The American Public Gas Association (APGA), several power sector groups and other parties this week collectively criticized FERC’s plan to use the “public interest” standard as the default standard of review for energy contract modifications. APGA and the others said this approach “flies in the face of the plain language” of the Federal Power Act (FPA) and the Natural Gas Act (NGA) [RM05-35].

FERC in December issued a proposed rule aimed at reducing the time and expense involved in settling disputes that arise when parties move to change the terms of their jurisdictional wholesale power and natural gas sales contracts (see Power Market Today, Dec. 16, 2005). The courts have asked FERC to eliminate the confusion and regulatory uncertainty around these issues by clarifying the default standard of review that will apply when parties fail to adopt a standard in their contracts.

In its notice of proposed rulemaking (NOPR), FERC proposed that the standard of review for modifications to Commission-jurisdictional agreements under the FPA and the NGA be the public interest standard, in accordance with the Mobile Sierra doctrine, unless such agreements contain specific language incorporating a different standard.

The docket addresses the legal standard that the Commission would apply in a proceeding, initiated under Section 206 of the FPA or Section 5 of the NGA, to consider a request for modification of a filed agreement where the parties have not agreed on the modification.

The proposed rule states that unless contracting parties have used very specific language to preserve application of the “just and reasonable” standard specified in NGA Section 5 and FPA Section 206, the Commission would apply the more stringent public interest standard in considering any such modification request.

“As a result, the proposed rule would change the long-standing approach of applying the ‘public interest’ standard only where the contracting parties had expressly agreed to its application,” wrote APGA and the others in an Aug. 22 letter to FERC commissioners.

The proposed rule, “however, also would impose this more difficult public interest standard on nonparties who may be affected by a contract (e.g., as downstream purchasers that bear the costs of a contract between two upstream parties), and on the Commission itself in proceedings the Commission commences on its own initiative. Thus, if the rule were adopted, contracting parties would be able to ‘bind’ nonparties, and the Commission itself, to application of the more difficult public interest standard.”

APGA, the American Public Power Association (APPA), the National Rural Electric Cooperative Association (NRECA) and the other parties argued that the pertinent statutory provisions of the NGA and FPA “state very clearly that the Commission must modify a jurisdictional contract if it is found to be ‘unjust, unreasonable, or unduly discriminatory or preferential.'”

The proposed rule, “on the other hand, would hold nonsignatories to the contract, and the Commission itself, to the more stringent ‘public interest’ standard. But, as the courts have made clear on many occasions, an administrative agency may not vary the terms of the statute it administers. Only Congress can change the legal standard set forth in the statutes the Commission is charged with applying.”

Signatories to the letter said FERC’s “own actions confirm that the proposed rule conflicts with the FPA and the NGA. For many years, the Commission interpreted these acts to preclude acceptance of contract provisions purporting to limit third-party rights or the Commission’s own authority to modify filed agreements. The proposed rule is thus an unwarranted and impermissible turnabout from FERC’s previous view.”

APGA and the others noted that the House version (HR6) of the bill that became the Energy Policy Act of 2005 (EPAct 2005) included a provision (Section 1286) that would have modified the FPA and NGA to implement the same approach now proposed in Docket No. RM05-35 (i.e., use of the “public interest” test as the default standard in cases of contractual silence), but with respect to a smaller universe of contracts (i.e., market-based rate agreements).

“Congress, however, rejected Section 1286 and the changes to the FPA and NGA it would have effected. Congress’ express rejection of that measure means that it considered, and then decided against, the policy the proposed rule now seeks to implement,” the letter said.

“Some argue that the Commission should apply the strictest possible standard to contract modification requests, to promote the stability of long-term business relationships and foster the growth of competitive markets. But the Commission often has said that it does not take contract modification lightly, even under the ‘just and reasonable’ standard.”

“In fact, the just and reasonable standard has been the linchpin of Commission regulation for decades. Regulation in accordance with that standard has supported many billions of dollars of investment in energy facilities. There is simply no need for a more stringent default standard.”

APGA and the others have also heard it argued that the proposed rule actually benefits consumers by preventing energy suppliers from increasing their charges in the middle of a contract’s term. “Indeed, that was the genesis of the Mobile Sierra doctrine — attempts by jurisdictional sellers to break long-term, fixed-rate contracts by unilaterally filing rate increases. But the proposed rule is unnecessary to protect consumers in that situation because that protection is written into the existing statutes, as the Supreme Court held in 1956,” the letter said.

“In any event, the proposed rule would apply to all jurisdictional contracts, covering a wide variety of arrangements and subject matters, including market-based rate contracts and multi-party contracts in connection with regional transmission organizations (RTO). We are at a loss to see how consumers would benefit from limiting the Commission’s ability to reform such a wide variety of jurisdictional contracts and tariffs, even in cases where doing so is necessary to ensure that they remain just and reasonable.”

APGA and the others believe there is no need for the rule proposed by FERC. “Even more important, the proposed rule is contrary to the Commission’s duty to protect the interests of consumers. Customers should not be forced to bargain (as by paying extra for the services they receive) to preserve a right Congress already has given them (specifically, the right to receive service at rates that are just, reasonable and not unduly discriminatory). Yet, the proposed rule would put customers in exactly that position. No court has ever suggested that this is permissible.”

The proposed rule “also would limit the Commission’s own ability to modify an agreement after it has been filed, even if the agreement has become unjust, unreasonable or unduly discriminatory. Given the rapid changes in energy markets, the Commission should not limit its own ability to act to protect consumers.”

Along with APGA, NRECA and APPA, the letter was signed by officials from the Transmission Access Policy Study Group, the Blue Ridge Power Agency, American Municipal Power-Ohio Inc. and Old Dominion Electric Cooperative. It was also signed by transmission-dependent utility systems, consisting of several rural electric generation and transmission cooperatives.

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