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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 ...

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