Energy Legal Blog

Divided FERC Affirms Primacy of Contract in Proposed New Regulation

In a December 27 rulemaking, two of three sitting FERC commissioners propose to eliminate the agency’s regulation in effect since 1963 that requires the parties to contracts subject to its Natural Gas (NGA) or Federal Power (FPA) Acts’ jurisdiction to include in their agreements prescribed language indicating whether they intend the seller to have the right unilaterally to change the rate or other material terms of their agreement.  In lieu of that requirement, a new rule would require only that the contractual parties state in their contract whether it is their intent that any unilateral proposal to change their agreement be allowed to take effect if shown to meet the just and reasonable standard of the NGA and FPA.  Absent expression of this intent, contracts other than pro forma transmission or transportation agreements will be interpreted as not authorizing unilateral changes unless the proposed change is shown not only to be just and reasonable, but also shown to be demanded by the greater public interest.  To be considered, public comments on this proposed change must be filed with FERC within 30 days of publication in the Federal Register — most likely early February.  If adopted in a final rule, the new rule of contract interpretation will apply to all non-form contracts executed 30 days or more after publication of the final rule in the Federal Register.

The proposed rule reflects the fact that, unlike common carrier regulation under which a tariff rate for a service is the only lawful rate for that service, the NGA and FPA implement a contract carrier form of regulation under which contracts (and not uniform tariffs) often establish the rates and terms of service in the first instance.  Interpreting these regulatory regimes, nearly 50 years ago the Supreme Court articulated the so-called Mobile-Sierra doctrine that bars FERC from unilaterally changing a contract rate and term under the NGA and FPA unless the change is required by the public interest.   Consonant with contract carriage and the Mobile-Sierra doctrine, it follows that the parties to a contract can agree to permit or to bar unilateral modifications to their bargains, and that, absent such an agreement, the default should be no unilateral changes to contracts under the NGA and FPA other than standard tariff service agreements for transportation and transmission.

Although sensible in the context of contract carriage, the proposed new rule will nevertheless engender controversy and criticism.  Exhibit A is the strongly worded dissent of FERC Commission Kelly.  By making no unilateral change — i.e., the public interest standard — the default, the majority, in Commissioner Kelly’s opinion, “turns the statute on its head.”  In the event of contract silence, she would have made just and reasonable the standard for unilateral changes, especially in instances where it is FERC itself or an interested non-party to the contract that is proposing the contract modification.  [Standard of Review for Modifications to Jurisdictional Agreements, 113 FERC ¶ 61,317 (2005)]