On January 13, 2010, the United States Supreme Court (“Supreme Court”) decision reversed the United States Court of Appeals for the D.C. Circuit (“DC Circuit”), holding that the Mobile-Sierra public interest standard applies to noncontracting parties. As such, the Supreme Court’s decision (“NRG v. Maine PUC”) returns the same Federal Energy Regulatory Commission (“FERC” or “Commission”) standard of review to both contracting parties and non-contracting parties.
Under the Court’s Mobile-Sierra doctrine, FERC must presume that a rate set by a “freely negotiated wholesale-energy contract” meets the statutory “just and reasonable” requirement. This “presumption may be overcome only if FERC concludes that the contract seriously harms the public interest.”
The case at issue before the Supreme Court stems from FERC ordering settlement negotiations for 115 parties regarding the forward-capacity market in New England. Since only eight parties did not agree to the settlement, the Commission approved the settlement on June 16, 2006. The new forward capacity market allowed annual forward capacity auctions (“FCA”). The resulting rates and transition payments from the FCA would then be prorated across New England utilities. Additionally, the settlement stated that any challenges to the settlement, including FCA rates, would have to face the stringent “public interest” standard of review – the Mobile-Sierra standard – regardless of who brought the challenge.
The Maine Public Utilities Commission (“Maine PUC”), along with the attorneys general for Connecticut and Massachusetts, appealed to the DC Circuit. The DC Circuit agreed with the Maine PUC and held that non-parties to an agreement must be held to the Federal Power Act’s (“FPA”) requirement that rates for the wholesale sale of electricity in interstate commerce must meet a “just and reasonable” standard. Thus, the DC Circuit concluded that the Mobile-Sierra doctrine did not apply. After the DC Circuit issued its decision, the Supreme Court decided Morgan Stanley Capital Group, Inc. v. Public Utility District No. 1, 128 S. Ct. 2733 (2008) (“Morgan Stanley”). In Morgan Stanley, the Supreme Court among other things elaborated on the Mobile-Sierra doctrine, holding that the just and reasonable standard is the only statutory standard for assessing wholesale electricity rates, whether set by contract or tariff. Thus, the presumption that rates are just and reasonable can only be overcome if the Commission concludes that the contract seriously harms the public interest.
Given the reasoning in Morgan Stanley, NRG Power Marketing LLC (“NRG”) appealed the DC Circuit’s decision. Both FERC and NRG expressed concern that too lenient a standard for allowing challenges to a contract could lead to market instability. Meanwhile, the Maine PUC also argued that the FCA rates are not standard contract rates, and that non-parties are bound by them. Connecticut Attorney General Richard Blumenthal added that it is unfair to bind third-parties to an agreement that they did not sign, and that the DC Circuit was correct in its ruling.
In writing for the majority (only Justice Stevens dissented), Justice Ginsburg admitted that the Morgan Stanley decision did not decide the same question presented in NRG v. Maine PUC. However, Justice Ginsburg stated that Morgan Stanley’s reasoning strongly suggests that the DC Circuit’s decision should be reversed. First, Justice Ginsburg stated that the Mobile-Sierra public interest standard is not independent of the just and reasonable standard. Instead, the public interest standard defines “what it means for a rate to satisfy the just-and-reasonable standard in the contract context.” Thus, the Court found “if 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.”
Second, Justice Ginsburg insisted that third-party interests are not overlooked by the Mobile-Sierra doctrine. Instead, the doctrine states that the Commission must reject a contract that seriously harms the consuming public. Finally, the Mobile-Sierra doctrine promotes a stable supply of agreements that is healthy for the energy industry. Justice Ginsburg reasoned that if the Mobile-Sierra presumption only applied to contracting parties, that stability would be broken.
Interestingly, the Supreme Court did not address the issue whether the settlement agreement in question constituted a tariff rate or a rate established between two parties through a contract. Instead, Justice Ginsburg stated that the question if the rates at issue were “contract rates” and if so, if the Commission could treat them as contract rates, was not decided by the DC Circuit. As such, the DC Circuit can consider the question on remand.
The full order, NRG Power Marketing, LLC v. Main Public Utilities Commission, on the Supreme Court’s website at: http://www.supremecourtus.gov/opinions/09pdf/08-674.pdf