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03/08/79 Metropolitan Edison v. Federal Energy Regulatory


March 8, 1979




Before ROBINSON, ROBB and WILKEY, Circuit Judges.


Petition for Review of an Order of the Federal Energy Regulatory commission.


Opinion for the Court filed by Circuit Judge SPOTTSWOOD W. ROBINSON, III. Dissenting opinion filed by Circuit Judge WILKEY.


We address on this review an electric utility's claim of discrimination assertedly requiring upward revision of a wholesale rate otherwise shielded against unilateral alteration by the well-known Mobile-Sierra doctrine. *fn1 Metropolitan Edison Company (Met-Ed) seeks reversal of an order *fn2 of the Federal Power Commission *fn3 repulsing its effort under Section 206(a) of the Federal Power Act *fn4 to bypass a contract in terms obligating it to furnish power to the Borough of Middletown, Pennsylvania, at a fixed rate. We find the Commission's disposition unimpeachable and accordingly affirm. I

In 1906, York Haven Water & Power Company, Met-Ed's corporate predecessor, contracted to supply Middletown's electrical requirements in their entirety *fn5 at a rate of one cent per kilowatt hour. *fn6 The contract's penultimate paragraph is of great significance in this litigation. It states:

Inasmuch as the Borough is practically abandoning its present electric light plant at great loss to itself and has been induced by the Company to use the electricity and electric power of the Company as a matter of economy and advantage to the Borough, it is agreed that this contract shall continue in full force indefinitely until terminated by the Borough upon six months' notice in writing to the Company. *fn7

Met-Ed first voiced dissatisfaction with the Middletown agreement in 1971 65 years after its execution. By then, rising fuel costs were about to turn the once remunerative pricing provision into a losing proposition for Met-Ed, a consequence likely to worsen with the passage of time. In 1972, Met-Ed's revenues from its Middletown service were $368,990, some $9,000 less than corresponding operating expenses. *fn8 Those revenues were as much as $294,189 less than Met-Ed would have derived had Middletown been charged the same rate as Kutztown, Pennsylvania, a Met-Ed wholesale customer akin to Middletown in type and quantity of service provided. *fn9 However, though hardly a boon to Met-Ed's growth, the shortfalls generated by the Middletown contract presently pose no threat to the company's financial health and stability. In 1972, when Met-Ed lost $9,000 on Middletown, its overall revenues exceeded total operating costs by some $33 million, *fn10 and in the next year total income outpaced costs by more than $36 million. *fn11

In 1974, Met-Ed petitioned the Commission for an investigation of the Middletown arrangement with a view toward an increase of the one-cent rate. *fn12 The Commission instituted the requested proceeding, *fn13 which progressed to a hearing before an administrative law judge. Met-Ed assailed the contract rate on the ground that it jeopardized the public interest by eroding Met-Ed's ability to discharge its service obligations, by imposing a disproportionate financial burden on other customers and in comparison with rates charged similarly situated customers by discriminating. *fn14 In an initial decision, the judge rejected Met-Ed's assessment on all three counts *fn15 and, concluding that the Middletown contract was insulated by the Mobile-Sierra doctrine against unilateral modification, *fn16 dismissed Met-Ed's petition. *fn17

Met-Ed filed exceptions to this ruling. The Commission, adopting the initial decision, affirmed, *fn18 and subsequently refused to reconsider. *fn19 This petition for review then ensued. Met-Ed, abandoning two of its earlier positions, presses for reversal solely on the theory that the one-cent contract rate is unduly discriminatory. *fn20 II

The relevant legal terrain is largely charted by the Supreme Court's decision in FPC v. Sierra Pacific Power Co. *fn21 The Court there held that a public electric utility subject to regulation under the Federal Power Act cannot unilaterally abrogate a contractually-fixed rate simply by filing a new rate under Section 205(d) and securing Commission approval thereof under Section 205(e). *fn22 Rather, the Court explained, the Commission may change the agreed-upon rate only if it finds under Section 206(a) that it is "unjust, unreasonable, unduly discriminatory or preferential." *fn23 And since, as the Court declared, "the purpose of the power given the Commission by ยง 206(a) is the protection of the public interest, as distinguished from the private interests of the utilities," *fn24 that power is exercisable only when "the (contract) rate is so low as to adversely affect the public interest as where it might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory." *fn25

The service agreement in suit makes clear beyond peradventure the parties' bargain on duration of the one-cent rate established for power supplied to Middletown. It specifies unequivocally that "this contract shall continue in full force indefinitely until terminated by the Borough upon six months' notice in writing to the Company." *fn26 This provision, we conclude, is intercepted by the Mobile-Sierra doctrine, *fn27 and thus can be revised only in conformity with Sierra criteria. *fn28 Indeed, Met-Ed does not argue to the contrary; *fn29 instead, it grounds its attack on the Middletown compact exclusively on discrimination, *fn30 the third Sierra -mentioned foe of the public interest. *fn31 Initially, Met-Ed argues that the Commission adopted an unduly restricted view of its authority under Section 206(a) to modify a fixed-rate contract as discriminatory. *fn32 Met-Ed then disputes the Commission's treatment of the rate differential among Met-Ed's customers occasioned by the Middletown agreement. *fn33 Neither contention persuades us. III

On the first matter, Met-Ed argues that each of Sierra's three illustrations of adverse consequences warranting disregard of a contractually-fixed rate possesses independent force, but that the Commission considered the third undue discrimination to be merely repetitive of the second excess burden on other customers. *fn34 To be sure, the Commission did point to the lack of financial harm to anyone but Met-Ed in finding the Middletown contract rate not unduly discriminatory. *fn35 That reference, however, is perfectly understandable and acceptable on this record, where nothing beyond disparate rates among Met-Ed's customers has been shown. We recognize that to a degree Met-Ed is correct: A rate arrangement may be unduly discriminatory even though consumers not paying the contract rate would not gain a rate decrease were the contract altered by the Commission. In Town of Norwood v. FERC, *fn36 we ruled that Sierra -type discrimination may emerge at the stage of contract formation, as when a utility negotiates a "sweetheart" contract with a favored customer; *fn37 Sierra, we held, does not permit "a utility to use a fixed-rate contract as a device to render unassailable an otherwise prohibited undue preference." *fn38

Yet, Met-Ed's position remains incurably infirm because the possibility of discrimination of this sort was not ignored by the Commission. On the contrary, the Commission emphasized the substantial and unusual consideration for the one-cent contract rate given Middletown. *fn39 As the Middletown contract overtly acknowledges, "the Borough . . . practically abandon(ed) its (then-) present electric light plant at great loss to itself and (was) induced by the Company *fn40 to use the electricity and electric power of the Company as a matter of economy and advantage to the Borough. . . ." *fn41 A difference in rate treatment is not unduly discriminatory when the difference is amply justified, *fn42 and we cannot label as error the Commission's considered judgment that Middletown relinquished enough to immunize its special long-term one-cent rate from any suspicion of favoritism.

Moreover, the Commission found that Met-Ed had profited from the Middletown contract for many years. *fn43 From 193744 through 1971, the Middletown rate was higher than the average rate paid by all of the rest of Met-Ed's customers;45 not until 1972 did the average rate exceed Middletown's.46 It is true that for nine selected years between 1937 and 1973, the average rate to Kutztown one of the two resale customers comparable to Middletown in type of service was 1.29 cents, 0.29 cents higher than the rate to Middletown.47 On the other hand, Hershey Electric Company, the other such customer, had since 1969 been charged an average rate of 0.92 cents, .08 cents less than the Middletown contract rate.48 It is no great wonder, then, that the Commission accepted the administrative law judge's finding "that the Borough of Middletown, if anyone, had been discriminated against by the rate for the last 65 years."49 And, we again note, there is nothing in the record to indicate that either Kutztown or Hershey yielded anything comparable in value to Middletown's power-plant surrender for the rates they were able to obtain.

These circumstances are hardly hallmarks of a sweetheart arrangement.50 Rather, as the Commission declared, the only discernible reason for current rate differentials between Middletown and any other Met-Ed customer similarly situated is the atypical concession that Middletown's 1906 town council made to Met-Ed's predecessor.51 In short, the Commission did not misconceive its authority under Sierra to revise fixed-rate agreements when unduly discriminatory, nor did it plainly misapprehend the real genesis of the rate differentials occasioned by Met-Ed's arrangement with Middletown. IV

Met-Ed's second contention amounts to little more than a plea that we balance de novo the public interest in preserving the integrity of power-supply contracts against the perceived unfairness and undesirable incentives assertedly flowing from a contract rate lower than the rate some other consumer is charged. Met-Ed is simply taking a different view of evenhandedness and the public weal than did the Commission. In reaching its public-interest resolution in this case, the Commission succinctly identified the considerations it thought to be of major significance:

There is no contention that Kutztown's is not a just and reasonable rate; nor even that all other parties to rate RT52 are not paying just, reasonable, and non-excessive rates. Even if there is discrimination, there appears to be no damage to these third parties. They would receive no reduction were we to uphold Met-Ed's position here. Even were damages to be found, the fact that Middletown's customers would sustain a 50% Rate increase raises substantial questions regarding whether the public interest would best be served by bailing Met-Ed out of its unwise bargain. The equities, once balanced, favor upholding the contract.53

Other factors urged by Met-Ed as of moment in the public-interest calculus notably, the asserted imprudence of encouraging consumption of energy by selling it cheaply were considered and dismissed by the administrative law judge as either speculative or de minimis,54 and the Commission unreservedly concurred.55

The Commission's regulatory charter "contemplates abrogation of (fixed-rate) agreements only in circumstances of unequivocal public necessity."56 In this light, we see no ground for disturbing the Commission's assessment. As the Commission rightly noted,57 its function was "not only to appraise the facts and draw inferences from them but also to bring to bear upon the problem an expert judgment and determine from analysis of the total situation on which side of the controversy the public interest lies."58 We find the Commission's assessment of the public interest reasonable and well within the bounds of its authority and discretion.

We do not understand that the Commission, in declining Met-Ed's invitation to upset the Middletown contract rate, has validated that rate for all time. The Commission expressly recognized that the bargain with Middletown conceivably could eventually saddle other Met-Ed customers with such burdens as to bring Sierra into play.59 There is no reason for supposing that the Commission did not realize that future conditions might implicate Sierra in some other manner. It bears repeating that "denying . . . companies the power unilaterally to change their contracts in no way impairs the regulatory powers of the Commission, for the contracts remain fully subject to the paramount power of the Commission to modify them when necessary in the public interest."60 Our mission, of course, is to adjudge the Commission's present determination on the record before us, and on that basis the orders under review must be



WILKEY, Circuit Judge, dissenting:

In Mobile and Sierra the Supreme Court promulgated rigorous standards for invoking the public interest to terminate fixed-rate contracts. However, those cases involved Fixed-term contracts of 10 and 15 years, respectively. It is my view that the strict standards in Mobile and Sierra were enunciated with fixed-term contracts in mind and Were not intended to apply to perpetual contracts of the type at issue here.

The contract in this case was entered into by Metropolitan Edison's predecessor in 1906, even before there was state or federal regulation of these transactions. The contract has already run for 72 years. Metropolitan Edison has suffered losses on the contract in 39 of the past 41 years. At present, the contract rate is less than one half of the just and reasonable rate being charged comparable customers; it covers less than one half of the cost of providing the service and, since 1974, has not even covered the fuel costs.

Because the contract is small relative to Metropolitan Edison's total business, the company's other customers are able to carry the financial load occasioned by these losses. Nevertheless, these losses are having an adverse impact on the company's performance and have contributed materially to an impairment of resources. The company has experienced a series of financial difficulties which in 1974 became so serious that it was forced to curtail its construction program below a level it deemed prudent and to cut expenses relating to current service. Its losses under the contract rate, which have increased from less than $300,000 in 1972 to more than $500,000 in 1974, represented revenues urgently needed to provide for future load growth as well as to maintain the quality of current service. By reducing interest coverage and the attractiveness of Metropolitan Edison's securities generally, the contract rate also adversely affects other customers in terms of higher capital costs, particularly at times when the company is unable to issue funded debt and must resort to costlier financing.

The Commission admits that there is no reasonable possibility that at any time in the foreseeable future fuel costs are going to drop to a level at which they can be covered by the existing contract rate. Indeed, it admits that fuel costs are going to remain high and most probably increase. Thus, the Commission acknowledges that there is no way that this contract will be anything but a sheer loss and an increasing drain on the company. Unless the Commission grants relief, this situation will continue indefinitely into the future. Presumably, this contract will still be in effect in the year 2079 A.D., and Middletown will have been reaping the benefits of these rates for 13/4 centuries.

The Supreme Court could not have contemplated this result in Mobile and Sierra. As already stated, those cases involved limited fixed-term contracts of 10 and 15 years, respectively. Within that context the Supreme Court set forth standards which reconciled the public's interest in regulation with the principle of contract stability. However, in the context of a Perpetual contract, these two considerations of (1) public interest and (2) contract stability Take on an entirely different character.

While this court should be guided by the same two considerations in its treatment of perpetual contracts, it should not be bound by the precise standards formulated in the wholly different context of fixed-term contracts. In my view, rates in a perpetual contract are Unduly discriminatory when they have already resulted in substantial losses for the last four decades, when they presently do not even cover the cost of fuel, when they are less than one half of the just and reasonable rates charged comparable customers, when they are admittedly discriminatory and will continue to be so indefinitely into the future. It is folly for the Commission to stay its hand. Applying the two Mobile-Sierra considerations: Whose interests are served? How is the public interest served? How is general interest in preserving the stability of supply arrangements served?

I respectfully dissent.

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