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Court Says Changes to Settlements Invalid Under Mobile-Sierra

A federal appeals court in Washington, DC has vacated and remanded an order in which FERC, after having approved two rate settlements, modified them to require Dominion Transmission Inc. to provide additional information to its shippers with respect to its fuel accounting practices.

In its July 25 decision the court held that the agency's action -- prospectively altering the settlements -- was invalid under the Mobile-Sierra doctrine, which allows for the abrogation and modification of freely negotiated private rate contracts or settlements only in cases where the rates may cause parties to be financially impaired or inflict excessive burdens on consumers. The Mobile-Sierra standard for overturning a contract or settlement is much higher than the "just and reasonable" standard.

Dominion challenged the Federal Energy Regulatory Commission (FERC) order requiring it to supply shippers with three additional items about its fuel retention practices, which were not required under a 2001 settlement but which KeySpan Corp believed were necessary to determine whether Dominion's recourse customers may have been subsidizing certain negotiated-rate customers. The information sought by KeySpan sought was in addition to16 items about Dominion's fuel accounting practices that the pipeline already had agreed to provide annually.

A second rate settlement in April 2005 continued the 2001 settlement's requirement that Dominion file an annual report listing 16 items about its fuel accounting practices. FERC found that under Section 5 of the Natural Gas Act (NGA) the 2005 settlement was "unjust and unreasonable insofar as it fails to require [the] additional information" requested by KeySpan. It ordered Dominion to refile its 2004 and 2005 fuel reports with the supplemental information and to include the additional information in all future fuel reports.

On rehearing, Dominion argued that the Commission was wrong in failing to apply the Mobile-Sierra doctrine to KeySpan's request to abrogate the terms of the 2005 settlement; wrong in deviating from its policy supporting the sanctity of settlements; and it violated Section 5 of the NGA when it ordered Dominion to modify its tariff without adequately demonstrating that the pipeline's tariff is unjust and unreasonable. In 2007 FERC denied rehearing.

The U.S. Court of Appeals for the District of Columbia Circuit reviewed FERC's interpretation of the 2001 and 2005 settlements under a two-step test first performed by the Supreme Court in Chevron U.S.A. Inc. vs. Natural Resources Defense Council Inc.

FERC argued that its order did not modify the settled list of information to be provided by Dominion, but simply added to it. "We find this argument cannot withstand Chevron review under step one. During the 'intensive' settlement negotiations...the parties precisely defined the information to be contained in Dominion's annual fuel reports...We find no ambiguity in this language and therefore decline to defer to FERC's suggestion that it can 'add to' or 'supplement' a contractual obligation without at the same time modifying it," the three-judge court said.

The Commission further argued that its order did not implicate Mobile-Sierra because it was consistent with the "purpose and intent" of the settlements. According to FERC, the primary bargain struck by the settling parties related to rates, and that requiring additional information did not, in and of itself, change those settled rates.

"We disagree. Even granting that the 'primary' purpose of the 2005 settlement was to establish Dominion's transportation and storage service rates, the 2005 settlement made clear that the information contained in the fuel report was also an integral part thereof. Indeed, the 2005 settlement specifies that it is 'an integrated package' and that 'none of the terms of the settlement [is] agreed to without each of the others,'" the court ruled.

"FERC's second variation on the theme, its 'intent of the parties' argument, fares no better...In effect, FERC argues that its understanding of the 'purpose' of the settlements takes precedence over their respective provisions. Not so. Both settlements unambiguously define Dominion's reporting obligations. The plain language of the settlements -- which provides for a 16-item fuel report -- cannot be overridden by a purported 'purpose and intent' that would significantly alter that language," the court opinion said.

The Commission further argued that the Mobile-Sierra doctrine did not apply because the 2005 settlement provided that the agency could initiate an NGA Section 5 proceeding on its own volition to ensure "just and reasonable" rates. "This argument too is without merit...FERC argues that it did not run afoul of the 'on its own volition' clause because it acted 'upon Dominion's customers' comments, distinguishable from [their] complaints.' In other words, FERC apparently interprets Section 4.6 [of the settlement] as allowing the settling parties to petition FERC for modification of the 2005 settlement -- without triggering the Mobile-Sierra presumption -- so long as they proceed informally," the court noted.

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