Electricity Sales in Interstate Commerce

Below, Scott Johnson, an Akin Gump clerk, analyzes the Court’s decision, handed down on Wednesday, in NRG Power Marketing v. Maine Public Utilities Commission (08-674). To see earlier coverage of the case, check its SCOTUSwiki page. [Note:  Akin Gump represented a party to the settlement agreement in the proceedings before FERC, but was not involved in the proceedings in either the D.C. Circuit or the Supreme Court.  An attorney from Howe & Russell also filed an amicus brief on behalf of the respondents in the case.]

The Federal Power Act (“FPA”) requires rates for the sale of electricity in interstate commerce to be “just and reasonable.”  In United Gas Pipe Line Co. v. Mobile Gas Service Corp. and FPC v. Sierra Pacific Power Co. in 1956 and Morgan Stanley Capital Group v. Pub. Util. Dist. No. 1 of Snohomish County in 2008, the Supreme Court held that the Federal Energy Regulatory Commission (“FERC”) must presume that rates set by freely negotiated wholesale energy contracts meet the “just and reasonable” requirement; FERC thus cannot modify or abrogate such rates unless it concludes that the contract seriously harms the public interest.  This presumption is known as the Mobile-Sierra public interest standard of review.

On January 13, 2010, the Supreme Court held, in NRG Power Marketing, LLC v. Maine Public Utilities Commission (No. 08-674), that the Mobile-Sierra public interest standard is not limited to challenges brought by contracting parties, but instead applies to all challenges to contract rates, regardless of the challenger’s identity.  The Court’s decision will help shield contract rates from regulatory intervention and reduce the likelihood of success of third-party challenges.

The case arose from FERC’s approval in 2006 of a settlement among 115 parties that established a new mechanism for establishing electric generating capacity prices in New England.  Eight parties objected to the settlement; six of those parties then sought review of FERC’s approval in the D.C. Circuit.  The D.C. Circuit held that applying the Mobile-Sierra public interest standard to third-party challenges to contract rates deprives those third parties of their rights under the FPA, and it concluded that “when a rate challenge is brought by a non-contracting third party, the Mobile-Sierra doctrine simply does not apply.”  NRG Power Marketing, LLC, supported by various suppliers, utilities, and industry stakeholders, appealed, arguing that the D.C. Circuit decision threatened the integrity of energy contracts and the stability of the industry.

The Court on January 13 reversed the D.C. Circuit to the extent that its 2008 decision rejected the application of Mobile-Sierra review to third-party challenges in favor of a less stringent “just and reasonable” review.  Chief Justice Roberts and Justices Scalia, Kennedy, Thomas, Breyer, Alito, and Sotomayor joined Justice Ginsburg’s opinion for the Court.  Justice Stevens dissented.

The Mobile-Sierra presumption, wrote Justice Ginsburg, “does not depend on the identity of the complainant,” but instead applies equally to challenges by non-contracting parties.  Morgan Stanley “made clear that the Mobile-Sierra public interest standard is not an exception” to the just and reasonable standard, but an application of that standard in the contract context.  To remain vital, the Mobile-Sierra doctrine must control in challenges to contract rates by non-contracting parties, contracting parties, and FERC itself.  Limiting Mobile-Sierra review to challenges by contracting parties “diminishes the animating purpose of the doctrine,” which is to promote the stability of agreements essential to the health of the industry.

Justice Ginsburg asked rhetorically, “[i]f FERC itself must presume just and reasonable a contract rate resulting from fair, arms-length negotiations, how can it be maintained that noncontracting parties nevertheless may escape that presumption?”  Quoting Morgan Stanley, she responded:  “Mobile-Sierra holds sway . . . because well-informed wholesale-market participants of approximately equal bargaining power generally can be expected to negotiate just-and-reasonable rates, . . . and because ‘contract stability ultimately benefits consumers.’  These reasons for the presumption explain why FERC, surely not legally bound by a contract rate, must apply the presumption and, correspondingly, why third parties are similarly controlled by it.”  Voiding the presumption “as to everyone else—consumers, advocacy groups, state utility commissions, elected officials acting parens patriae—could  scarcely provide the stability Mobile-Sierra aimed to secure.”

Finally, the Court held that certain other issues related to the case were raised before, but not decided by, the D.C. Circuit and “remain open for that court’s consideration on remand.”

Writing alone in dissent, Justice Stevens, who also dissented in Morgan Stanley, described the majority decision as “a quantum leap from the modest origin” of the Mobile-Sierra doctrine and argued that a higher bar for third-party challenges in fact will hinder protection of the public interest.  And he lamented the process by which this “third chapter in a story about how a reasonable principle, extended beyond its foundation, becomes bad law.”  The Mobile-Sierra doctrine, Stevens wrote, was “designed initially to protect the enforceability of freely negotiated contracts against parties who seek a release from their obligations”; it was certainly not intended to place additional burdens on third parties “exercising their statutory right [under the FPA] to object to unjust and unreasonable rates.”  While it made sense “to require a contracting party to show something more than its own desire to get out of what proved to be a bad bargain before could abrogate [it],” Stevens argued that “[i]t is not sensible, nor authorized by the [FPA], for the court to change the de facto standard of review [for contract rates] based solely on the court’s view that contract stability should be preserved unless there is extraordinary harm to the public interest.”  Quoting from his Morgan Stanley dissent, Justice Stevens agreed that “stable energy markets are important to the public interest, but ‘under the FPA, Congress has charged FERC, not the courts, with balancing the short-term and long-term interests of consumers’ under the just and reasonable standard of review.”