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October Term, 2009

January 13, 2010

Today the Supreme Court issued a decision, described below, of interest to the business community.

Federal Power Act—Third Party Rate Challenges

NRG Power Marketing, LLC v. Maine Public Utilities Commission, No. 08-674 (previously discussed in the April 27, 2009 docket report).

The Supreme Court held today that the presumption that rates established by a freely negotiated wholesale-energy contract are “just and reasonable” applies fully when a contractual rate is challenged by an entity that is not a party to the contract at issue.

The Federal Power Act (“FPA”), 16 U.S.C. § 824 et seq., gives the Federal Energy Regulatory Commission (“FERC”) exclusive authority to regulate the transmission and sale for resale of electricity in interstate commerce. Section 206 of the Act, 16 U.S.C. § 824d\d(a), requires that the rates for any such services be “just and reasonable.” Under the well-established Mobile-Sierra doctrine, however, FERC must “presume that the rate set out in a freely negotiated wholesale-energy contract meets the ‘just and reasonable’ requirement imposed by law,” and that “presumption may be overcome only if FERC concludes that the contract seriously harms the public interest.” Morgan Stanley Capital Group Inc. v. Pub. Util. Dist. No. 1, 128 S. Ct. 2733, 2737 (2008).

In this case, FERC approved a comprehensive settlement agreement that established a rate-setting mechanism for sales of energy capacity in New England. Third-party objectors to the settlement sought review in the D.C. Circuit, contending that the rate challenges of non-settling parties should not be controlled by the Mobile-Sierra doctrine, as the settlement agreement provided. The court of appeals held that the Mobile-Sierra presumption applied “as between the contracting parties,” but was inapplicable “when a rate challenge is brought by a non-contracting third party.” 520 F.3d 464, 478.  

Today, the Supreme Court held that the Mobile-Sierra presumption applies, not just to disputes between contracting parties, but to challenges brought by non-contracting parties as well. The Court concluded that the doctrine is not independent of the FPA’s “just and reasonable” standard, but instead defines “what it means for a rate to satisfy the just-and-reasonable standard in the contract context.” Slip op. 8. Because it directs FERC to reject a contract rate that “seriously harms the consuming public,” the Court observed, application of the Mobile-Sierra doctrine does not neglect third-party interests. Id. at 9. Finally, the Court reasoned, confinement of the doctrine to rate challenges by contracting parties would “diminish” the “animating purpose of the doctrine: promotion of the stability of supply arrangements which all agree is essential to the health of the energy industry.” Ibid. (internal quotation marks omitted). However, the Court remanded to the D.C. Circuit the question of whether the rates in this case—which were established by the settlement of a proceeding before FERC—qualify as “contract rates” for purpose of applying the doctrine. Id. at 10-11.

Justice Stevens dissented. In his view, application of the “serious harm” standard in this context imposes an unjustifiable burden on third parties exercising their statutory right to object to rates that they never agreed to.

As a result of the Court’s decision, third parties seeking to overturn rates set by wholesale-energy contracts must demonstrate that the contract terms will “seriously harm” the consuming public. Faced with this high bar, non-contracting parties may be less inclined to bring such suits. Whether the Mobile-Sierra doctrine applies to rates established by a settlement of a proceeding before FERC, however, remains an open question.

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