The Supreme Court addressed challenges to FERC's application of the Mobile-Sierra doctrine to long-term power contracts made under FERC-approved market-based rate authority during the California energy crisis.
On June 26, 2008, the Supreme Court of the United States issued an opinion in Morgan Stanley Capital Group, Inc. v. Public Utility District No. 1 of Snohomish County, Washington, Nos. 06-1457, 06-1462, slip op. (2008). The Supreme Court's opinion addressed challenges to the Federal Energy Regulatory Commission's (FERC's) application of the Mobile-Sierra doctrine to long-term power contracts made under FERC-approved market-based rate authority during the California energy crisis.
On petition for review of FERC's order upholding the contracts, the U.S. Court of Appeals for the Ninth Circuit remanded. The court held as follows:
- The Mobile-Sierra presumption only applies where
FERC has had an initial opportunity to review the contracts
and, thus, the presumption does not apply to contracts formed
under market-based tariffs.
- There is a different standard for purchasers to overcome
the Mobile-Sierra presumption, namely, whether the
contract exceeds a "zone of reasonableness."
With respect to the Ninth Circuit's decision, the Supreme Court addressed the Ninth Circuit's holdings. The Supreme Court rejected the Ninth Circuit's holding that the Mobile-Sierra presumption only applies when FERC has had an initial opportunity to review a contract rate without the presumption. The Supreme Court held that the Mobile-Sierra presumption applies to all negotiated wholesale power contracts, regardless of when they are challenged. As such, the doctrine applies to contracts formed under market-based rate authority. The Supreme Court rejected the Ninth Circuit's conclusion that FERC must inquire into whether a contract was formed in a period of market "dysfunction" before applying the Mobile-Sierra presumption.
The Supreme Court also rejected the Ninth Circuit's holding that purchasers have a different standard for overcoming Mobile-Sierra than sellers. The Supreme Court held that the standard for overcoming the Mobile-Sierra presumption is generally the same for sellers and purchasers and, therefore, rejected the Ninth Circuit's "zone of reasonableness" standard for purchasers. The standard is that "the FPA [Federal Power Act] intended to reserve the Commission's contract-abrogation power for those extraordinary circumstances where the public will be severely harmed."
The Supreme Court nevertheless affirmed the Ninth Circuit's remand in order to correct flaws by FERC in its consideration of whether the contracts are in the public interest. The Supreme Court directed FERC to clarify two points:
- Whether FERC determined that the contracts imposed an
excessive burden on consumers "down the line"
relative to the rates they could have obtained (but for the
contracts) after the elimination of the dysfunctional
market—i.e., the current burden and not
just the burden imposed at the very outset of the
contract. The Supreme Court provided that "if the
increase is so great that, even taking into account the
desirability of fostering market-stabilizing long-term
contracts, the rates impose an excessive burden on consumers
or otherwise seriously harm the public interest, the rates
must be disallowed."
- Whether the FERC determined that one party to the
contract did not engage in such extensive unlawful market
manipulation as to alter the playing field for contract
negotiations—i.e., did FERC find a causal
connection between unlawful activity and the contract
rate. The Supreme Court reasoned that the
Mobile-Sierra presumption should not apply when
contract negotiations are affected directly by fraud, duress
and unlawful market activity.
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