Standards for Unilateral Changes to Energy Contracts – U.S. Policy is Changing

Michael Giberson

In an interesting complement to Lynne’s article on the Russia-Ukraine natural gas situation (How Do You Say “Holdup Problem” in Ukrainian?), the folks at the Energy Legal Blog report on a proposed regulatory change by the U.S. Federal Energy Regulatory Commission affecting the ability to unilaterally change the terms of a long-term contract (see: Divided FERC Affirms Primacy of Contract in Proposed New Regulation).

Generally the rates and other terms in contracts subject to FERC jurisdiction are assessed under a “just and reasonable” standard. That means, absent specific contractual provisions to the contrary, a proposed unilateral change to a contract could be accepted by the Commission if the Commission found the change was “just and reasonable” (as that term has been interpreted in decades of regulatory and legal practice).

Under the proposed new policy, FERC would change the default provision for unilateral revisions of contracts from “just and reasonable” to “in the public interest.” While not clearly set out in statue, according to the FERC proposal the “public interest” standard of review has been held to be higher or stricter than the “just and reasonable” standard of review.

The FERC proposal says courts have been divided on the issue of whether a “just and reasonable” or “public interest” standard should prevail when the contract is silent on the issue. By clearly promoting the “public interest” standard, said FERC, it will produce greater certainty. The rule would not prevent parties to a contract from explicitly agreeing to allow unilateral changes under a “just and reasonable” standard.

Commissioner Suedeen Kelly dissented from the proposed, saying that because the term “public interest” is not well established in the law the change will lead to additional controversy and litigation. Kelly also observed that the change could hamper FERC’s ability to change contracts when acting on its own motion or on behalf of third parties. She notes that courts have called the public interest standard “practically insurmountable” in such cases.

The Commission is now accepting comments on the proposal (Docket RM05-35-000), which if implemented would only apply to contracts made after a final rule was formally adopted.

FERC has issued a press release and the complete Notice of Proposed Rule (PDF).

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