11 Mobile-Sierra Doctrine: When Does Contract 'Sanctity' Give Way to Government-Ordered Amendments?

• Author: Scott Hempling
• Pages: 339-354

11.A. Principle: The commission cannot let parties out of their contracts

11.B. The “public interest” exception

11.C. One standard—with a rebuttable presumption

11.D. Three ways to preserve the regulator’s role

11.E. Escape from the presumption: Fraud, duress, illegality

11.F. Special applications

11.F.1. Market-based contracts

11.F.2. Non-signatories

11.F.3. Application to tariffs

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Mobile-Sierra Doctrine

When Does Contract “Sanctity” Give Way

to Government-Ordered Amendments?

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[T]here is nothing in the structure or purpose of the Act from which we can infer the

right, not otherwise possessed and nowhere expressly given by the Act, of natural gas

companies unilaterally to change their contracts.1

In 1956, Dwight Eisenhower was reelected President, Don Larsen pitched baseball’s only

World Series perfect game,

2

and the U.S. Supreme Court established the Mobile-Sierra

doctrine. The doctrine is “refreshingly simple: The contract between the parties governs

the legality of the ling. Rate lings consistent with contractual obligations are valid; rate

lings inconsistent with contractual obligations are invalid.”

3

The question of how refresh-

ing, and how simple, has occupied practitioners for more than 50 years.

11.A. Principle: The commission cannot let parties out of their contracts

1947: Pacic Gas & Electric had historically sold electricity to Sierra Pacic Power. Fac-

ing growing post-World War II demand growth, along with customer desires for lower

rates, Sierra started negotiating with alternative suppliers. PG&E responded by offering

Sierra Pacic a fteen-year contract at a “special low rate.” Sierra Pacic accepted. Five

years into the contract, with Sierra’s alternatives no longer available, PG&E led at the

Federal Power Commission (FPC) for a rate increase of 28 percent.

2000: California faced transmission and generation shortages, with power prices ris-

ing rapidly to unheard-of levels. Faced with a “dysfunctional market” and anxious about

supply, Western retail utilities with an obligation to serve signed multi-year contracts to

buy power at ve times the historical prices. (The sellers had FERC-granted permission

to charge these “market-based rates.”) Several years later, the retail utilities led com-

plaints with FERC, asserting that the contract prices were not just and reasonable. They

asked FERC to modify the contracts, prospectively and retroactively, to reduce the rates

and order refunds.

In each of these situations, a contract signatory tried to escape the deal it signed. In

the rst example, the seller argued the price was unlawfully low; in the second example,

the buyers argued the price was unlawfully high. How do regulators and courts respond?

When can a regulator intervene in a private contract? That is the subject of the “venerable

Mobile-Sierra doctrine,” the Supreme Court’s interpretation of the Natural Gas Act and

the Federal Power Act. The doctrine was established for cost-based contracts in United

Gas Pipe Line Co. v. Mobile Gas Service Corp. and Federal Power Commission v. Sierra

1. United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S.332, 343–44 (1956).

2. On October 8, 1956, the author’s date of birth.

3. Richmond Power & Light v. FPC, 481 F.2d 490, 493 (D.C. Cir. 1973).

Chapter Eleven340

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