical tack: It concludes that whatever the rationale
set forth in FERC’s orders, Chenery does not apply be-
cause “the Commission was required, under our decision
in Sierra, to apply the Mobile-Sierra presumption in its
evaluation of the contracts here.” Ante, at 16. This point
prompts the Court to comment that “FERC has lucked
out.” Ibid. If the Commission has “lucked out,” it is not
only a purely fortuitous victory, but also a Pyrrhic one.
——————
for such a standard but rather evidence an intent that the contracts
may be changed only pursuant to the ‘public interest’ standard of
review. Under the ‘public interest’ standard, to justify contract modifi-
cation it is not enough to show that forward prices became unjust and
unreasonable due to the impact of spot market dysfunctions” (footnote
omitted)); id., at 1527a (“Complainants were required to meet the
public interest standard of review, not the just and reasonable standard
of review which could have taken into account the causal connection
between the spot market prices and forward bilateral market prices”);
id., at 1534a (“The Staff Report did not make any findings regarding
the justness and reasonableness of any contract rates and any such
findings would not be relevant here because the just and reasonable
standard is not applicable”).
Cite as: 554 U. S. ____ (2008) 15
STEVENS, J., dissenting
Although FERC prevails in these cases despite having
“offered a justification in court different from what it
provided in its opinion,” ibid., it has paid a tremendous
price. The Court has curtailed the agency’s authority to
interpret the terms “just and reasonable” and thereby
substantially narrowed FERC’s discretion to protect the
public interest by the means it thinks best. Contrary to
congressional intent, FERC no longer has the flexibility to
adjust its review of contractual rates to account for chang-
ing conditions in the energy markets or among consumers.
Cf. Permian Basin, 390 U.S., at 784 (“[A]dministrative
authorities must be permitted, consistently with the obli-
gations of due process, to adapt their rules and policies to
the demands of changing circumstances”).
V
The decision of the Court of Appeals for the Ninth Cir-
cuit deserves praise for its efforts to bring the freewheel-
ing Mobile-Sierra doctrine back in line with the FPA and
this Court’s cases. I cannot endorse the opinion in its
entirety, however, because it verges into the same sort of
improper policymaking that I have criticized in the Court’s
opinion. Both decisions would hobble the Commission,
albeit from different sides. Congress has not authorized
courts to prescribe energy policy by imposing presump-
tions or prerequisites, or by making marginal cost the sole
concern or no concern at all. I would therefore vacate and
remand the cases in order to give the Commission an
opportunity to evaluate the contract rates in light of a
proper understanding of its discretion.
I respectfully dissent.