MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH COUNTY et al.

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527 OCTOBER TERM, 2007
Syllabus
MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTILITY DISTRICT NO. 1 OF SNOHOMISH COUNTY
et al.
certiorari to the united states court of appeals for
the ninth circuit
No. 06–1457. Argued February 19, 2008—Decided June 26, 2008*
Under the Mobile-Sierra doctrine, the Federal Energy Regulatory Com
mission (FERC) must presume that the electricity rate set in a freely
negotiated wholesale-energy contract meets the “just and reasonable”
requirement of the Federal Power Act (FPA), see 16 U. S. C. § 824d(a),
and the presumption may be overcome only if FERC concludes that the
contract seriously harms the public interest. See United Gas Pipe
Line Co. v. Mobile Gas Service Corp., 350 U. S. 332; FPC v. Sierra Pa
cific Power Co., 350 U. S. 348. Under FERC’s current regulatory re
gime, a wholesale-electricity seller may file a “market-based” tariff,
which simply states that the utility will enter into freely negotiated
contracts with purchasers. Those contracts are not filed with FERC
before they go into effect. In 2000 and 2001, there was a dramatic in
crease in the price of electricity in the western United States. As a
result, respondents entered into long-term contracts with petitioners
that locked in rates that were very high by historical standards. Re
spondents subsequently asked FERC to modify the contracts, contend
ing that the rates should not be presumed just and reasonable under
Mobile-Sierra. The Administrative Law Judge concluded that the pre
sumption applied and that the contracts did not seriously harm the pub
lic interest. FERC affirmed, but the Ninth Circuit remanded. The
court held that contract rates are presumptively reasonable only where
FERC has had an initial opportunity to review the contracts without
applying the Mobile-Sierra presumption and therefore that the pre
sumption should not apply to contracts entered into under “market
based” tariffs. The court alternatively held that there is a different
standard for overcoming the Mobile-Sierra presumption when a pur
chaser challenges a contract: whether the contract exceeds a “zone of
reasonableness.”
*Together with No. 06–1462, American Electric Power Service Corp.
et al. v. Public Utility District No. 1 of Snohomish County et al., also on
certiorari to the same court.

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528 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
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Syllabus
Held:
1. FERC was required to apply the Mobile-Sierra presumption in
evaluating the contracts here. Sierra held that a rate set out in a con
tract must be presumed to be just and reasonable absent serious harm
to the public interest, regardless of when the contract is challenged.
FPC v. Texaco Inc., 417 U. S. 380, distinguished. Also, the Ninth Cir
cuit’s rule requiring FERC to ask whether a contract was formed in an
environment of market “dysfunction” is not supported by this Court’s
cases and plainly undermines the role of contracts in the FPA’s statutory
scheme. Pp. 544–548.
2. The Ninth Circuit’s “zone of reasonableness” test fails to accord an
adequate level of protection to contracts. The standard for a buyer’s
rate-increase challenge must be the same, generally, as the standard for
a seller’s challenge: The contract rate must seriously harm the public
interest. The Ninth Circuit misread Sierra in holding that the stand
ard for evaluating a high-rate challenge and setting aside a contract rate
is whether consumers’ electricity bills were higher than they would have
been had the contract rates equaled “marginal cost.” Under the
Mobile-Sierra presumption, setting aside a contract rate requires a
finding of “unequivocal public necessity,” Permian Basin Area Rate
Cases, 390 U. S. 747, 822, or “extraordinary circumstances,” Arkansas
Louisiana Gas Co. v. Hall, 453 U. S. 571, 582. Pp. 548–551.
3. The judgment below is nonetheless affirmed on alternative
grounds, based on two defects in FERC’s analysis. First, the analysis
was flawed or incomplete to the extent FERC looked simply to whether
consumers’ rates increased immediately upon conclusion of the relevant
contracts, rather than determining whether the contracts imposed an
excessive burden “down the line,” relative to the rates consumers could
have obtained (but for the contracts) after elimination of the dysfunc
tional market. Sierra’s “excessive burden” on customers was the cur
rent burden, not just the burden imposed at the contract’s outset. See
350 U. S., at 355. Second, it is unclear from FERC’s orders whether
it found respondents’ evidence inadequate to support their claim that
petitioners engaged in unlawful market manipulation that altered the
playing field for contract negotiations. In such a case, FERC should
not presume that a contract is just and reasonable. Like fraud and
duress, unlawful market activity directly affecting contract negotiations
eliminates the premise on which the Mobile-Sierra presumption rests:
that the contract rates are the product of fair, arms-length negotiations.
On remand, FERC should amplify or clarify its findings on these two
points. Pp. 552–555.
471 F. 3d 1053, affirmed and remanded.

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Syllabus
Scalia, J., delivered the opinion of the Court, in which Kennedy,
Thomas, and Alito, JJ., joined, and in which Ginsburg, J., joined as to
Part III. Ginsburg, J., filed an opinion concurring in part and concurring
in the judgment, post, p. 555. Stevens, J., filed a dissenting opinion, in
which Souter, J., joined, post, p. 555. Roberts, C. J., and Breyer, J.,
took no part in the consideration or decision of the cases.
Walter Dellinger argued the cause for petitioners in both
cases. With him on the briefs for petitioner in No. 06–1457
were Sri Srinivasan, Mark S. Davies, Zachary D. Stern,
Paul J. Pantano, Jr., and Michael A. Yuffee. Donald B.
Ayer, Lawrence D. Rosenberg, Shay Dvoretzky, Juliet J.
Karastelev, Robert F. Shapiro, Keith R. McCrea, Kent L.
Jones, William H. Penniman, Michael J. Gergen, and Jared
W. Johnson filed briefs for petitioners in No. 06–1462.
Deputy Solicitor General Kneedler argued the cause for
respondent FERC in support of petitioners in both cases
pursuant to this Court’s Rule 12.6. With him on the brief
were former Solicitor General Clement, Eric D. Miller,
Cynthia A. Marlette, Robert H. Solomon, and Lona T.
Perry.
Christopher J. Wright argued the cause for nonfederal re
spondents in both cases. With him on the brief for respond
ents Public Utility District No. 1 of Snohomish County et al.
were Richard G. Taranto, Paul J. Kaleta, Eric Christensen,
John E. McCaffrey, David D’Alessandro, and Kelly A. Daly.
Randolph Lee Elliott and Milton J. Grossman filed a brief
in both cases for respondent Golden State Water Company.
William J. Kayatta, Jr., Jared S. des Rosiers, Catherine R.
Connors, Randolph L. Wu, Mary F. McKenzie, Harvey Y.
Morris, and Elizabeth M. McQuillan filed a brief in both
cases for respondents Public Utilities Commission of the
State of California et al.†
†Briefs of amici curiae urging reversal in both cases were filed for
Coral Power, L. L. C., et al. by Richard P. Bress, Stephanie S. Lim, Barry
J. Blonien, Jeffrey D. Watkiss, James N. Westwood, and Joseph M. Paul;
for the Electric Power Supply Association et al. by Kenneth W. Starr, Neil

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530 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
Opinion of the Court
Justice Scalia delivered the opinion of the Court.
Under the Mobile-Sierra doctrine, the Federal Energy
Regulatory Commission (FERC or Commission) must pre
sume that the rate set out in a freely negotiated wholesale
energy contract meets the “just and reasonable” require
ment imposed by law. The presumption may be overcome
only if FERC concludes that the contract seriously harms
the public interest. These cases present two questions
L. Levy, Robert R. Gasaway, Ashley C. Parrish, David G. Tewksbury,
Scott M. Abeles, David B. Johnson, Barry Russell, Timm Abendroth,
Henry S. May, Jr., Catherine O’Harra, Peter W. Brown, and Daniel W.
Douglass; for the International Swaps and Derivatives Association, Inc.,
et al. by Roy T. Englert, Jr., Gary A. Orseck, and Donald J. Russell; for
Powerex Corp. et al. by David C. Frederick, Scott H. Angstreich, Paul W.
Fox, Deanna E. King, Gary D. Bachman, Howard E. Shapiro, Brett A.
Snyder, Jesse A. Dillon, Donald A. Kaplan, John Longstreth, and Alan
Z. Yudkowsky; and for William J. Baumol et al. by John N. Estes III and
Jeffrey A. Lamken.
Briefs of amici curiae urging affirmance in both cases were filed for the
State of Illinois et al. by Lisa Madigan, Attorney General of Illinois, Mi
chael A. Scodro, Solicitor General, Jane Elinor Notz, Deputy Solicitor
General, and Susan Hedman, Senior Assistant Attorney General, and by
the Attorneys General for their respective States as follows: Richard Blu
menthal of Connecticut, Thomas J. Miller of Iowa, Martha Coakley of
Massachusetts, Lori Swanson of Minnesota, Mike McGrath of Montana,
Kelly A. Ayotte of New Hampshire, W. A. Drew Edmondson of Oklahoma,
and Patrick C. Lynch of Rhode Island; for AARP by Barbara Jones, Stacy
Canan, Michael Schuster, and William Julian II; for the American Public
Power Association et al. by Scott H. Strauss, Susan N. Kelly, Wallace F.
Tillman, and Richard Meyer; for the Colorado Office of Consumer Counsel
et al. by Lynn Hargis and Scott L. Nelson; for the Large Public Power
Council by Jonathan D. Schneider and Harvey L. Reiter; for the National
Association of Regulatory Utility Commissioners et al. by James Bradford
Ramsay; and for the Public Utility Law Project of New York, Inc., by
Gerald A. Norlander.
A brief of amicus curiae was filed in both cases for the State of Wash
ington by Robert M. McKenna, Attorney General, Jeffrey D. Goltz, Dep
uty Attorney General, Donald T. Trotter and Robert D. Cedarbaum, Se
nior Counsel, Tina E. Kondo, Senior Assistant Attorney General, and
Brady R. Johnson, Assistant Attorney General.

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Opinion of the Court
about the scope of the Mobile-Sierra doctrine: First, does
the presumption apply only when FERC has had an initial
opportunity to review a contract rate without the presump
tion? Second, does the presumption impose as high a bar to
challenges by purchasers of wholesale electricity as it does
to challenges by sellers?
I
A
Statutory Background
The Federal Power Act (FPA), 41 Stat. 1063, as amended,
gives the Commission 1 the authority to regulate the sale of
electricity in interstate commerce—a market historically
characterized by natural monopoly and therefore subject to
abuses of market power. See 16 U. S. C. § 824 et seq. (2000
ed. and Supp. V). Modeled on the Interstate Commerce
Act, the FPA requires regulated utilities to file compilations
of their rate schedules, or “tariffs,” with the Commission,
and to provide service to electricity purchasers on the terms
and prices there set forth. § 824d(c). Utilities wishing to
change their tariffs must notify the Commission 60 days be
fore the change is to go into effect. § 824d(d). Unlike the
Interstate Commerce Act, however, the FPA also permits
utilities to set rates with individual electricity purchasers
through bilateral contracts. § 824d(c), (d). As we have ex
plained elsewhere, the FPA “departed from the scheme of
purely tariff-based regulation and acknowledged that con
tracts between commercial buyers and sellers could be
used in ratesetting.” Verizon Communications Inc. v.
FCC, 535 U. S. 467, 479 (2002). Like tariffs, contracts
must be filed with the Commission before they go into effect.
16 U. S. C. § 824d(c), (d).
The FPA requires all wholesale-electricity rates to be
“just and reasonable.” § 824d(a). When a utility files a new
1 We also use “Commission” to refer to the Federal Power Commission,
FERC’s predecessor.

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rate with the Commission, through a change to its tariff or
a new contract, the Commission may suspend the rate for up
to five months while it investigates whether the rate is just
and reasonable. § 824d(e). The Commission may, however,
decline to investigate and permit the rate to go into effect—
which does not amount to a determination that the rate is
“just and reasonable.” See 18 CFR § 35.4 (2007). After a
rate goes into effect, whether or not the Commission deemed
it just and reasonable when filed, the Commission may con
clude, in response to a complaint or on its own motion, that
the rate is not just and reasonable and replace it with a law
ful rate. 16 U. S. C. § 824e(a) (2000 ed., Supp. V).
The statutory requirement that rates be “just and reason
able” is obviously incapable of precise judicial definition, and
we afford great deference to the Commission in its rate deci
sions. See FPC v. Texaco Inc., 417 U. S. 380, 389 (1974);
Permian Basin Area Rate Cases, 390 U. S. 747, 767 (1968).
We have repeatedly emphasized that the Commission is not
bound to any one ratemaking formula. See Mobil Oil Ex
ploration & Producing Southeast, Inc. v. United Distribu
tion Cos., 498 U. S. 211, 224 (1991); Permian Basin, supra,
at 776–777. But FERC must choose a method that entails
an appropriate “balancing of the investor and the consumer
interests.” FPC v. Hope Natural Gas Co., 320 U. S. 591, 603
(1944). In exercising its broad discretion, the Commission
traditionally reviewed and set tariff rates under the “cost
of-service” method, which ensures that a seller of electricity
recovers its costs plus a rate of return sufficient to attract
necessary capital. See J. McGrew, Federal Energy Regula
tory Commission 152, 160–161 (2003) (hereinafter McGrew).
In two cases decided on the same day in 1956, we ad
dressed the authority of the Commission to modify rates set
bilaterally by contract rather than unilaterally by tariff. In
United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350
U. S. 332, we rejected a natural-gas utility’s argument that

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the Natural Gas Act’s requirement that it file all new rates
with the Commission authorized it to abrogate a lawful con
tract with a purchaser simply by filing a new tariff, see id.,
at 336–337. The filing requirement, we explained, is merely
a precondition to changing a rate, not an authorization to
change rates in violation of a lawful contract (i. e., a contract
that sets a just and reasonable rate). See id., at 339–344.
In FPC v. Sierra Pacific Power Co., 350 U. S. 348, 352–353
(1956), we applied the holding of Mobile to the analogous
provisions of the FPA, concluding that the complaining util
ity could not supersede a contract rate simply by filing a new
tariff. In Sierra, however, the Commission had concluded
not only (contrary to our holding) that the newly filed tariff
superseded the contract, but also that the contract rate itself
was not just and reasonable, “solely because it yield[ed] less
than a fair return on the net invested capital” of the utility.
350 U. S., at 355. Thus, we were confronted with the ques
tion of how the Commission may evaluate whether a contract
rate is just and reasonable.
We answered that question in the following way:
“[T]he Commission’s conclusion appears on its face to be
based on an erroneous standard. . . . [W]hile it may be
that the Commission may not normally impose upon a
public utility a rate which would produce less than a fair
return, it does not follow that the public utility may not
itself agree by contract to a rate affording less than a
fair return or that, if it does so, it is entitled to be re
lieved of its improvident bargain. . . . In such circum
stances the sole concern of the Commission would seem
to be whether the rate is so low as to adversely affect
the public interest—as where it might impair the finan
cial ability of the public utility to continue its service,
cast upon other consumers an excessive burden, or
be unduly discriminatory.” Id., at 354–355 (emphasis
deleted).

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As we said in a later case, “[t]he regulatory system created
by the [FPA] is premised on contractual agreements volun
tarily devised by the regulated companies; it contemplates
abrogation of these agreements only in circumstances of un
equivocal public necessity.” Permian Basin, supra, at 822.
Over the past 50 years, decisions of this Court and the
Courts of Appeals have refined the Mobile-Sierra presump
tion to allow greater freedom of contract. In United Gas
Pipe Line Co. v. Memphis Light, Gas and Water Div., 358
U. S. 103, 110–113 (1958), we held that parties could contract
out of the Mobile-Sierra presumption by specifying in their
contracts that a new rate filed with the Commission would
supersede the contract rate. Courts of Appeals have held
that contracting parties may also agree to a middle option
between Mobile-Sierra and Memphis Light: A contract that
does not allow the seller to supersede the contract rate by
filing a new rate may nonetheless permit the Commission to
set aside the contract rate if it results in an unfair rate of
return, not just if it violates the public interest. See, e. g.,
Papago Tribal Util. Auth. v. FERC, 723 F. 2d 950, 953
(CADC 1983); Louisiana Power & Light Co. v. FERC, 587
F. 2d 671, 675–676 (CA5 1979). Thus, as the Mobile-Sierra
doctrine has developed, regulated parties have retained
broad authority to specify whether FERC can review a con
tract rate solely for whether it violates the public interest or
also for whether it results in an unfair rate of return. But
the Mobile-Sierra presumption remains the default rule.
Moreover, even though the challenges in Mobile and Si
erra were brought by sellers, lower courts have concluded
that the Mobile-Sierra presumption also applies where a
purchaser, rather than a seller, asks FERC to modify a con
tract. See Potomac Elec. Power Co. v. FERC, 210 F. 3d 403,
404–405, 409–410 (CADC 2000); Boston Edison Co. v. FERC,
856 F. 2d 361, 372 (CA1 1988). This Court has seemingly
blessed that conclusion, explaining that under the FPA,
“[w]hen commercial parties . . . avail themselves of rate

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agreements, the principal regulatory responsibility [is] not
to relieve a contracting party of an unreasonable rate.” Ver
izon, 535 U. S., at 479 (citing Sierra, supra, at 355).
Over the years, the Commission began to refer to the two
modes of review—one with the Mobile-Sierra presumption
and the other without—as the “public interest standard” and
the “just and reasonable standard.” See, e. g., In re South
ern Company Servs., Inc., 39 FERC ¶ 63,026, pp. 65,134,
65,141 (1987). Decisions from the Courts of Appeals did
likewise. See, e. g., Kansas Cities v. FERC, 723 F. 2d 82,
87–88 (CADC 1983); Northeast Utils. Serv. Co. v. FERC, 993
F. 2d 937, 961 (CA1 1993). We do not take this nomenclature
to stand for the obviously indefensible proposition that a
standard different from the statutory just-and-reasonable
standard applies to contract rates. Rather, the term “public
interest standard” refers to the differing application of that
just-and-reasonable standard to contract rates. See Phila
delphia Elec. Co., 58 F. P. C. 88, 90 (1977). (It would be
less confusing to adopt the Solicitor General’s terminology,
referring to the two differing applications of the just-and
reasonable standard as the “ordinary” “just and reasonable
standard” and the “public interest standard.” See Reply
Brief for Respondent FERC 6.)
B
Recent FERC Innovations; Market-Based Tariffs
In recent decades, the Commission has undertaken an am
bitious program of market-based reforms. Part of the im
petus for those changes was technological evolution. His
torically, electric utilities had been vertically integrated
monopolies. For a particular geographic area, a single util
ity would control the generation of electricity, its transmis
sion, and its distribution to consumers. See Midwest ISO
Transmission Owners v. FERC, 373 F. 3d 1361, 1363 (CADC
2004). Since the 1970’s, however, engineering innovations
have lowered the cost of generating electricity and transmit

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ting it over long distances, enabling new entrants to chal
lenge the regional generating monopolies of traditional utili
ties. See generally New York v. FERC, 535 U. S. 1, 7–8
(2002); Public Util. Dist. No. 1 of Snohomish Cty. v. FERC,
272 F. 3d 607, 610 (CADC 2001) (per curiam).
To take advantage of these changes, the Commission has
attempted to break down regulatory and economic barriers
that hinder a free market in wholesale electricity. It has
sought to promote competition in those areas of the industry
amenable to competition, such as the segment that generates
electric power, while ensuring that the segment of the indus
try characterized by natural monopoly—namely, the trans
mission grid that conveys the generated electricity—cannot
exert monopolistic influence over other areas. See New
York, supra, at 9–10; Snohomish, supra. To that end,
FERC required in Order No. 888 that each transmission pro
vider offer transmission service to all customers on an equal
basis by filing an “open access transmission tariff.” Promot
ing Wholesale Competition Through Open Access Non-
Discriminatory Transmission Services by Public Utilities, 61
Fed. Reg. 21540 (1996); see New York, supra, at 10–12. That
requirement prevents the utilities that own the grid from
offering more favorable transmission terms to their own af
filiates and thereby extending their monopoly power to other
areas of the industry.
To further pry open the wholesale-electricity market and
to reduce technical inefficiencies caused when different util
ities operate different portions of the grid independently,
the Commission has encouraged transmission providers to
establish “Regional Transmission Organizations”—entities
to which transmission providers would transfer operational
control of their facilities for the purpose of efficient coordina
tion. Order No. 2000, 65 Fed. Reg. 810, 811–812 (2000); see
Midwest ISO, supra, at 1364. It has encouraged the man
agement of those entities by “Independent System Opera
tors,” not-for-profit entities that operate transmission facili

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ties in a nondiscriminatory manner. See Midwest ISO,
supra. In addition to coordinating transmission service, Re
gional Transmission Organizations perform other functions,
such as running auction markets for electricity sales and of
fering contracts for hedging against potential grid conges
tion. See Blumsack, Measuring the Benefits and Costs of
Regional Electric Grid Integration, 28 Energy L. J. 147
(2007).
Against this backdrop of technological change and
market-based reforms, the Commission over the past two
decades has begun to permit sellers of wholesale electricity
to file “market-based” tariffs. These tariffs, instead of set
ting forth rate schedules or rate-fixing contracts, simply
state that the seller will enter into freely negotiated con
tracts with purchasers. See generally Market-Based Rates
for Wholesale Sales of Electric Energy, Capacity and An
cillary Services by Public Utilities, Order No. 697, 72 Fed.
Reg. 39904 (2007) (hereinafter Market-Based Rates); Mc-
Grew 160–167. FERC does not subject the contracts en
tered into under these tariffs (as it subjected traditional
wholesale-power contracts) to § 824d’s requirement of imme
diate filing, apparently on the theory that the requirement
has been satisfied by the initial filing of the market-based
tariffs themselves. See Brief for Respondent FERC 28–29
(hereinafter Brief for FERC).
FERC will grant approval of a market-based tariff only if
a utility demonstrates that it lacks or has adequately miti
gated market power, lacks the capacity to erect other barri
ers to entry, and has avoided giving preferences to its affili
ates. See Market-Based Rates ¶ 7, 72 Fed. Reg. 39907. In
addition to the initial authorization of a market-based tariff,
FERC imposes ongoing reporting requirements. A seller
must file quarterly reports summarizing the contracts that it
has entered into, even extremely short-term contracts. See
California ex rel. Lockyer v. FERC, 383 F. 3d 1006, 1013
(CA9 2004). It must also demonstrate every four months

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that it still lacks or has adequately mitigated market power.
See ibid. If FERC determines from these filings that a
seller has reattained market power, it may revoke the au
thority prospectively. See Market-Based Rates ¶ 5, 72 Fed.
Reg. 39906. And if the Commission finds that a seller has
violated its Regional Transmission Organization’s market
rules, its tariff, or Commission orders, the Commission may
take appropriate remedial action, such as ordering refunds,
requiring disgorgement of profits, and imposing civil penal
ties. See ibid.
Both the Ninth Circuit and the D. C. Circuit have gener
ally approved FERC’s scheme of market-based tariffs. See
Lockyer, supra, at 1011–1013; Louisiana Energy & Power
Auth. v. FERC, 141 F. 3d 364, 365 (CADC 1998). We have
not hitherto approved, and express no opinion today, on the
lawfulness of the market-based-tariff system, which is not
one of the issues before us. It suffices for the present cases
to recognize that when a seller files a market-based tariff,
purchasers no longer have the option of buying electricity at
a rate set by tariff and contracts no longer need to be filed
with FERC (and subjected to its investigatory power) before
going into effect.
C
California’s Electricity Regulation and
Its Consequences
In 1996, California enacted Assembly Bill 1890 (AB 1890),
which massively restructured the California electricity mar
ket. See 1996 Cal. Stat. ch. 854 (codified at Cal. Pub. Util.
Code Ann. §§ 330–398.5 (West 2004 and Supp. 2008)); see gen
erally Cudahy, Whither Deregulation: A Look at the Por
tents, 58 N. Y. U. Annual Survey of Am. Law 155, 172–185
(2001) (hereinafter Cudahy). The bill transferred opera
tional control of the transmission facilities of California’s
three largest investor-owned utilities to an Independent
Service Operator (Cal-ISO). See Pacific Gas & Elec. Co. v.

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FERC, 464 F. 3d 861, 864 (CA9 2006). It also established
the California Power Exchange (CalPX), a nonprofit entity
that operated a short-term market—or “spot market”—for
electricity. The bill required California’s three largest
investor-owned utilities to divest most of their electricity
generation facilities. It then required those utilities to pur
chase and sell the bulk of their electricity from and to the
CalPX’s spot market, permitting only limited leeway for
them to enter into long-term contracts. See Public Util.
Dist. No. 1 of Snohomish Cty. v. FERC, 471 F. 3d 1053, 1068
(CA9 2006) (case below).
In 1997, FERC approved the Cal-ISO as consistent with
the requirements for an Independent Service Operator es
tablished in Order No. 888. FERC also approved the CalPX
and the investor-owned utilities’ authority to make sales at
market-based rates in the CalPX, finding that, in light of
the divesture of their generation units and other conditions
imposed under the restructuring plan, those utilities had ad
equately mitigated their market power. See Pacific Gas &
Elec. Co., 81 FERC ¶ 61,122, pp. 61,435, 61,435–61,436,
61,537–61,548 (1997).
The CalPX opened for business in March 1998. In the
summer of 1999, it expanded to include an auction for sales
of electricity under “forward contracts”—contracts in which
sellers promise to deliver electricity more than one day in
the future (sometimes many years). But the participation
of California’s large investor-owned utilities in that forward
market was limited because, as we have said, AB 1890
strictly capped the amount of power that they could purchase
outside of the spot market. See 471 F. 3d, at 1068.
That diminishment of the role of long-term contracts in the
California electricity market turned out to be one of the
seeds of an energy crisis. In the summer of 2000, the price
of electricity in the CalPX’s spot market jumped dramati
cally—more than fifteenfold. See ibid. The increase was
the result of a combination of natural, economic, and regula

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tory factors: “flawed market rules; inadequate addition of
generating facilities in the preceding years; a drop in avail
able hydropower due to drought conditions; a rupture of a
major pipeline supplying natural gas into California; strong
growth in the economy and in electricity demand; unusually
high temperatures; an increase in unplanned outages of ex
tremely old generating facilities; and market manipulation.”
CAlifornians for Renewable Energy, Inc. v. Sellers of En
ergy and Ancillary Servs., 119 FERC ¶ 61,058, pp. 61,243,
61,247 (2007). Because California’s investor-owned utilities
had for the most part been forbidden to obtain their power
through long-term contracts, the turmoil in the spot market
hit them hard. See Cudahy 174. The high prices led to
rolling blackouts and saddled utilities with mounting debt.
In late 2000, the Commission took action. A central plank
of its emergency effort was to eliminate the utilities’ reliance
on the CalPX’s spot market and to shift their purchases to
the forward market. To that end, FERC abolished the re
quirement that investor-owned utilities purchase and sell all
power through the CalPX and encouraged them to enter into
long-term contracts. See San Diego Gas & Electric Co. v.
Sellers of Energy and Ancillary Servs., 93 FERC ¶ 61,294,
pp. 61,980, 61,982 (2000); see also 471 F. 3d, at 1069. The
Commission also put price caps on wholesale electricity.
See San Diego Gas & Elec. Co. v. Sellers of Energy and
Ancillary Servs., 95 FERC ¶ 61,418, p. 62,545 (2001). By
June 2001, electricity prices began to decline to normal lev
els. Id., at 62,546.
D
Genesis of These Cases
The principal respondents in these cases are western utili
ties that purchased power under long-term contracts during
that tumultuous period in 2000 and 2001. Although they are
not located in California, the high prices in California spilled

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over into other Western States. See 471 F. 3d, at 1069.
Petitioners are the sellers that entered into the contracts
with respondents.
The contracts between the parties included rates that
were very high by historical standards. For example, re
spondent Snohomish signed a 9-year contract to purchase
electricity from petitioner Morgan Stanley at a rate of $105/
megawatt hour (MWh), whereas prices in the Pacific North
west have historically averaged $24/MWh. The contract
prices were substantially lower, however, than the prices
that Snohomish would have paid in the spot market during
the energy crisis, when prices peaked at $3,300/MWh. See
id., at 1069–1070.
After the crisis had passed, buyer’s remorse set in and
respondents asked FERC to modify the contracts. They
contended that the rates in the contracts should not be pre
sumed to be just and reasonable under Mobile-Sierra be
cause, given the sellers’ market-based tariffs, the contracts
had never been initially approved by the Commission with
out the presumption. See Nevada Power Co. v. Enron
Power Marketing, Inc., 103 FERC ¶ 61,353, pp. 62,382, 62,387
(2003). Respondents also argued that contract modification
was warranted even under the Mobile-Sierra presumption
because the contract rates were so high that they violated
the public interest. See 103 FERC, at 62,383, 62,387–62,395.
In a preliminary order, the Commission instructed the Ad
ministrative Law Judge (ALJ) to consider 12 different fac
tors in deciding whether the presumption could be overcome
for the contracts, such as the terms of the contracts, the
available alternatives at the time of sale, the relationship of
the rates to Commission benchmarks, the effect of the con
tracts on the financial health of the purchasers, and the im
pact of contract modification on national energy markets.
After a hearing, the ALJ concluded that the Mobile-Sierra
presumption should apply to the contracts and that the con

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tracts did not seriously harm the public interest. In fact,
according to the ALJ, even if the Mobile-Sierra presumption
did not apply, respondents would not be entitled to have the
contracts modified. 103 FERC, at 62,390–62,394.
Between the ALJ’s decision and the Commission’s ruling,
the Commission’s staff issued a report (Staff Report) con
cluding that unlawful activities of various sellers in the spot
market had affected prices in the forward market. See id.,
at 62,396. Respondents raised the report at oral argument
before the Commission, and some of them argued that peti
tioners “were unlawfully manipulating market prices,
thereby engaging in fraud and deception in violation of their
market-based rate tariffs.” Ibid. Petitioners contended,
however, that the Staff Report demonstrated only a correla
tion between rates in the spot and forward markets, not a
causal connection. See ibid.
FERC affirmed the ALJ. The Commission first held that
the Mobile-Sierra presumption did apply to the contracts at
issue. Although agreeing with respondents that the pre
sumption applies only where FERC has had an initial op
portunity to review a contract rate, the Commission relied
on the somewhat metaphysical ground that the grant of
market-based authority to petitioners qualified as that initial
opportunity. See 103 FERC, at 62,388–62,389. The Com
mission then held that respondents could not overcome the
Mobile-Sierra presumption. It recognized that the Staff
Report had “found that spot market distortions flowed
through to forward power prices,” 103 FERC, at 62,396–
62,397, but concluded that this finding, even if true, was not
“determinative” because:
“a finding that the unjust and unreasonable spot market
caused forward bilateral prices to be unjust and unrea
sonable would be relevant to contract modification only
where there is a ‘just and reasonable’ standard of
review. . . . Under the ‘public interest’ standard, to jus

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tify contract modification it is not enough to show that
forward prices became unjust and unreasonable due to
the impact of spot market dysfunctions; it must be
shown that the rates, terms and conditions are contrary
to the public interest.” Id., at 62,397.
The Commission determined that under the factors iden
tified in Si er ra, as well as under a totality-of-the
circumstances test, respondents had not demonstrated that
the contracts threatened the public interest. See 103
FERC, at 62,397–62,399. On rehearing, respondents reiter
ated their complaints, including their charge that “their con
tracts were the product of market manipulation by Enron,
Morgan Stanley and other [sellers].” 105 FERC ¶ 61,185,
pp. 61,979, 61,989 (2003). The Commission answered that
there was “no evidence to support a finding of market manip
ulation that specifically affected the contracts at issue.” Id.,
at 61,989.
Respondents filed petitions for review in the Ninth Circuit,
which granted the petitions and remanded to the Commis
sion, finding two flaws in the Commission’s analysis.2 First,
the court agreed with respondents that rates set by contract
(whether pursuant to a market-based tariff or not) are pre
sumptively reasonable only where FERC has had an initial
opportunity to review the contracts without applying the
Mobile-Sierra presumption. To satisfy that prerequisite
under the market-based tariff regime, the court said, the
Commission must promptly review the terms of contracts
after their formation and must modify those that do not
appear to be just and reasonable when evaluated without
the Mobile-Sierra presumption (rather than merely revok
2 In a holding not challenged before this Court, the Ninth Circuit con
cluded that the contracts at issue did not contain “Memphis clause[s],” 471
F. 3d 1053, 1079 (2006) (citing United Gas Pipe Line Co. v. Memphis Light,
Gas and Water Div., 358 U. S. 103 (1958)), see supra, at 534, that would
have precluded application of the Mobile-Sierra presumption.

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ing market-based authority prospectively but leaving pre
existing contracts intact). See 471 F. 3d, at 1075–1077,
1079–1085. This initial review must include an inquiry into
“the market conditions in which the contracts at issue were
formed,” and market “dysfunction” is a ground for finding a
contract not to be just and reasonable. Id., at 1085–1087.
Second, the Ninth Circuit held that even assuming that the
Mobile-Sierra presumption applied, the standard for over
coming that presumption is different for a purchaser’s chal
lenge to a contract, namely, whether the contract rate ex
ceeds a “zone of reasonableness.” 471 F. 3d, at 1088–1090.
We granted certiorari. See 551 U. S. 1189 (2007).
II
A
Application of Mobile-Sierra Presumption to
Contracts Concluded Under Market-Based
Rate Authority
As noted earlier, the FERC order under review here
agreed with the Ninth Circuit’s premise that the Commission
must have an initial opportunity to review a contract without
the Mobile-Sierra presumption, but maintained that the au
thorization for market-based rate authority qualified as that
initial review. Before this Court, however, FERC changes
its tune, arguing that there is no such prerequisite—or at
least that FERC could reasonably conclude so and therefore
that Chevron deference is in order. See Brief for FERC
20–21, 33–34; Chevron U. S. A. Inc. v. Natural Resources De
fense Council, Inc., 467 U. S. 837 (1984). We will not uphold
a discretionary agency decision where the agency has offered
a justification in court different from what it provided in its
opinion. See SEC v. Chenery Corp., 318 U. S. 80, 94–95
(1943). But FERC has lucked out: The Chenery doctrine
has no application to these cases, because we conclude that
the Commission was required, under our decision in Sierra,

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to apply the Mobile-Sierra presumption in its evaluation of
the contracts here. That it provided a different rationale
for the necessary result is no cause for upsetting its ruling.
“To remand would be an idle and useless formality. Chen
ery does not require that we convert judicial review of
agency action into a ping-pong game.” NLRB v. Wyman-
Gordon Co., 394 U. S. 759, 766–767, n. 6 (1969) (plurality
opinion).
We are in broad agreement with the Ninth Circuit on a
central premise: There is only one statutory standard for as
sessing wholesale-electricity rates, whether set by contract
or tariff—the just-and-reasonable standard. The plain text
of the FPA states that “[a]ll rates . . . shall be just and rea
sonable.” 16 U. S. C. § 824d(a); see also § 824e(a) (2000 ed.,
Supp. V). But we disagree with the Ninth Circuit’s inter
pretation of Sierra as requiring (contrary to the statute) that
the Commission apply the standard differently, depending on
when a contract rate is challenged. In the Ninth Circuit’s
view, Sierra was premised on the idea that “as long as the
rate was just and reasonable when the contract was formed,
there would be a presumption . . . that the reasonableness
continued throughout the term of the contract.” 471 F. 3d,
at 1077. In other words, so long as the Commission con
cludes (either after a hearing or by allowing a rate to go into
effect) that a contract rate is just and reasonable when ini
tially filed, the rate will be presumed just and reasonable in
future proceedings.
That is a misreading of Sierra. Sierra was grounded in
the commonsense notion that “[i]n wholesale markets, the
party charging the rate and the party charged [are] often
sophisticated businesses enjoying presumptively equal bar
gaining power, who could be expected to negotiate a ‘just
and reasonable’ rate as between the two of them.” Veri
zon, 535 U. S., at 479. Therefore, only when the mutually
agreed-upon contract rate seriously harms the consuming

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public may the Commission declare it not to be just and rea
sonable.3 Sierra thus provided a definition of what it means
for a rate to satisfy the just-and-reasonable standard in the
contract context—a definition that applies regardless of
when the contract is reviewed. The Ninth Circuit, by con
trast, essentially read Sierra “as the equivalent of an estop
pel doctrine,” whereby an initial Commission opportunity for
review prevents the Commission from modifying the rates
absent serious future harm to the public interest. Tewks
bury & Lim, Applying the Mobile-Sierra Doctrine to
Market-Based Rate Contracts, 26 Energy L. J. 437, 457–458
(2005). But Sierra said nothing of the sort. And given
that the Commission’s passive permission for a rate to go
into effect does not constitute a finding that the rate is just
and reasonable, it would be odd to treat that initial “opportu
nity for review” as curtailing later challenges.
The Ninth Circuit found support for its prerequisite in our
decision in FPC v. Texaco Inc., 417 U. S. 380 (1974). In that
case, we warned that the Commission’s attempt to rely solely
on market forces to evaluate rates charged by small natural
gas producers was inconsistent with the Natural Gas Act’s
insistence that rates be just and reasonable. See id., at 397.
The Ninth Circuit apparently took this to mean that all ini
tially filed contracts must be subject to review without the
Mobile-Sierra presumption. But Texaco had nothing to do
with that doctrine. It held that the Commission had im
properly implemented a scheme of total deregulation by
applying no standard of review at all to small-producer rates.
See 417 U. S., at 395–397. It did not cast doubt on the prop
osition that in a proper regulatory scheme, the ordinary
mode for evaluating contractually set rates is to look to
3 We do not say, as the dissent alleges, post, at 561 (opinion of
Stevens, J.), that the public interest is not also relevant in a challenge to
unilaterally set rates. But it is the “ ‘sole concern’ ” in a contract case.
See FPC v. Sierra Pacific Power Co., 350 U. S. 348, 355 (1956).

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whether the rates seriously harm the public interest, not to
whether they are unfair to one of the parties that voluntarily
assented to the contract. Cf. id., at 391, n. 4.
Nor do we agree with the Ninth Circuit that FERC must
inquire into whether a contract was formed in an environ
ment of market “dysfunction” before applying the Mobile-
Sierra presumption. Markets are not perfect, and one of
the reasons that parties enter into wholesale-power con
tracts is precisely to hedge against the volatility that market
imperfections produce. That is why one of the Commis
sion’s responses to the energy crisis was to remove regula
tory barriers to long-term contracts. It would be a perverse
rule that rendered contracts less likely to be enforced when
there is volatility in the market. (Such a rule would come
into play, after all, only when a contract formed in a period
of “dysfunction” did not significantly harm the consuming
public, since contracts that seriously harm the public should
be set aside even under the Mobile-Sierra presumption.)
By enabling sophisticated parties who weathered market
turmoil by entering long-term contracts to renounce those
contracts once the storm has passed, the Ninth Circuit’s
holding would reduce the incentive to conclude such con
tracts in the future. Such a rule has no support in our case
law and plainly undermines the role of contracts in the FPA’s
statutory scheme.
To be sure, FERC has ample authority to set aside a con
tract where there is unfair dealing at the contract formation
stage—for instance, if it finds traditional grounds for the ab
rogation of the contract such as fraud or duress. See 103
FERC, at 62,399–62,400 (“[T]here is no evidence of unfair
ness, bad faith, or duress in the original negotiations”). In
addition, if the “dysfunctional” market conditions under
which the contract was formed were caused by illegal action
of one of the parties, FERC should not apply the Mobile-
Sierra presumption. See Part III, infra. But the mere

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fact that the market is imperfect, or even chaotic, is no rea
son to undermine the stabilizing force of contracts that the
FPA embraced as an alternative to “purely tariff-based reg
ulation.” Verizon, 535 U. S., at 479. We may add that eval
uating market “dysfunction” is a very difficult and highly
speculative task—not one that the FPA would likely require
the agency to engage in before holding sophisticated parties
to their bargains.
We reiterate that we do not address the lawfulness of
FERC’s market-based-rates scheme, which assuredly has its
critics. But any needed revision in that scheme is properly
addressed in a challenge to the scheme itself, not through a
disfigurement of the venerable Mobile-Sierra doctrine. We
hold only that FERC may abrogate a valid contract only if
it harms the public interest.
B
Application of “Excessive Burden” Exception
to High-Rate Challenges
We turn now to the Ninth Circuit’s second holding: that a
“zone of reasonableness” test should be used to evaluate a
buyer’s challenge that a rate is too high. In our view that
fails to accord an adequate level of protection to contracts.
The standard for a buyer’s challenge must be the same, gen
erally speaking, as the standard for a seller’s challenge: The
contract rate must seriously harm the public interest. That
is the standard that the Commission applied in the proceed
ings below.
We are again in agreement with the Ninth Circuit on a
starting premise: It is clear that the three factors we identi
fied in Sierra—“where [a rate] might impair the financial
ability of the public utility to continue its service, cast upon
other consumers an excessive burden, or be unduly discrimi
natory,” 350 U. S., at 355—are not all precisely applicable to
the high-rate challenge of a purchaser (where, for example,
the relevant question is not whether “other customers” [of

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the utility] would be excessively burdened, but whether any
customers of the purchaser would be); and that those three
factors are in any event not the exclusive components of the
public interest. In its decision below, the Commission rec
ognized both these realities. See 103 FERC, at 62,397 (“Ne
vada Companies failed to show that the contract terms at
issue impose an excessive burden on their customers” (em
phasis added)); id., at 62,398 (“The record also demonstrates
that Snohomish presented no evidence that its contract with
Morgan Stanley adversely affected Snohomish or its rate
payers” (emphasis added)); id., at 62,398–62,399 (evaluating
the “totality of circumstances”); see also Brief for FERC
41–42.4
Where we disagree with the Ninth Circuit is on the over
arching “zone of reasonableness” standard it established for
evaluating a high-rate challenge and setting aside a contract
rate: whether consumers’ electricity bills “are higher than
they would otherwise have been had the challenged con
tracts called for rates within the just and reasonable range,”
i. e., rates that equal “marginal cost.” 5 471 F. 3d, at 1089.
4 The dissent criticizes the Commission’s decision because it took into
account under the heading “totality of the circumstances” only the circum
stances of the contract formation, not “circumstances exogenous to con
tract negotiations, including natural disasters and market manipulation
by entities not parties to the challenged contract.” Post, at 567. Those
considerations are relevant to whether the contracts impose an “excessive
burden” on consumers relative to what they would have paid absent the
contracts. It is precisely our uncertainty whether the Commission con
sidered those “circumstances exogenous to contract negotiations,” dis
cussed in Part III of our opinion, that causes us to approve the remand
to FERC.
5 Elsewhere the Ninth Circuit softened this standard somewhat, saying
that “[e]ven if a particular rate exceeds marginal cost . . . it may still be
within this reasonable range—or ‘zone of reasonableness’—if that higher
than-cost-based price results from normal market forces and is part of a
general trend toward rates that do reflect cost.” 471 F. 3d, at 1089. We
are not sure (and we think no one can be sure) precisely what this means.
It has no basis in our opinions, and is in any event wrong because its point

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The Ninth Circuit derived this test from our statement in
Sierra that a contract rate would have to be modified if it
were so low that it imposed an “excessive burden” on other
wholesale purchasers. The Ninth Circuit took “excessive
burden” to mean merely the burden caused when one set of
consumers is forced to pay above marginal cost to compen
sate for below-marginal-cost rates charged other consumers.
See 471 F. 3d, at 1088. And it proceeded to apply a similar
notion of “excessive burden” to high-rate challenges (where
all the burden of the above-marginal-cost contract rate falls
on the purchaser’s own customers, and does not affect the
customers of third parties). Id., at 1089. That is a misread
ing of Sierra and our later cases. A presumption of validity
that disappears when the rate is above marginal cost is no
presumption of validity at all, but a reinstitution of cost
based rather than contract-based regulation. We have said
that, under the Mobile-Sierra presumption, setting aside a
contract rate requires a finding of “unequivocal public neces
sity,” Permian Basin, 390 U. S., at 822, or “extraordinary
circumstances,” Arkansas Louisiana Gas Co. v. Hall, 453
of departure (the general principle that rates cannot exceed marginal cost)
contradicts Mobile-Sierra.
The Ninth Circuit purported to find support for its “zone of reasonable
ness” test in the case law of the District of Columbia Circuit. But the
cited case stands only for the proposition that a market-based scheme
must ensure that market forces will, “over the long pull,” cause rates to
approximate marginal cost. Interstate Natural Gas Assn. of Am. v.
FERC, 285 F. 3d 18, 31 (2002). Nowhere does the opinion suggest that
the standard for reforming a particular contract validly entered into under
a market-based scheme is whether the rates approximate marginal cost.
By the same token, our approval of FERC’s decision not to set prospec
tive area rates solely with reference to pre-existing contract prices, Per
mian Basin Area Rate Cases, 390 U. S. 747, 792–793 (1968), does not sup
port, as the dissent thinks, post, at 562–563, n. 2, the view that the
standard for abrogating an existing, valid contract is anything less than
the Mobile-Sierra standard. That is the standard Permian Basin ap
plied when actually confronted with the issue of contract modification.
See 390 U. S., at 781–784, 821–822.

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U. S. 571, 582 (1981). In no way can these descriptions be
thought to refer to the mere exceeding of marginal cost.
The Ninth Circuit’s standard would give short shrift to
the important role of contracts in the FPA, as reflected in
our decision in Sierra, and would threaten to inject more
volatility into the electricity market by undermining a key
source of stability. The FPA recognizes that contract stabil
ity ultimately benefits consumers, even if short-term rates
for a subset of the public might be high by historical stand
ards—which is why it permits rates to be set by contract
and not just by tariff. As the Commission has recently put
it, its “first and foremost duty is to protect consumers from
unjust and unreasonable rates; however, . . . uncertainties
regarding rate stability and contract sanctity can have a
chilling effect on investments and a seller’s willingness to
enter into long-term contracts and this, in turn, can harm
customers in the long run.” Market-Based Rates ¶ 6, 72
Fed. Reg. 33906–33907.
Besides being wrong in principle, in its practical effect the
Ninth Circuit’s rule would impose an onerous new burden on
the Commission, requiring it to calculate the marginal cost
of the power sold under a market-based contract. Assuming
that FERC even ventured to undertake such an analysis,
rather than reverting to the ancien re´gime of cost-of-service
ratesetting, the regulatory costs would be enormous. We
think that the FPA intended to reserve the Commission’s
contract-abrogation power for those extraordinary circum
stances where the public will be severely harmed.6
6 The dissent claims that we have misread the FPA because its provi
sions “do not distinguish between rates set unilaterally by tariff and rates
set bilaterally by contract.” Post, at 556. But the dissent’s interpreta
tion, whatever plausibility it has as an original matter, cannot be squared
with Sierra, which plainly distinguished between unilaterally and bilater
ally set rates, and said that the only relevant consideration for the Com
mission in the latter case is whether the public interest is harmed. And
the circumstances identified in Sierra as implicating the public interest

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III
Defects in FERC’s Analysis Supporting Remand
Despite our significant disagreement with the Ninth Cir
cuit, we find two errors in the Commission’s analysis, and we
therefore affirm the judgment below on alternative grounds.
First, it appears, as the Ninth Circuit concluded, see 471
F. 3d, at 1090, that the Commission may have looked simply
to whether consumers’ rates increased immediately upon the
relevant contracts’ going into effect, rather than determining
whether the contracts imposed an excessive burden on con
sumers “down the line,” relative to the rates they could have
obtained (but for the contracts) after elimination of the dys
functional market. For example, the Commission concluded
that two of the respondents would experience “rate de
creases of approximately 20 percent for retail service” dur
ing the period covered by the contracts. 103 FERC, at
62,397. But the baseline for that computation was the rate
they were paying before the contracts went into effect.
That disparity is certainly a relevant consideration; but so is
refer to something more than a small dent in the consumer’s pocket, which
is why our subsequent cases have described the standard as a high one.
At the end of the day, the dissent simply argues against the settled
understanding of the FPA that has prevailed in this Court, lower courts,
and the Commission for half a century. Although the dissent is correct
that we have never used the phrase “Mobile-Sierra doctrine” in our cases,
that is probably because the understanding of it was so uniform that no
circuit split concerning its meaning arose until the Ninth Circuit’s errone
ous decision in these cases. If one searches the Commission’s reports,
over 600 decisions since 2000 alone have cited the doctrine, see Brief for
Electric Power Supply Association et al. as Amici Curiae 15, and the
Courts of Appeals have used the term “Mobile-Sierra doctrine” (or
“Sierra-Mobile” doctrine) over 75 times since 1974. If there were ever a
context where long-settled understanding should be honored it is here,
where a statutory decision (subject to revision by Congress) has been
understood the same way for many years by lower courts, by this Court,
by the federal agency the statute governs, and hence surely by the private
actors trying to observe the law.

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the disparity between the contract rate and the rates con
sumers would have paid (but for the contracts) further down
the line, when the open market was no longer dysfunctional.
That disparity, past a certain point, could amount to an “ex
cessive burden.” That is what was contemplated by Sierra,
which involved a challenge 5 years into a 15-year contract.
The “excessive burden” on other customers to which the
opinion referred was assuredly the current burden, and not
only the burden imposed at the very outset of the contract.
See 350 U. S., at 355. The “unequivocal public necessity”
that justifies overriding the Mobile-Sierra presumption does
not disappear as a factor once the contract enters into force.
Thus, FERC’s analysis on this point was flawed—or at least
incomplete. As the Ninth Circuit put it, “[i]t is entirely pos
sible that rates had increased so high during the energy cri
ses because of dysfunction in the spot market that, even with
the acknowledged decrease in rates, consumers still paid
more under the forward contracts than they otherwise would
have.” 471 F. 3d, at 1090. If that is so, and if that increase
is so great that, even taking into account the desirability
of fostering market-stabilizing long-term contracts, the rates
impose an excessive burden on consumers or otherwise seri
ously harm the public interest, the rates must be disallowed.
Second, respondents alleged before FERC that some of
the petitioners in these cases had engaged in market manipu
lation in the spot market. See, e. g., 105 FERC, at 61,989
(“Snohomish and Nevada Companies argue that their con
tracts were the product of market manipulation by Enron,
Morgan Stanley and other Respondents, which, as estab
lished by the Commission Staff, engaged in market manipu
lation”). The Staff Report concluded, as we have said, that
the abnormally high prices in the spot market during the
energy crisis influenced the terms of contracts in the forward
market. But the Commission dismissed the relevance of the
Staff Report on the ground that it had not demonstrated that
forward market prices were so high as to overcome the

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554 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
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Opinion of the Court
Mobile-Sierra presumption. We conclude, however, that if
it is clear that one party to a contract engaged in such exten
sive unlawful market manipulation as to alter the playing
field for contract negotiations, the Commission should not
presume that the contract is just and reasonable. Like
fraud and duress, unlawful market activity that directly af
fects contract negotiations eliminates the premise on which
the Mobile-Sierra presumption rests: that the contract rates
are the product of fair, arms-length negotiations. The mere
fact that the unlawful activity occurred in a different (but
related) market does not automatically establish that it had
no effect upon the contract—especially given the Staff Re
port’s (unsurprising) finding that high prices in the one mar
ket produced high prices in the other. We are unable to
determine from the Commission’s orders whether it found
the evidence inadequate to support the claim that respond
ents’ alleged unlawful activities affected the contracts at
issue here. It said in its order on rehearing, 105 FERC, at
61,989, that “[w]e . . . found no evidence to support a finding
of market manipulation [by respondents] that specifically af
fected the contracts at issue.” But perhaps that must be
read in light of the Commission’s above described rejection
of the Staff Report on the ground that high spot-market
prices caused by manipulation are irrelevant unless the for
ward market prices fail the Mobile-Sierra standard; and in
light of the statement in its initial order, in apparent re
sponse to the claim of spot-market manipulation by respond
ents, 103 FERC, at 62,397, that “a finding that the unjust
and unreasonable spot market prices caused forward bilat
eral prices to be unjust and unreasonable would be relevant
to contract modification only where there is a ‘just and rea
sonable’ standard of review.”
We emphasize that the mere fact of a party’s engaging in
unlawful activity in the spot market does not deprive its for
ward contracts of the benefit of the Mobile-Sierra presump
tion. There is no reason why FERC should be able to abro

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Stevens, J., dissenting
gate a contract on these grounds without finding a causal
connection between unlawful activity and the contract rate.
Where, however, causality has been established, the Mobile-
Sierra presumption should not apply.
On remand, the Commission should amplify or clarify its
findings on these two points. The judgment of the Court of
Appeals is affirmed, and the cases are remanded for proceed
ings consistent with this opinion.
It is so ordered.
The Chief Justice and Justice Breyer took no part in
the consideration or decision of these cases.
Justice Ginsburg, concurring in part and concurring in
the judgment.
Recommending denial of the petition for certiorari in these
cases, the Federal Energy Regulatory Commission urged
that review “would be premature” given “the interlocutory
nature of th[e] issues.” Brief in Opposition for Respondent
Federal Energy Regulatory Commission 22, 25. In this
regard, the Commission called our attention to “new meas
ures” it had taken, as well as recent enactments by Congress,
bearing on “the evaluation of contracts under Mobile-
Sierra.” Id., at 14–16. In view of these developments, the
Commission suggested, this Court should await “the better
developed record that would be produced by FER[C] . . . on
remand.” Id., at 22. I agree that the Court would have
been better informed had it awaited the Commission’s deci
sion on remand. I think it plain, however, that the Commis
sion erred in the two respects identified by the Court. See
ante, at 552–554. I therefore concur in the Court’s judg
ment and join Part III of the Court’s opinion.
Justice Stevens, with whom Justice Souter joins,
dissenting.
The basic question presented by these complicated cases
is whether “the Federal Energy Regulatory Commission

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Stevens, J., dissenting
(FERC or Commission) must presume that the rate set out
in a freely negotiated wholesale-energy contract meets the
‘just and reasonable’ requirement imposed by law.” Ante,
at 530. The opening sentence of the Court’s opinion tells us
that the “Mobile-Sierra doctrine”—a term that makes its
first appearance in the United States Reports today—man
dates an affirmative answer. This holding finds no support
in either case that lends its name to the doctrine. Neverthe
less, in the interest of guarding against “disfigurement of the
venerable Mobile-Sierra doctrine,” ante, at 548, the Court
mangles both the governing statute and precedent.
I
Under the Federal Power Act (FPA), 41 Stat. 1063, 16
U. S. C. § 791a et seq., wholesale electricity prices are estab
lished in the first instance by public utilities, either via tar
iffs or in contracts with purchasers. § 824d(c). Whether
set by tariff or contract, all rates must be filed with the Com
mission. See ibid. Section 205(a) of the FPA provides, “All
rates and charges . . . shall be just and reasonable, and any
such rate or charge that is not just and reasonable is hereby
declared to be unlawful.” 16 U. S. C. § 824d(a). Pursuant
to § 206(a), if FERC determines “that any rate . . . or that
any rule, regulation, practice, or contract affect[ing] such
rate . . . is unjust [or] unreasonable . . . , the Commission shall
determine the just and reasonable rate, . . . rule, regulation,
practice, or contract to be thereafter observed and in force,
and shall fix the same by order.” 16 U. S. C. § 824e(a) (2000
ed., Supp. V). These provisions distinguish between the
ratesetting roles of utilities (which initially set rates) and the
Commission (which may override utility-set rates that are
not just and reasonable), but they do not distinguish between
rates set unilaterally by tariff and rates set bilaterally by
contract. However the utility sets its prices, the standard
of review is the same—rates must be just and reasonable.

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The Court purports to acknowledge that “[t]here is only
one statutory standard for assessing wholesale-electricity
rates, whether set by contract or tariff—the just-and
reasonable standard.” Ante, at 545. Unlike rates set by
tariff, however, the Court holds that any “freely negotiated”
contract rate is presumptively just and reasonable unless it
“seriously harms” the public interest. Ante, at 530. Ac
cording to the Court, this presumption represents a “differ
ing application of [the] just-and-reasonable standard,” but
not a different standard altogether. Ante, at 535. I dis
agree. There is no significant difference between requiring
a heightened showing to overcome an otherwise conclusive
presumption and imposing a heightened standard of review.
I agree that applying a separate standard of review to con
tract rates is “obviously indefensible,” ibid., but that is also
true with respect to the Court’s presumption.
Even if the “Mobile-Sierra presumption” were not tanta
mount to a separate standard, nothing in the statute man
dates “differing application” of the statutory standard to
rates set by contract. Ibid. Section 206(a) of the FPA pro
vides, “without qualification or exception,” that FERC may
replace any unjust or unreasonable contract with a lawful
contract. Permian Basin Area Rate Cases, 390 U. S. 747,
783–784 (1968) (construing identical language in the Natural
Gas Act, 15 U. S. C. § 717d(a)). The statute does not say
anything about a mandatory presumption for contracts,
much less define the burden of proof for overcoming it or
delineate the circumstances for its nonapplication. Cf. ante,
at 530, 547–548. Nor does the statute prohibit FERC from
considering marginal cost when reviewing rates set by con
tract. Cf. ante, at 549–551, and n. 5.
If Congress had intended to impose such detailed con
straints on the Commission’s authority to review contract
rates, it would have done so itself in the FPA. Congress
instead used the general words “just and reasonable” be
cause it wanted to give FERC, not the courts, wide latitude

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Stevens, J., dissenting
in setting policy. As we explained in Chevron U. S. A. Inc.
v. Natural Resources Defense Council, Inc., 467 U. S. 837,
843–844 (1984):
“ ‘The power of an administrative agency to adminis
ter a congressionally created . . . program necessarily
requires the formulation of policy and the making of
rules to fill any gap left, implicitly or explicitly, by Con
gress.’ Morton v. Ruiz, 415 U. S. 199, 231 (1974). If
Congress has explicitly left a gap for the agency to fill,
there is an express delegation of authority to the agency
to elucidate a specific provision of the statute by regula
tion. Such legislative regulations are given controlling
weight unless they are arbitrary, capricious, or mani
festly contrary to the statute. Sometimes the legisla
tive delegation to an agency on a particular question is
implicit rather than explicit. In such a case, a court
may not substitute its own construction of a statutory
provision for a reasonable interpretation made by the
administrator of an agency.” (Footnote omitted.)
Consistent with this understanding of administrative law,
our cases interpreting the FPA have invariably “emphasized
that courts are without authority to set aside any rate
adopted by the Commission which is within a ‘zone of reason
ableness.’ ” Permian Basin, 390 U. S., at 797. But see
ante, at 548 (asserting that “a ‘zone of reasonableness’
test . . . fails to accord an adequate level of protection to
contracts”). This deference makes eminent sense because
“rate-making agencies are not bound to the service of any
single regulatory formula; they are permitted, unless their
statutory authority otherwise plainly indicates, ‘to make the
pragmatic adjustments which may be called for by particular
circumstances.’ ” Permian Basin, 390 U. S., at 776–777.
Despite paying lipservice to this principle, see ante, at 532,
the Court binds the Commission to a rigid formula of the
Court’s own making.

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Having found no statutory text that supports its vision of
the Mobile-Sierra doctrine, the Court invokes the “impor
tant role of contracts in the FPA.” Ante, at 551. But con
tracts play an “important role” in the FPA only insofar as
the statute “departed from the scheme of purely tariff-based
regulation.” Verizon Communications Inc. v. FCC, 535
U. S. 467, 479 (2002). In allowing parties to establish rates
by contract, Congress did not intend to immunize such rates
from just-and-reasonable review. Both United Gas Pipe
Line Co. v. Mobile Gas Service Corp., 350 U. S. 332 (1956),
and FPC v. Sierra Pacific Power Co., 350 U. S. 348 (1956),
the supposed progenitors of the “Mobile-Sierra presump
tion,” make this point in no uncertain terms. See id., at 353
(“The Commission has undoubted power under § 206(a) to
prescribe a change in contract rates whenever it determines
such rates to be unlawful”); Mobile, 350 U. S., at 344 (“[C]on
tracts remain fully subject to the paramount power of the
Commission to modify them when necessary in the public
interest”).1 Accordingly, the fact that the FPA tolerates
contracts does not make it subservient to contracts.
II
Neither of the eponymous cases in the “Mobile-Sierra pre
sumption,” nor any of our subsequent decisions, substanti
ates the Court’s atextual reading of §§ 205 and 206.
As the Court acknowledges, Mobile itself says nothing
about what standard of review applies to rates established
by contract. See ante, at 532–533. Rather, Mobile merely
held that utilities cannot unilaterally abrogate contracts with
1 See also, e. g., Arkansas Louisiana Gas Co. v. Hall, 453 U. S. 571, 582
(1981) (Arkla) (“[T]he clear purpose of the congressional scheme” for rate
filing is to “gran[t] the Commission an opportunity in every case to judge
the reasonableness of the rate”); Permian Basin Area Rate Cases, 390
U. S. 747, 784 (1968) (“[T]he Commission has plenary authority to limit or
to proscribe contractual arrangements that contravene the relevant pub
lic interests”).

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Stevens, J., dissenting
purchasers by filing new rate schedules with the Commis
sion. See 350 U. S., at 339–341. The Court neglects to
mention, however, that although Mobile had no occasion to
comment on the standard of review, it did imply that Con
gress would not have permitted parties to establish rates by
contract but for “the protection of the public interest being
afforded by supervision of the individual contracts, which to
that end must be filed with the Commission and made pub
lic.” Id., at 339.
In Sierra, a public utility entered into a long-term contract
to sell electricity “at a special low rate” in order to forestall
potential competition. See 350 U. S., at 351–352. Several
years later the utility complained that the rate provided too
little profit and was therefore not “just and reasonable.”
The Commission agreed and set aside the rate “solely be
cause it yield[ed] less than a fair return on the net invested
capital.” See id., at 354–355. The Court vacated and re
manded on the ground that the Commission had applied an
erroneous standard. “[W]hile it may be that the Commis
sion may not normally impose upon a public utility a rate
which would produce less than a fair return,” the Court rea
soned, “it does not follow that the public utility may not itself
agree by contract to a rate affording less than a fair return
or that, if it does so, it is entitled to be relieved of its improvi
dent bargain.” Id., at 355. When the seller has agreed to
a rate that it later challenges as too low, “the sole concern of
the Commission would seem to be whether the 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.” Ibid. The Court further
elaborated on what it meant by the “public interest”:
“That the purpose of the power given the Commission
by § 206(a) is the protection of the public interest, as
distinguished from the private interests of the utilities,
is evidenced by the recital in § 201 of the Act that the

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scheme of regulation imposed ‘is necessary in the public
interest.’ When § 206(a) is read in the light of this pur
pose, it is clear that a contract may not be said to be
either ‘unjust’ or ‘unreasonable’ simply because it is un
profitable to the public utility.” Ibid.
Sierra therefore held that, in accordance with the state
ment of policy in the FPA, 16 U. S. C. § 824(a), whether a
rate is “just and reasonable” is measured against the public
interest, not the private interests of regulated sellers. Con
trary to the opinion of the Court, see ante, at 551–552, n. 6,
Sierra instructs that the public interest is the touchstone for
just-and-reasonable review of all rates, not just contract
rates. Sierra drew a distinction between the Commission’s
authority to impose low rates on utilities and its authority
to abrogate low rates agreed to by utilities because these
actions impact the public interest differently, not because the
public interest governs rates set bilaterally but not rates set
unilaterally. When the Commission imposes rates that af
ford less than a fair return, it compromises the public’s inter
est in attracting necessary capital. The impact is different,
however, if a utility has agreed to a low rate because inves
tors recognize that the utility, not the regulator, is responsi
ble for the unattractive rate of return.
Sierra used “public interest” as shorthand for the interest
of consumers in paying “the ‘lowest possible reasonable rate
consistent with the maintenance of adequate service in the
public interest.’ ” Permian Basin, 390 U. S., at 793 (quoting
Atlantic Refining Co. v. Public Serv. Comm’n of N. Y., 360
U. S. 378, 388 (1959)). Whereas high rates directly implicate
this interest, low rates do so only indirectly, such as when
the rate is so low that it “might impair the financial ability
of the public utility to continue its service, cast upon other
consumers an excessive burden, or be unduly discrimina
tory.” Sierra, 350 U. S., at 355. Nothing in Sierra pur
ports to mandate a “serious harm” standard of review, or to
require any assumption that high rates and low rates impose

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symmetric burdens on the public interest. As we later ex
plained in FPC v. Texaco Inc., 417 U. S. 380, 399 (1974), the
Commission cannot ignore even “a small dent in the consum
er’s pocket” because “the Act makes unlawful all rates which
are not just and reasonable, and does not say a little unlaw
fulness is permitted.”
Brushing aside the text of the FPA, as well as the holdings
in Mobile and Sierra themselves, the Court cherry picks lan
guage from Verizon, Arkla, and Permian Basin. Both Ver
izon and Arkla mentioned the Mobile-Sierra line of cases
only in passing, and neither case had anything to do with
just-and-reasonable review of rates. See Verizon, 535 U. S.,
at 479; Arkla, 453 U. S. 571, 582 (1981). Furthermore, the
statement in Permian Basin about “unequivocal public ne
cessity,” 390 U. S., at 822, speaks to the difficulty of establish
ing injury to the public interest in the context of a low-rate
challenge, not a high-rate challenge.2 The Court’s reliance
2 The Court repeatedly quotes the following snippet from the 75-page
opinion in Permian Basin: “The regulatory system created by the Act is
premised on contractual agreements voluntarily devised by the regulated
companies; it contemplates abrogation of these agreements only in circum
stances of unequivocal public necessity.” 390 U. S., at 822 (cited ante, at
534, 550, 553). Like FPC v. Sierra Pacific Power Co., 350 U. S. 348 (1956),
however, Permian Basin made this statement in the course of rejecting
a low-rate challenge. Read in context, the Court’s reference to “unequiv
ocal public necessity” is a loose restatement of Sierra, which required
“evidence of injury to the public interest,” and which underscored how
rarely a utility will be able to demonstrate that a “contract price is so ‘low
as to adversely affect the public interest.’ ” 390 U. S., at 820–821 (quoting
Sierra, 350 U. S., at 355). The Court’s expansive reading of the “unequiv
ocal public necessity” statement cannot be squared with Permian Basin’s
discussion of the Commission’s authority to review rates set by contract:
“Although the Natural Gas Act is premised upon a continuing system of
private contracting, the Commission has plenary authority to limit or to
proscribe contractual arrangements that contravene the relevant public
interests.” 390 U. S., at 784 (citation omitted). Nor can it be reconciled
with Permian Basin’s rejection of the producers’ arguments (1) that the
Commission “wrongly invalidated existing contracts” by imposing a ceiling
on rates, see id., at 781–784, and (2) that the Commission was compelled

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on these few stray sentences calls to mind our admonishment
in Permian Basin: “The Commission’s exercise of its regula
tory authority must be assessed in light of its purposes and
consequences, and not by references to isolated phrases from
previous cases.” Id., at 791, n. 60.
III
Lacking any grounding in the FPA or precedent, the Court
concludes, as a matter of policy, that the Mobile-Sierra pre
sumption is necessary to ensure stability in volatile energy
markets and to reduce regulatory costs. See ante, at 551.
Of course, “the desirability of fostering market-stabilizing
long-term contracts,” ante, at 553, plays into the public inter
est insofar as the “Commission’s responsibilities include the
protection of future, as well as present, consumer interests,”
Permian Basin, 390 U. S., at 798; see also United Gas Pipe
Line Co. v. Memphis Light, Gas and Water Div., 358 U. S.
103, 113 (1958) (“It seems plain that Congress . . . was not
only expressing its conviction that the public interest re
quires the protection of consumers from excessive prices for
natural gas, but was also manifesting its concern for the le
gitimate interests of natural gas companies in whose finan
cial stability the gas-consuming public has a vital stake”).
But under the FPA, Congress has charged FERC, not the
courts, with balancing the short-term and long-term inter
ests of consumers. See Permian Basin, 390 U. S., at 792
(“The court’s responsibility is not to supplant the Commis
sion’s balance of these interests with one more nearly to
its liking, but instead to assure itself that the Commission
has given reasoned consideration to each of the pertinent
factors”).
Moreover, not even FERC has the authority to endorse
the rule announced by the Court today. The FPA does not
indulge, much less require, a “practically insurmountable”
to adopt contract prices as the basis for computing area rates, see id.,
at 792–795.

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Stevens, J., dissenting
presumption, see Papago Tribal Util. Auth. v. FERC, 723
F. 2d 950, 954 (CADC 1983) (opinion for the court by Scalia,
J.), that all rates set by contract comport with the public
interest and are therefore just and reasonable. Congress
enacted the FPA precisely because it concluded that reg
ulation was necessary to protect consumers from deficient
markets. It follows, then, that “the Commission lacks the
authority to place exclusive reliance on market prices.”
Texaco, 417 U. S., at 400; see also id., at 399 (“In subjecting
producers to regulation because of anticompetitive condi
tions in the industry, Congress could not have assumed that
‘just and reasonable’ rates could conclusively be determined
by reference to market price”). For this reason, we have
already rejected the policy rationale proffered by the Court
today:
“It may be, as some economists have persuasively ar
gued, that the assumptions of the 1930’s about the com
petitive structure of the natural gas industry, if true
then, are no longer true today. It may also be that con
trol of prices in this industry, in a time of shortage, if
such there be, is counterproductive to the interests of
the consumer in increasing the production of natural
gas. It is not the Court’s role, however, to overturn
congressional assumptions embedded into the frame
work of regulation established by the Act. This is a
proper task for the Legislature where the public inter
est may be considered from the multifaceted points of
view of the representational process.” Id., at 400 (foot
note omitted).
Balancing the short-term and long-term interests of con
sumers entails difficult judgment calls, and to the extent
FERC actually engages in this balancing, its reasoned deter
mination is entitled to deference. But FERC cannot abdi
cate its statutory responsibility to ensure just and reasonable
rates through the expedient of a heavyhanded presumption.

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This is not to say that the Commission should abrogate any
contract that increases rates, but to underscore that the
agency is “obliged at each step of its regulatory process to
assess the requirements of the broad public interests en
trusted to its protection by Congress.” Permian Basin, 390
U. S., at 791.
IV
Even if, as the Court holds today, the “Mobile-Sierra pre
sumption” is merely a “differing application” of the statu
tory just-and-reasonable standard, FERC’s orders must be
set aside because they were not decided on this basis.
The FERC orders repeatedly aver that the agency is
applying a “public interest” standard different from and dis
tinctly more demanding than the statutory standard. See,
e. g., App. 1198a (“[T]he burden of showing that a contract is
contrary to the public interest is a higher burden than show
ing that a contract is not just and reasonable. . . . The fact
that a contract may be found to be unjust and unreasonable
under [§§ 205 and 206] does not in and of itself demonstrate
that the contract is contrary to the public interest under the
Supreme Court cases”). Indeed, the Commission’s misun
derstanding of our cases is so egregious that the sellers, con
cerned that the orders would be overturned, asked the Com
mission for “clarification that the public interest standard of
review does not authorize unjust and unreasonable rates.”
Id., at 1506a, 1567a. FERC clarified as follows:
“[I]f rates . . . become unjust and unreasonable and the
contract at issue is subject to the Mobile-Sierra stand
ard of review, the Commission under court precedent
may not change the contract simply because it is no
longer just and reasonable. If parties’ market-based
rate contracts provide for the public interest standard
of review, the Commission is bound to a higher bur
den to support modification of such contracts.” Id., at
1506a, 1567a.

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Whereas in Texaco we faulted the Commission for failing to
“expressly mention the just-and-reasonable standard,” 417
U. S., at 396, in these cases FERC refused outright to apply
that standard.3
In addition to misrepresenting FERC’s understanding of
the Mobile-Sierra doctrine as a presumption rather than a
separate standard, the Court overstates the extent to which
FERC considered the lawfulness of the rates. The Court
recognizes, as it must, that the three factors identified in
Sierra are neither exclusive nor “precisely applicable to the
high-rate challenge of a purchaser.” See ante, at 548; Brief
for Respondent FERC 41–42. Although FERC applied
what it termed the “Sierra Three-Prong Test,” App. 1276a,
the Court contends the agency did not err because it also
evaluated the “ ‘totality of [the] circumstances,’ ” see ante,
at 549. But FERC’s totality-of-the-circumstances review
was infected by its misapprehension of the standard “dic
tated by the U. S. Supreme Court under the Mobile-Sierra
doctrine.” App. 1229a.
Whereas the focus of §§ 205(a) and 206(a) is on the reason
ableness of the rates charged, not the conduct of the con
tracting parties, FERC restricted its review to the contract
ing parties’ behavior around the time of formation. See
id., at 1280a–1284a. FERC seems to have thought it was
powerless to conduct just-and-reasonable review unless the
contract was already subject to abrogation based on contract
defenses such as fraud or duress. By including contracts
within the scope of § 206(a), however, Congress must have
concluded that contract defenses are insufficient to protect
the public interest. But see ante, at 547 (holding that the
3 The Court contends that FERC’s application of the Mobile-Sierra doc
trine “should be honored” because it represents the “settled understand
ing of the FPA.” Ante, at 552, n. 6. As explained above, however,
FERC’s interpretation of the FPA (and of our cases construing the FPA)
is “ ‘obviously indefensible,’ ” supra, at 557 (quoting ante, at 535), and is
therefore not entitled to any deference.

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“Mobile-Sierra presumption” applies in all circumstances ab
sent “traditional grounds for . . . abrogation” or “illegal ac
tion” by a contracting party).4 Indeed, nothing in the FPA
or this Court’s cases precludes FERC from considering cir
cumstances exogenous to contract negotiations, including
natural disasters and market manipulation by entities not
parties to the challenged contract.5 FERC’s error is obvi
ous from the face of the orders, which repeatedly state the
Commission’s belief that it could not consider evidence rele
vant to the reasonableness of the contract rates.6
4 The Court quite sensibly instructs FERC that “if it is clear that one
party to a contract engaged in such extensive unlawful market manipula
tion as to alter the playing field for contract negotiations, the Commission
should not presume that the contract is just and reasonable”; and that the
“mere fact that the unlawful activity occurred in a different (but related)
market does not automatically establish that it had no effect upon the
contract—especially given the Staff Report’s (unsurprising) finding that
high prices in the one market produced high prices in the other.” Ante,
at 554. I disagree, however, with the Court’s suggestion that the FPA
restricts FERC’s review of contract rates to these limited criteria.
5 The FPA does not specify how market deficiencies should weigh in
FERC’s review of contract rates. Depending on the circumstances and
how one balances the short-term and long-term interests of consumers,
evidence of “market turmoil” may, as the Court argues, support rather
than detract from a finding that contract rates are just and reasonable.
See ante, at 547. Whether any given contract rate “ultimately benefits
consumers,” ante, at 551, however, is a determination that Congress has
vested in FERC, not this Court.
6 See, e. g., App. 1275a (“[A] finding that the unjust and unreasonable
spot market prices caused forward bilateral prices to be unjust and unrea
sonable would be relevant to contract modification only where there is a
‘just and reasonable’ standard of review. As we have previously con
cluded, the contracts at issue in this proceeding do not provide for such a
standard but rather evidence an intent that the contracts may be changed
only pursuant to the ‘public interest’ standard of review. Under the ‘pub
lic interest’ standard, to justify contract modification it is not enough to
show that forward prices became unjust and unreasonable due to the im
pact of spot market dysfunctions” (footnote omitted)); id., at 1527a (“Com
plainants were required to meet the public interest standard of review,
not the just and reasonable standard of review which could have taken

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568 MORGAN STANLEY CAPITAL GROUP INC. v. PUBLIC
UTIL. DIST. NO. 1 OF SNOHOMISH CTY.
Stevens, J., dissenting
Although the Court and the Commission attempt to recast
FERC’s orders as applying the statutory standard, see ante,
at 542–543; Brief for Respondent FERC 21, under the doc
trine set forth in SEC v. Chenery Corp., 318 U. S. 80 (1943),
“we cannot accept appellate counsel’s post hoc rationaliza
tions for agency action; for an agency’s order must be up
held, if at all, on the same basis articulated in the order by
the agency itself,” Texaco, 417 U. S., at 397 (internal quota
tion marks omitted). Furthermore, even assuming FERC
subjectively believed that it was applying the just-and
reasonable standard despite its repeated declarations to the
contrary, each order must be deemed “so ambiguous that it
falls short of that standard of clarity that administrative or
ders must exhibit.” Id., at 395–396.
In order to get around the Chenery doctrine, the Court
not only mischaracterizes FERC’s orders, but also takes a
more radical tack: It concludes that whatever the rationale
set forth in FERC’s orders, Chenery does not apply because
“the Commission was required, under our decision in Sierra,
to apply the Mobile-Sierra presumption in its evaluation of
the contracts here.” Ante, at 544–545. This point prompts
the Court to comment that “FERC has lucked out.” Ante,
at 544. If the Commission has “lucked out,” it is not only a
purely fortuitous victory, but also a Pyrrhic one. Although
FERC prevails in these cases despite having “offered a justi
fication in court different from what it provided in its opin
ion,” ibid., it has paid a tremendous price. The Court has
curtailed the agency’s authority to interpret the terms “just
and reasonable” and thereby substantially narrowed FERC’s
discretion to protect the public interest by the means it
thinks best. Contrary to congressional intent, FERC no
into account the causal connection between the spot market prices and
forward bilateral market prices”); id., at 1534a (“The Staff Report did not
make any findings regarding the justness and reasonableness of any con
tract rates and any such findings would not be relevant here because the
just and reasonable standard is not applicable”).

554US2 Unit: $U70 [01-05-13 17:52:05] PAGES PGT: OPIN
Cite as: 554 U. S. 527 (2008) 569
Stevens, J., dissenting
longer has the flexibility to adjust its review of contrac
tual rates to account for changing conditions in the energy
markets or among consumers. Cf. Permian Basin, 390
U. S., at 784 (“[A]dministrative authorities must be per
mitted, consistently with the obligations of due process, to
adapt their rules and policies to the demands of changing
circumstances”).
V
The decision of the Court of Appeals for the Ninth Circuit
deserves praise for its efforts to bring the freewheeling
Mobile-Sierra doctrine back in line with the FPA and this
Court’s cases. I cannot endorse the opinion in its entirety,
however, because it verges into the same sort of improper
policymaking that I have criticized in the Court’s opinion.
Both decisions would hobble the Commission, albeit from dif
ferent sides. Congress has not authorized courts to pre
scribe energy policy by imposing presumptions or prerequi
sites, or by making marginal cost the sole concern or no
concern at all. I would therefore vacate and remand the
cases in order to give the Commission an opportunity to eval
uate the contract rates in light of a proper understanding of
its discretion.
I respectfully dissent.