Energy Law

Divided Supreme Court Stirs Ashes of the 2000-01 California Energy Market Conflagration

By Haley Mittler

A divided US Supreme Court in June 26 opinions argued over the meaning and existence of the eponymously named, half-century-old Mobile-Sierra doctrine.  Morgan Stanley Capital Group, Inc. v. Public Utility District No. 1 of Snohomish County ruled on consolidated buyer challenges to the prices in long-term wholesale energy contracts entered during the 2000-01 western energy market meltdown.  The buyers? complaints were initially raised at the Federal Energy Regulatory Commission, which denied the challenges on the ground that the Federal Power Act authorized FERC to change the terms of a bilateral contract only if the contract were improperly induced (for example, through fraud or duress) or found to be contrary to public (as opposed to private) interest.  The buyers had made neither showing, FERC ruled.  On appeal, the United States Court of Appeals for the Ninth Circuit reversed on the ground that Mobile-Sierra?s presumption of lawfulness never attached to the contracts since FERC had not at the outset reviewed and found the market-based prices at issue to be just and reasonable.  Even if the presumption did attach, the Ninth Circuit held that FERC erred by holding a buyer to the same high burden of proof that a seller confronts in proving a contract violates the public interest.  According to the Ninth Circuit, a buyer challenging a wholesale power price as too high confronts a lesser burden than a seller challenging a price as too low, and need show only that a contract price exceeds a ?zone of reasonableness? defined as marginal cost.

Justice Scalia?s (5-2) majority decision, with Justice Ginsburg concurring, Stevens and Souter dissenting (Chief Justice Roberts and Justice Breyer did not participate), affirmed FERC?s determination that Mobile-Sierra applies to the challenged contracts and rejected the Ninth Circuit?s interpretation of Mobile-Sierra as an ?estoppel doctrine? that attaches only after a necessary threshold determination of price justness and reasonableness is made and thereafter ?prevents [FERC] from modifying the rates absent serious future harm to the public interests.?  It also affirmed FERC's conclusion that its contract abrogation authority is confined to "extraordinary circumstances where the public will be severely harmed" and rejected the Ninth Circuit?s asymmetric interpretation of Mobile-Sierra as requiring only that a challenging buyer show that price exceeds a marginal-cost zone of reasonableness.  Weirdly, however, the majority went on to affirm the Ninth Circuit decision to send the buyers' complaints back to FERC on remand.  It did so for two reasons.

First, the majority erroneously conjectured that FERC ?appears . . . to have looked simply to whether consumers? rates increased immediately upon the relevant contracts? going into effect, rather than determining whether the contracts imposed an excessive burden on consumers ?down the line . . . .?  Not only is this factually wrong ? FERC made explicit findings as to the rate effects over the life of many of the challenged contracts ? it is also inconsistent with the majority?s validation of market "stabilizing force of contracts? that Mobile-Sierra enforces by "holding sophisticated parties to their bargains? over time.

Second, the majority explained that Mobile-Sierra?s presumption that a contract is just and reasonable should not attach ?if it is clear that one party to a contract engaged in such extensive unlawful market manipulation as to alter the playing field for contract negotiations? because (as in instances of fraud or duress) no contract is legally formed in the first place under such circumstances.  The Court directed FERC on remand to explain ?whether it found the evidence inadequate to support the claim that respondents? alleged unlawful activities affected the contracts at issue here.?  The referenced allegations, which are sure to be repeated, come from a 2003 FERC staff report that the agency never adopted and which has since been called into question for using allegedly falsified data.

 The majority decision is noteworthy in two additional respects.  First both the majority held and dissent agreed that the three showings that a rate violates the public interest ? impairs the financial ability of a public utility to provide service, excessively burdens consumers, or is unduly discriminatory ? are not exclusive.  And second, at one point the majority seems to invite a facial challenge to FERC?s market-base ratemaking ??We reiterate that we do not address the lawfulness of FERC?s market-based-rates scheme, which assuredly has its critics? ? notwithstanding the recent decision of the US Court of Appeals for the DC Circuit rejecting such a challenge. 

Justice Stevens? dissenting opinion questions whether there is a Mobile-Sierra doctrine or public interest standard independent of the Federal Power Act requirement that rates be just and reasonable and faults both the Ninth Circuit and the majority for ?hobbl[ing]? FERC from different sides in making a required determination whether contracts are just and reasonable.

Full post as published by Energy Legal Blog on June 28, 2008 (boomark / email).