On November 5, 2010, the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) issued its remand opinion in Maine Public Utilities Commission v. FERC.  The D.C. Circuit remanded the case back to the Federal Energy Regulatory Commission (“FERC” or the “Commission”) for further consideration of the Commission’s position that, while auction rates may not be contract rates, the Mobile-Sierra doctrine nevertheless applies.

As described in the D.C. Circuit’s order, the origins of the case stem from certain problems in the ISO-New England’s (“ISO-NE”) capacity market.  After a lengthy process, the ISO-NE and most parties were able to reach a settlement agreement addressing the capacity issues.  The D.C. Circuit noted that “[t]he key feature of the settlement agreement is the Forward Capacity Market, which entails annual auctions that set the rates for electricity ‘capacity’ (the option of buying a quantum of power).”  The settlement agreement provided that any challenges to its terms would be decided under “‘the highly-deferential Mobile-Sierra “public interest” standard . . .’”

In its initial decision in this case, issued in 2008, the D.C. Circuit held that the Mobile-Sierra standard of review did not apply to parties who were not signatories to a contract.  However, two subsequent Supreme Court rulings clarified the approach to the Mobile-Sierra doctrine.  First, in Morgan Stanley Capital Group Inc. v. Public Utility District No. 1 of Snohomish County, the Supreme Court stated that only the just and reasonable standard applied to the review of utility rates.  Under Mobile-Sierra, the presumption is that market forces enable the parties to a contract to negotiate a reasonable rate.  The Supreme Court held that under Mobile-Sierra FERC may only abrogate an otherwise valid contract if the contract harms the public interest. 

Next, in NRG Power Marketing, LLC, v. Maine Public Utilities Commission, issued earlier this year, the Supreme Court directly addressed the application of Mobile-Sierra to the ISO-NE settlement agreement. (see January 18, 2010 edition of the WER)   The Supreme Court concluded that the Mobile-Sierra standard of review applies even when a contract rate is challenged by an entity who is not a party to the contract.  The Supreme Court did not reach, but rather remanded back to the D.C. Circuit, the issue of whether the Forward Capacity Market auction rates that result from the settlement agreement are entitled to the Mobile-Sierra standard of review. 

During the remand proceedings, the Commission proffered that, while auction rates are more analogous to cost-based rates, they should nevertheless be reviewed under the Mobile-Sierra standard.  However, since the Commission never articulated this position in an order, the D.C. Circuit remanded back to FERC for further consideration, noting “[h]owever FERC justifies its decision to approve the Mobile-Sierra clause, FERC must explain why, if the auction rates are not contract rates, they are entitled to Mobile-Sierra treatment.”

Currently, the D.C. Circuit’s mandate to FERC has been suspended until seven days after all opportunities to request rehearing have passed.  A copy of the D.C. Circuit’s order can be found here.