The Mobile-Sierra Doctrine and Non-Contracting Parties

By Anna Christensen
on Nov 2, 2009 at 5:55 pm

Below, Akin Gump’s Scott Johnson previews NRG Power Marketing, LLC v. Maine Public Utilities Commission, one of the three cases to be heard by the Supreme Court on Tuesday, November 3. Check the NRG Power Marketing, LLC v. Maine Public Utilities Commission (08-674) SCOTUSwiki page for additional updates.

Background

The Federal Power Act (“FPA”) requires rates for the wholesale sale of electricity to be “just and reasonable.” In United Gas Pipe Line Co. v. Mobile Gas Service Corp. (1956) and FPC v. Sierra Pacific Power Co. (1956), as interpreted in Morgan Stanley Capital Group v. Public Utility District No. 1 of Snohomish County (2008), the Supreme Court held that the Federal Energy Regulatory Commission (“FERC”) must presume that rates established by contract (as opposed to those established by a unilateral rate filing) are just and reasonable. There are two limited exceptions to this general presumption: if FERC concludes that the contract “seriously harms the public interest” or if the parties to the contract agree that the Mobile-Sierra public interest standard will not apply, then FERC may abrogate or modify contract rates. Tomorrow in No. 08-674, NRG Power Marketing, LLC v. Maine Public Utilities Commission, the Court will address whether the Mobile-Sierra public interest standard applies when a contract rate is challenged by an entity that was not a party to the contract.

This case arose from a FERC proceeding in which ISO New England Inc., the bulk power system operator for New England, reformed its mechanism for procuring electric generating capacity (i.e., the option to purchase energy rather than wholesale energy itself). After two years of litigation, all but eight of the 115 parties to the proceeding reached a settlement that created a Forward Capacity Market (“FCM”) for New England, whereby annual Forward Capacity Auctions (“FCA”) would both establish prices for capacity for one-year periods three years in the future and set transition payments for existing capacity resources during the three-year period after the first FCA. The costs arising from the FCA rates and transition payments would be prorated across New England utilities serving end-use customers based on their load. The settlement also made all future challenges to the FCA rates and transition payments subject to Mobile-Sierra public interest review, regardless of the identity of the challenger, but provided that FERC would use the “just and reasonable” standard to review the terms of the settlement.

FERC issued an order approving the FCM settlement. It reasoned that it could still protect non-contracting parties and contract stability by applying the public interest standard to future challenges to the FCM rates and transition payments. FERC subsequently denied rehearing of that order; in so doing, it rejected arguments that (1) rates covered by the settlement’s Mobile-Sierra provision are not “contracts” to which Mobile-Sierra review applies; and (2) the public interest standard cannot apply to rate challenges by non-contracting parties.

In an opinion issued prior to the Court’s opinion in Morgan Stanley, the D.C. Circuit largely upheld FERC’s orders, but it also held that that stringent, “nearly insurmountable” Mobile-Sierra review applies only when a party to a contract attempts a unilateral rate change; it does not apply when a third party challenges a contract rate. In other words, the public interest standard does not apply to future challenges to the FCA rates and transition payments by non-contracting parties; such challenges must instead be reviewed under the FPA’s just and reasonable standard. In the D.C. Circuit’s view, applying the public interest standard would deprive third parties of their statutory right to challenge rates as unjust and unreasonable. Moreover, it reasoned, contracts cannot bind non-parties, and the Mobile-Sierra doctrine protects contract stability only as between counterparties. After the D.C. Circuit denied rehearing, NRG Power Marketing, LLC and various affiliates (together, “NRG”) filed a petition for certiorari, which the Court granted on April 27, 2009.

Brief of Petitioners

First, NRG asserts that Morgan Stanley affirmed the Mobile and Sierra holdings that contract rates set by sophisticated parties are presumptively just and reasonable and that FERC can modify such rates only where the contract seriously harms the public interest – for example, it impairs a utility’s ability to provide service, casts an excessive burden on consumers, or is unduly discriminatory. The decision below, NRG argues, would enable anyone to challenge a contract rate under a standard that is less stringent than the one that would apply to a challenge by a party – even if the challenger is only indirectly affected by the rate. If the public interest standard protects contract stability only as between counterparties, it provides no stability at all.

Second, NRG argues that the D.C. Circuit’s decision is inconsistent with the Court’s holding in Morgan Stanley that public interest review is merely an application of the “just and reasonable” standard and does not deprive any challenger of just and reasonable review. FERC must presume contract rates are just and reasonable regardless of the challenger. The D.C. Circuit’s decision, NRG continues, cannot be reconciled with the rationales underlying Morgan Stanley, which are implicated whenever FERC considers contract rate modification. These rationales –that rates agreed to by sophisticated parties are presumptively reasonable, that such rates benefit all consumers, and that contract stability is essential to the industry – are independent of the challenger’s identity.

Third, NRG argues, public interest review only restricts FERC’s authority to modify a contract rate, rather than any entity’s ability to challenge such a rate. That authority does not depend on the challenger, but instead is based on harm to the public interest – including non-party interests. Indeed, even for party challenges, FERC can grant relief only when the challenger’s private interest coincides with the public interest. The D.C. Circuit’s decision stands the Mobile-Sierra doctrine on its head by exempting from public interest review challenges by the very public it protects.

Fourth, NRG argues, the D.C. Circuit misunderstood basic contract law. Contracts do not “bind” non-parties merely because they indirectly affect such parties by, for example, affecting utility costs and thus retail rates. Rather, the existence of a contract is merely a fact that makes the rate more likely to be reasonable. Applying public interest review to a non-party challenge does not “bind” that non-party to the contract. To the extent that they are even relevant, NRG explains, basic contract issues cannot be reconciled with the D.C. Circuit’s decision because non-parties lack standing to challenge contracts at all.

Finally, NRG argues, the Court need not address the respondents’ argument that, even if public interest review does apply to non-party challenges, the FCA rates and transition payments are not “contract rates.” Rather, the rates arose from the FCM settlement, which by its terms was subject to just and reasonable review. Because the settlement provided for Mobile-Sierra review only of future challenges to the FCA rates and transition payments, the Court need not now decide whether those rates are “contract rates” subject to Mobile-Sierra review. In any event, NRG contends, FCA rates establish binding, voluntary contracts subject to Mobile-Sierra review.

Respondents’ Brief

The Maine Public Utilities Commission, several New England attorneys general, one public utility, and two consumer groups (together, “MPUC”) frame the issue as whether FERC can approve a contested settlement that deprives non-contracting entities of the right to challenge contract rates as unjust and unreasonable except under the public interest standard of review.

First, MPUC asserts both that the FCM rates are not established by “run-of-the-mill” contracts and that non-contracting parties are more than “indirectly affected” by those rates. Because the FCA rates apply to all New England market participants, the settlement binds them to the same degree as the parties. Mobile-Sierra review of non-party challenges thus would enable contracting parties to use the Mobile-Sierra doctrine to bind third parties to rates to which they never agreed. MPUC further argues the FCA rates are not contract rates to which public interest review applies – a position that, it contends, FERC has acknowledged. Instead, because the rates apply to all to New England market participants, they are tariff rates. Making tariff rates subject to public interest review would subsume all tariff rates under the Mobile-Sierra doctrine, eviscerating the Morgan Stanley distinction between contract and tariff rates.

Second, MPUC argues, even if the FCA rates are “contract” rates, public interest review does not apply to non-party challenges. While the Mobile-Sierra doctrine properly limits the ability of a contract party to bring a unilateral challenge, non-parties remain entitled to “just and reasonable” review under the FPA because the Mobile-Sierra doctrine presupposes a willing buyer and willing seller, contract rates are presumptively reasonable only as between counterparties, and contracts cannot bind non-parties. MPUC contends that the respondents, as non-settling parties, did not relinquish their statutory right to challenge rates under the just and reasonable standard.

Third, although FERC contends that it has authority to approve contested settlements when it believes that they will produce just and reasonable rates, MPUC counters that FERC in fact lacks discretion to apply public interest review outside the contract context. Contract rates, MPUC argues, are not inherently reasonable, but remain subject to just and reasonable review – a standard, MPUC contends, that is separate from public interest review. FERC cannot, MPUC argues, “rewrite” the FPA based on what it believes will produce just and reasonable rates and cannot abrogate statutory rights by determining that public interest review applies outside the contract context. If there is no contract, any challenge must be reviewed under the just and reasonable standard of the FPA.

Finally, MPUC argues that the D.C. Circuit decision does not threaten reasonable expectations of contract stability, industry stability, or electric reliability. The settling parties could not have reasonably expected that the FCA rates would be free from uncertainty or immune to litigation, because not all of the parties to a complex, multiparty proceeding agreed to the settlement. Moreover, even in light of any purported litigation uncertainty that might arise from just and reasonable review of non-party challenges, capacity in New England is increasing, capacity prices are decreasing, and entities in other circumstances continue to enter into rate contracts, notwithstanding that public interest review does not apply. FERC has applied the public interest standard to non-party challenges only since 2002, and it has failed to do so consistently. Yet, the electric industry was stable before the shift and remains so. In addition, under just and reasonable review, non-party challengers still must prove a contract rate is not just and reasonable; even applying this standard, FERC has resisted abrogating private contracts. Non-parties, MPUC argues, should not be forced to prove grave public necessity to obtain relief from unjust and unreasonable rates to which they did not agree.

FERC Brief

In its brief on the merits, FERC argues that, although it is not compelled by the FPA to do so, it permissibly exercised its discretion to approve the contested settlement making future challenges to the FCM rates subject to Mobile-Sierra review because the Mobile-Sierra doctrine fully applies to all challenges to contract rates regardless of the challenger, Congress did not specify the precise standard of review FERC is to apply to contract rates under the FPA, and the public interest standard is an application of, and thus consistent with, the just and reasonable standard. FERC further argues that it acted reasonably in approving the FCM settlement because the overall result of the settlement is just and reasonable.