Supreme Court Finds Mobile-Sierra Public Interest Standard Applies to Noncontracting Parties
On January 13, 2010, the U.S. Supreme Court issued a decision holding that the Mobile-Sierra public interest standard applies to third parties that were not parties to the underlying wholesale energy contract. NRG Power Mktg., LLC v. Maine Pub. Util. Comm’n, No. 08-674, 2010 WL 98876 (U.S. Jan. 13, 2010) (NRG v. Maine PUC). This decision upholds the purpose of the Mobile-Sierra doctrine, which is to create additional stability in wholesale energy contract markets and ultimately provide more certainty for both buyers and sellers.
The Mobile-Sierra Public Interest Standard
Under the Federal Power Act (FPA), 16 U.S.C. § 791 et seq., the Federal Energy Regulatory Commission (FERC or Commission) has authority to regulate sales of electricity in interstate commerce subject to, inter alia, a requirement that the rates for wholesale sales of electric energy be just and reasonable. 16 U.S.C. § 824d(a). Regulated utilities are allowed to set rates unilaterally by tariff or bilaterally by contract. The Mobile-Sierra doctrine originated in twin decisions issued in 1956 that concerned rates set by contract under the Natural Gas Act (NGA) and the FPA, which have nearly identical rate-making requirements and standards. United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332 (1956); FPC v. Sierra Pac. Power Co., 350 U.S. 348 (1956). In Mobile, the Court set forth the proposition that a pipeline company (or utility) could not abrogate a lawful contract by simply filing a new tariff. In Sierra, the Court addressed the question of how the Commission should evaluate whether a contract rate is just and reasonable and determined that a contract could be overturned only if the rate was “so low as to adversely affect the public interest.”
The Court later explained that rate regulation established by the FPA “contemplates abrogation of these agreements only in circumstances of unequivocal public necessity.” Permian Basin Area Rate Cases, 390 U.S. 747, 822 (1968). In a recent case, Morgan Stanley Capital Group Inc. v. Pub. Util. Dist. No. 1 of Snohomish County, 128 S. Ct. 2733 (2008), the Court confirmed that under Mobile-Sierra, FERC must presume that a freely negotiated rate in a wholesale energy contract meets the just and reasonable standard and that the presumption may be overcome only if FERC concludes that the contract seriously harms the public interest.
NRG v. Maine PUC
The NRG case involves a comprehensive settlement agreement that establishes a rate-setting mechanism for sales of energy capacity in New England. The settlement was reached after four months of negotiations, with only eight of the 115 negotiating parties opposing the settlement. Those opposing the settlement took exception to, among other things, a provision in the settlement agreement establishing that challenges to payments and prices will be adjudicated under the public interest standard of review set forth in Mobile-Sierra. The opponents prevailed in the U.S. Court of Appeals for the D.C. Circuit, which held that the Mobile-Sierra standard applies only to contracting parties. Maine Pub. Util. Comm’n v. FERC, 520 F.3d 464, 478 (2008) (per curiam).
The U.S. Supreme Court reversed, holding that the Mobile-Sierra presumption applies to challenges to contract rates brought by noncontracting third parties. According to the Court, the Mobile-Sierra doctrine, which “directs the Commission to reject a contract rate that seriously harms the consuming public,” is “framed with a view” to protecting third-party interests. Since FERC itself must presume that a contract rate resulting from fair, arm’s-length negotiations is just and reasonable, the Court queried how noncontracting parties could escape the same presumption. In addition, the Court stated that confining the doctrine to challenges by contracting parties would diminish the “animating purpose” of the doctrine—to promote the stability of supply arrangements, which are essential to the energy industry.
The Court remanded the case to the D.C. Circuit to determine whether the settlement rates at issue qualify as “contract rates” and, if not, whether FERC had discretion to treat them as analogous to contract rates. Justice Stevens dissented.
Implications for All Industry Participants
NRG v. Maine PUC may certainly be seen as good for buyers and sellers in wholesale energy markets since it does much to preserve the sanctity of their contracts and establish rate stability. Third parties that oppose the contracts, however, will face more difficulty, as they have the burden of proving that the contract terms will cause serious harm to the consuming public. It remains to be seen, however, whether rates established in a settlement at FERC are subject to the Mobile-Sierra doctrine.