On February 15, 2013, the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) issued an order upholding FERC’s determination that the rates stemming from an ISO New England, Inc. (“ISO-NE”) Forward Capacity Market are not contractual, although challenges to the forward capacity market rates are subject to the same Mobile-Sierra public interest (as opposed to the just and reasonable) standard as contracted rates. This case is significant because the D.C. Circuit upheld the use of a legal standard normally applied in contractual situations to rates produced by tariff provisions.
The case originated from a settlement agreement between ISO-NE and interested parties regarding the provision of capacity supplies in the New England region. The settlement agreement featured a Forward Capacity Market, and provided that any challenges to the rates set by the Forward Capacity Market, by parties or non-parties, would be reviewed under the Mobile-Sierra “public interest” standard. Based on two eponymous Supreme Court cases, the Mobile-Sierra doctrine is generally considered to be a difficult standard to overcome—it holds that FERC may modify the rates or conditions of a negotiated bilateral contract only if they are found to be contrary to the “public interest.” The settlement, including specifically the application of the Mobile-Sierra standard to non-contracting parties, was challenged by several objectors. The case was eventually reviewed by the Supreme Court, which held 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 remanded back to the D.C. Circuit the issue of whether the Forward Capacity Market rates were in fact contract rates and entitled to the Mobile-Sierra standard of review. (See January 18, 2010 edition of the WER.)
FERC argued that the Forward Capacity Market rates were not equivalent to contract rates, but that FERC had the discretion to enforce the settlement agreement’s provision that required the use of the Mobile-Sierra public interest standard for reviewing rates. The D.C. Circuit remanded the issue back to FERC for further consideration, noting that it had not articulated a justification for this position in its underlying orders. (See November 12, 2012 edition of the WER.)
On remand, FERC reiterated its position that Forward Capacity Market rates were not technically contracts, but because they possess certain characteristics that are similar to contracts, FERC was using its discretion to enforce the settlement agreement’s Mobile-Sierra provision. The New England Power Generators Association Inc. (“NEPGA”) challenged FERC’s decision, agreeing that the Mobile-Sierra standard applied, but that FERC should have determined that the Forward Capacity Market rates were contracts. The court dismissed NEPGA’s petition for lack of standing because the desired outcome, application of the Mobile-Sierra standard, had been achieved and NEPGA had not been injured by the decision. The Maine Public Utilities Commission and the Connecticut and Massachusetts attorneys general offices collectively challenged the decision, arguing that the Forward Capacity Market results are not contract rates and that without a contract rate, FERC cannot apply the Mobile-Sierra standard. The D.C. Circuit dismissed the state interests’ arguments, claiming that they are based on the misconception that because a contract rate requires the application of the Mobile-Sierra presumption, the absence of a contract rate precludes it.
The D.C. Circuit explained that the Supreme Court had previously clarified that the Mobile-Sierra doctrine’s public interest standard is an example of one method by which FERC may determine that a rate is just and reasonable, and not a standard that is separate from the requirement that rates be just and reasonable. The D.C. Circuit distilled the question before it as being simply “whether FERC exceeded the bounds of its considerable discretion by adopting the public interest standard for deciding whether a given Forward Capacity Auction rate is just and reasonable.” Based on reasoning provided by FERC and its decision being a reasonable choice, the D.C. Circuit found that FERC had not exceeded its discretion.
To view a copy of the order, click here.