Richmond Power and Light of the City of Richmond, Indiana, Petitioner v. Federal Power Commission, Respondentindiana & Michigan Electric Company, Intervenoranderson Power and Light of the City of Anderson, Indiana, Petitioner v. Federal Power Commission, Respondentindiana & Michigan Electric Company, Intervenor, 481 F.2d 490 (D.C. Cir. 1973)

Petitioners in these consolidated cases, two municipal power companies, seek review of an order of the Federal Power Commission accepting for filing tariffs tendered by intervenor, a public utility which sells petitioners electric power at wholesale. Petitioners contend that the tariffs, which implemented a rate increase and changed certain conditions of service, were inconsistent with existing contracts between petitioners and intervenor and therefore should have been rejected by the Commission. We agree and reverse.

The Federal Power Act, 16 U.S.C. § 824 et seq. (1970), pertinent provisions of which are set forth in the margin,¹  requires in Section 205(c) that public utilities file all rates and contracts with the Commission for sales subject to the Commission's jurisdiction. Section 206(a) authorizes the Commission to modify any rate or contract which it determines, after a hearing, to be "unjust, unreasonable, unduly discriminatory or preferential * * *." Under Section 205(d) changes in previously filed rates must be filed with the Commission at least 30 days before they are to go into effect, and under Section 205(e) the Commission may suspend operation of the new rate for up to five months pending a determination of its reasonableness.

The Supreme Court of the United States has held that if a public utility, subsequent to entering into a contract for the sale of power, unilaterally files with the Commission under Section 205(d) a new tariff inconsistent with its contractual obligations, the newly filed tariff is a nullity and does not abrogate or supersede the contract. See United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332, 76 S. Ct. 373, 100 L. Ed. 373 (1956); FPC v. Sierra Pacific Power Co., 350 U.S. 348, 76 S. Ct. 368, 100 L. Ed. 388 (1956).

Mobile concerned provisions of the Natural Gas Act virtually identical with the provisions of the Federal Power Act summarized above. There a regulated natural gas company entered into a 10-year contract to supply natural gas at a single fixed price. Subsequently the company, without the consent of the buyer, filed new schedules with the Commission purporting to increase the rate. The Court held that the new schedule "was a nullity insofar as it purported to change the rate set by [the] contract" and "that the contract rate remained the only lawful rate." 350 U.S. at 347, 76 S. Ct. at 382. It reasoned that the Natural Gas Act evidenced no purpose to abrogate private rate contracts, and expressly recognized that rates to particular customers may be set by individual contracts. 350 U.S. at 338, 76 S. Ct. 373. This interpretation of the statutory scheme, according to the Court, did not impair the regulatory powers of the Commission, for the Commission could at any time enter into a proceeding to determine that the contract rate was unreasonable and could modify it if it so found. See 350 U.S. at 344-345, 76 S. Ct. 373. The Sierra case expressly adopted Mobile's reasoning and holding in a similar situation arising under the Federal Power Act.

The Sierra-Mobile problem came before the Supreme Court again in United Gas Pipe Line Co. v. Memphis Light, Gas & Water Division, 358 U.S. 103, 79 S. Ct. 194, 3 L. Ed. 2d 153 (1958). There a regulated gas pipeline company had entered into long-term sale agreements. These agreements, unlike the ones in Sierra and Mobile, did not provide for a single fixed rate, but provided that " [a]ll gas delivered hereunder shall be paid for by Buyer under Seller's Rate Schedule * * * or any effective superseding rate schedules, on file with the Federal Power Commission." 358 U.S. at 105, 79 S. Ct. at 196. (Emphasis by the Court.) The seller filed a new rate schedule purporting to increase rates over the last previously filed schedule. The Court held that the newly filed rate was the effective rate, and distinguished the case from Mobile. Interpreting the contract between the parties, the Commission had concluded that the seller "bound itself to furnish gas to these customers during the life of the agreements not at a single fixed rate, as in Mobile, but at what in effect amounted to its current 'going' rate." 358 U.S. at 110, 79 S. Ct. 194. (Emphasis in original.) The Supreme Court, after scrutinizing the record, concluded that there was ample support for the Commission's interpretation of the contract, both factually and legally. See 358 U.S. at 114, 79 S. Ct. 194. The Court therefore held that, rather than seeking unilaterally to abrogate its contractual undertaking, the seller in Memphis sought "simply to assert, in accordance with the procedures specified by the Act, rights expressly reserved to it by contract." 358 U.S. at 112, 79 S. Ct. at 199. It was therefore concluded that the seller could, consistent with its contractual undertaking, unilaterally increase its rate by filing a new tariff with the Commission.

The rule of Sierra, Mobile and Memphis is refreshingly simple: The contract between the parties governs the legality of the filing. Rate filings consistent with contractual obligations are valid; rate filings inconsistent with contractual obligations are invalid.²  The two cases before us concern application of this rule to two slightly different contractual undertakings. Although the Commission dealt with both cases in the same order, we will consider them separately because of these differences.

II. RICHMOND POWER AND LIGHT OF THE CITY OF RICHMOND, INDIANA

Richmond Power and Light (hereinafter Richmond) is a municipally owned electric power company selling electricity to various retail customers. It generates part of the electric energy it sells and purchases the remainder of its requirements from intervenor Indiana & Michigan Electric Company (hereinafter I & M) pursuant to a 10-year contract dated November 15, 1965.³  I & M is a public utility subject to the jurisdiction of the Federal Power Commission, see Indiana & Michigan Electric Co., 33 FPC 739 (1965), affirmed, 7 Cir., 365 F.2d 180, cert. denied, 385 U.S. 972, 87 S. Ct. 509, 17 L. Ed. 2d 435 (1966), and its sales to Richmond are subject to the Commission's jurisdiction. I & M also has retail customers of its own in certain parts of Indiana, including many industrial users, and its sales to these customers are not subject to regulation under the Federal Power Act as the Act applies only "to the sale of electric energy at wholesale in interstate commerce * * *."⁴  Instead, I & M's sales to its retail customers are subject to the jurisdiction of the Indiana Public Service Commission.

Since the Federal Power Commission had jurisdiction over I & M's sale of electricity to Richmond, the contract between I & M and Richmond was filed with the Commission under Section 205(c) of the Act, and was designated Rate Schedule FPC No. 58. As is common practice,⁵  the contract between I & M and Richmond does not itself contain a price term, but rather refers to a rate tariff of general applicability. In this case the contract provides that electric energy will be provided "at the rate and under the provisions of Company's [I & M's] Tariff I.P. as regularly filed with the Public Service Commission of Indiana, said tariff being selected by the Customer [Richmond], as long as said tariff is in effect * * *." The Tariff IP referred to in the contract is an industrial tariff that I & M negotiated for many of its municipal power company wholesale buyers as well as for many of its larger industrial retail customers. Tariff IP was on file with the Public Service Commission of Indiana when this contract was negotiated. Pursuant to the terms of the Richmond-I & M contract, the same Tariff IP as was then on file with the Public Service Commission of Indiana was attached to the contract when it was filed with the Federal Power Commission and became a supplement thereto. As a result, I & M's industrial retail customers, whose rates were governed directly by the Tariff IP on file with the Indiana Public Service Commission, and Richmond, whose rates were governed by the contract on file with the Federal Power Commission which expressly incorporated the Tariff IP on file with the Public Service Commission of Indiana, all received electric power subject to the same rate formula.

It is conceded that, consistent with the Richmond-I & M contract, I & M had the right to seek rate increases in the Tariff IP on file with the Indiana Commission. The contract language "Tariff I.P. as regularly filed with the Public Service Commission of Indiana" obviously recognizes this possibility. Indeed, the contract expressly provides "and in the event said tariff is replaced by a new or revised tariff incorporating higher or lower rates than those stipulated in the aforementioned tariff, the Company will continue to furnish service as stipulated in the Agreement and the Customer will pay for such service at the higher or lower rates from and after the date when such rates are made effective." Acting consistently with the contract, then, I & M obtained from the Indiana Public Service Commission approval for a new Tariff IP which went into effect on March 29, 1972, implementing a rate increase of about 10 per cent.⁶  Richmond also concedes that at this point, consistent with I & M's contractual obligation, I & M could have filed the new Tariff IP as a superseding supplement to the Richmond-I & M contract on file with the Federal Power Commission. But I & M did not take this step. Instead, it filed with the Federal Power Commission, as a superseding supplement to the Richmond-I & M contract, a Rate Schedule WS which effected a rate increase estimated at 45 per cent and also changed certain conditions of service. Richmond's basic position on this appeal is that I & M's filing of Rate Schedule WS was inconsistent with its contractual undertaking to sell Richmond electricity "at the rate and under the provisions of Company's Tariff I.P. as regularly filed with the Public Service Commission of Indiana * * * as long as said tariff is in effect * * *."⁷ 

On its face Richmond's position appears unassailable. But in its order accepting Rate Schedule WS for filing, and in a subsequent order denying a rehearing, the Federal Power Commission has attempted what may charitably be termed an "end run" around that position; the Commission has made an effort to interpret the Richmond-I & M contract in a way that avoids compliance with the command of the Mobile-Sierra-Memphis cases.⁸ 

The Commission's analysis of the contract begins with this observation:

"* * * The contract provisions cited * * * indicate that, at the time the agreements were made, the Public Service Commission of Indiana was regarded as the regulatory body with jurisdiction and that rate changes were contemplated by the order or with the approval of that Commission. This Commission's jurisdiction over I & M's wholesale rates has since been asserted and confirmed, Indiana & Michigan Electric Company, 33 FPC 739 (1965), affirmed, 365 F.2d 180 (C.A.7, 1966), cert. denied, 385 U.S. 972 [87 S. Ct. 509, 17 L. Ed. 2d 435] (1966). * * *"

From this, the Commission argues in its brief that

"It is inconceivable that the parties intended to establish a rate for sales subject to the jurisdiction of the Federal Power Commission. Indeed, it is more likely that the parties intended that the contracts be subject to the ratemaking authority of the appropriate regulatory body. That organization is now the Federal Power Commission and its rate-changing procedures apply in full."

Brief for respondent at 15-16 (footnote omitted).

The problem with this whole argument is that, as applied to the Richmond -I & M contract, its first premise is factually incorrect. True, there was a time when it was assumed that I & M's sales to Richmond were subject to the jurisdiction of the Indiana Public Service Commission rather than the Federal Power Commission. But the contract between Richmond and I & M was entered into on November 15, 1965, and the Federal Power Commission's decision holding that it had jurisdiction over I & M's wholesale transactions had issued on April 15, 1965 after a lengthy investigation and hearing.⁹  By July 1965 I & M had already commenced filing its wholesale for resale rate schedules with the Federal Power Commission pursuant to Section 205(c) of the Act.¹⁰  The contract was thus entered into with full knowledge that it was the Federal Power Commission, not the Indiana Public Service Commission, which had ultimate jurisdiction over the transactions covered in the contract.¹¹ 

Richmond has given a most plausible explanation why Richmond and I & M, even though knowing that the Federal Power Commission had ultimate jurisdiction over their contract, agreed that the rate for electricity would be governed by the Tariff IP on file with the Public Service Commission of Indiana. According to Richmond, I & M and Richmond are competitors in certain respects: each tries to attract new industrial retail customers to its service territory and to keep existing industrial retail customers. The Richmond-I & M contract ensures that Richmond receives the same rate that I & M charges its own industrial retail customers. In other words, the contract ensures that Richmond, when it resells power to its industrial retail buyers, will be able to price itself competitively with the retail rates I & M offers to its own industrial customers. Absent such protection, I & M could offer a lower price to its industrial retail customers than Richmond would be able to offer, thereby directing new industries away from Richmond's service territory and into I & M's retail service territory. And because of concerns relating to such matters as employment and the property tax base, Richmond, a municipally owned company, had an interest in encouraging industries to locate in its service territory.¹² 

The Commission's order next states that this was not a "fixed-rate" contract under the Mobile and Sierra cases, as it permitted some change in the rates. Since rate changes were contemplated, the Commission argues, the case is properly controlled by the Supreme Court's decision in Memphis, where a unilateral filing was effective to change the rates. But this argument misperceives the rationale of the Court's holdings. Because the wholesale transactions regulated under the Natural Gas Act and the Federal Power Act "require substantial investment in capacity and facilities for the service of a particular distributor," both acts provide for individual arrangements between sellers and wholesale buyers, with the relations between the parties established initially by contract. See United Gas Pipe Line Co. v. Mobile Gas Service Corp., supra, 350 U.S. at 339, 76 S. Ct. at 378. By ensuring that contractual obligations cannot be circumvented by one party to the contract unilaterally filing with the Commission a new tariff inconsistent with those obligations, the Mobile-Sierra-Memphis doctrine "preserv [es] the integrity of contracts" and "permits the stability of supply arrangements which all agree is essential to the health of * * * industry." Id. at 344, 76 S. Ct. at 380. These principles apply whether the parties agree to a specific rate or whether they agree to a rate changeable in a specific manner. In either case the contract is binding, and a unilateral filing is ineffective to change it. The parties to this particular contract each had certain interests it sought to protect in drafting the provision under discussion. I & M, no doubt, wanted to be able to change its industrial tariff to reflect increased costs, inflation, and so forth, Richmond, in turn, wanted to ensure that it would not be placed in a competitive squeeze with respect to resale to industrial customers. The accommodation reached in the contract serves both these interests by permitting I & M to seek changes in its Tariff IP on file with the Public Service Commission of Indiana, but requiring that Richmond be served under the same tariff as that used by I & M for its own industrial retail customers. We see no reason why the integrity of this contractual undertaking is any less deserving of protection under the Act than one for a single fixed rate.

In its order denying a rehearing, the Commission adverted to Richmond's argument that the contract represented agreement by I & M that its wholesale rates to Richmond would be the same as I & M's retail rates in its Tariff IP on file with the Indiana Commission. The Federal Power Commission answers:

"This Commission has exclusive jurisdiction over I & M's wholesale sales to * * * [Richmond], and I & M is obligated to charge those rates which are on file with this Commission. This Commission's jurisdiction cannot be limited or avoided by private contract. * * *"

This response is most troubling, for it shows that the Commission simply does not understand, or more likely is not willing to abide by, the fundamental principle of the Sierra-Mobile-Memphis decisions. As the Supreme Court emphasized in Mobile in response to similar arguments, " [D]enying to natural gas 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." 350 U.S. at 344, 76 S. Ct. at 381. Thus, in our own case, the Commission always remains free, upon its own motion, to enter into a proceeding under Section 206(a) of the Act to determine whether the contract rate between Richmond and I & M is "unjust, unreasonable, unduly discriminatory or preferential * * *."¹³  If it so determines, it can order the rate changed. If the Federal Power Commission believes that the Public Service Commission of Indiana is being niggardly in approving rate increases in Tariff IP, it is free to enter into a proceeding to require Richmond or any other wholesale buyer to pay a higher rate. In summary, the Richmond-I & M contract, like the contracts in Mobile and Sierra, does not limit the Commission's jurisdiction, for under the Act the Commission has no jurisdiction to change contract rates except after determining, through a proceeding under Section 206(a), that the contract rate is unreasonable.

The Commission's brief argues:

"* * * If public utilities were prohibited from filing rates believed to be consistent with the Federal Power Act, the company might lose revenues to which it is entitled by statute for the period between the termination of suspension and the Commission's ultimate decision on the just and reasonable rate. * * *"

Brief for respondent at 17. But surely this argument proves too much, for it also cuts against the holding in the Sierra case. There, after the seller unilaterally filed its rate increase, the Commission accepted the rate for filing but suspended it for five months pending the outcome of a Section 206(a) proceeding to determine its reasonableness. The Commission ultimately found that the new rate was reasonable (thereby implying that the contract rate was unreasonable), but the order embodying this finding did not issue until some nine months after termination of the five-month suspension. Since the Commission had accepted the new rate for filing, the new rate became the effective rate during this nine-month period. The Court expressly held that the filing should have been rejected, as inconsistent with contractual obligations, and that the Section 206(a) determination "can effect no change prior to the date of the order * * *." 350 U.S. at 353, 76 S. Ct. at 371. Thus the Court recognized that the contract rate, even if it was ultimately determined to be unreasonably low, remained the only lawful rate until the date of the Commission's order in the Section 206(a) proceeding. Nor is there anything particularly inequitable about this result, since it was the seller after all who, through arm's length negotiation, entered into the contract in the first place. And, as stated in Mobile, this result was simply part of the "reasonable accommodation" afforded by the Act "between the conflicting interests of contract stability on the one hand and public regulation on the other." 350 U.S. at 344, 76 S. Ct. at 381.

III. ANDERSON POWER AND LIGHT OF THE CITY OF ANDERSON, INDIANA

Anderson Power and Light (hereinafter Anderson) is also a municipally owned electric power company selling electricity to assorted retail customers. Unlike Richmond, it no longer generates any electricity but purchases all of its requirements from I & M pursuant to a long-term agreement. In matters relevant to the issues before us, the Anderson-I & M contract is identical with the Richmond-I & M contract except in two respects. First, and most importantly, the Anderson-I & M contract was entered into on April 17, 1957 at a time when both parties to the contract admittedly assumed that the Public Service Commission of Indiana, not the Federal Power Commission, had ultimate jurisdiction over the contract. In addition, the relevant contract language is slightly different. Whereas the Richmond-I & M contract referred to the "Tariff I.P. as regularly filed with the Public Service Commission of Indiana," the Anderson-I & M contract provides, in pertinent part, that I & M will provide electric energy "at the rate and under the provisions of the regularly filed and published tariff selected by the Customer [Anderson] and known as Tariff I.P. (a copy of which is attached hereto), as long as said tariff is in effect * * *." In other respects the Anderson case is identical with the Richmond case. Here too I & M filed with the Federal Power Commission the new Rate Schedule WS purporting to increase Anderson's rates, and here too Anderson claims that since there is a Tariff IP still in effect before the Indiana Public Service Commission I & M's filing violates its contractual commitment to serve Anderson "at the rate and under the provisions of the regularly filed and published tariff * * * known as Tariff I.P. * * * as long as said tariff is in effect * * *."

We do not believe either of the differences between the Anderson contract and the Richmond contract affects the outcome of the case, though we reach that conclusion through reasoning quite different from that used in the previous section to discredit the Commission's interpretation of the Richmond-I & M contract.

We begin our analysis again by reference to the Commission's order accepting I & M's Rate Schedule WS for filing. After recognizing, correctly in this case, that the contract was entered into at a time when it was assumed the Public Service Commission of Indiana had jurisdiction over the transaction, the order notes "that rate changes were contemplated by the order or with the approval of that Commission." The order then refers to another recently decided case, concerning another Indiana wholesale power contract, wherein the Commission stated:

"Our review indicates that when read in their entirety, the subject contracts by their express provisions contemplate changes in the rates and charges for electrical power by or with the approval of the Public Service Commission of Indiana. Since 1965 sales under such contracts have been expressly held to be subject to the jurisdiction of the Federal Power Commission. We therefore find that because the contracts contemplate changes in rates and charges by the appropriate regulatory authority, [the seller] is not precluded from filing for an increase in its filed rates, and the rate filing procedures of Section 205 of the Federal Power Act are applicable to this proceeding. The Sierra and Mobile cases, supra, do not therefore apply. United Gas Pipeline Company v. Memphis Light, Gas and Water Division, et al., 358 U.S. 103, [79 S. Ct. 194, 3 L. Ed. 2d 153] (1958). We shall therefore deny the motions [to reject the filing]."¹⁴ 

The Commission seems to be saying that it is simply interpreting the contract, in light of changed circumstances, to accomplish what the parties intended. And we have no quarrel in principle with this approach to contract interpretation.¹⁵  But the Commission's analysis of what the parties intended in this instance, and its attempt to fit this case within the Memphis mold, will not stand scrutiny. The Commission says that the parties contemplated rate changes "by the order or with the approval of" the appropriate regulatory commission. This may well be true, but it is beside the point. The issue under Memphis is not whether the parties contemplated change by the appropriate regulatory authority, for under the law every electric power contract must contemplate such change. Instead, the question is whether the parties contemplated that the seller could unilaterally effect a change in the rate simply by filing a new tariff with the appropriate regulatory agency.¹⁶  And if we begin with the Commission's observation that the parties to the Anderson-I & M contract contemplated that Indiana law rather than the Federal Power Act governed their contract, we can see that the parties never contemplated anything of the sort.

Under Indiana law no change can be made in any public utility rate schedule except upon approval by the Public Service Commission of Indiana.¹⁷  A public utility may file a petition requesting an increase in its own rate,¹⁸  and the Commission must then proceed with an investigation into the lawfulness of the rates.¹⁹  But no order affecting the rates can be entered by the Commission without a formal public hearing,²⁰  and no rate change is effected until there is an order by the Commission approving the increase.²¹  In other words, no rate could be increased under Indiana law without going through a procedure similar in many respects to the procedure established in Section 206(a) of the Federal Power Act. The mere act of filing a rate increase did not effect a rate increase under Indiana law. There had to be affirmative approval of the increase by the Public Service Commission, after an investigation and a hearing. Indeed, in the instant case when I & M sought a 10 per cent increase in Tariff IP before the Public Service Commission these procedural requirements apparently were followed. I & M filed an application with the Public Service Commission to increase its rates in July 1971. The matter came on for a hearing before the Public Service Commission in January 1972. On March 24, 1972 the Commission approved the rate increase by order. Only then was it permitted to take effect.

We think that if one is to construe the Anderson-I & M contract, in light of changed circumstances, to reflect as nearly as one can the intentions of the parties to the contract, the only possible result is to construe it as not permitting I & M to change the rate simply by filing a new tariff with the Federal Power Commission. This case, then, is critically different from Memphis, where it was evident that the parties to the contract contemplated that the seller could unilaterally change the rate by filing a superseding tariff with the Commission. See 358 U.S. at 105, 114-115, & n.9, 79 S. Ct. 194. See also Pacific Natural Gas Co. v. FPC, 9 Cir., 276 F.2d 350, 351 (1960).

The obvious truth of the matter is that Anderson, like Richmond, intended to key its rates to those charged by I & M to its own industrial customers in order to protect itself against the same competitive squeeze that concerned Richmond. Any uncertainties one might have as to what the contracting parties intended are set to rest by the fact that in 1969, some four years after it had become clear that the Federal Power Commission was the appropriate regulatory body, I & M tendered to Anderson for its approval a new contract which provided, in terms identical with the Richmond-I & M contract, that electricity would be furnished "at the rate and under the provisions of Company's Tariff I.P. as regularly filed with the Public Service Commission of Indiana * *."²² 

The parties to both the Richmond and the Anderson contracts intended that the municipal buyers receive electricity under the same tariff that governed I & M's industrial retail customers. While they contemplated changes in Tariff IP, they never contemplated that those changes could be effected merely by I & M's filing a new tariff. As a result, I & M's filing of Rate Schedule WS as a superseding supplement to both contracts was inconsistent with its contractual obligations and those filings should have been rejected. Accordingly, we remand these cases to the Commission with directions to reject I & M's filings and to initiate such proceedings as may be necessary to secure refunds of the incremental amounts paid by Richmond and Anderson to I & M since the time Rate Schedule WS was erroneously allowed to become effective.

So ordered.