Today’s 8-1 opinion in NRG Power Marketing appears to reflect a fairly market-friendly view of the world.
The Federal Power Act, 16 USC §§ 791a et seq., requires that rates for the sale of electricity in interstate commerce be “just and reasonable.” The Court held in United Gas Pipe Line Co. v. Mobile Gas Service Corp, 350 U.S. 332 (1956), and FPC v. Sierra Pacific Power Co., 350 U.S. 348 (1956), that the Federal Energy Regulatory Commission (“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 the “presumption may be overcome only if FERC concludes that the contract seriously harms the public interest.” Morgan Stanley Capital Group v. Pub. Util. Dist. No. 1, 128 S. Ct. 2733, 2737 (2008). Based on the two seminal 1956 cases, this principle is known as “Mobile-Sierra doctrine.”
This case grew out of efforts to resolve New England’s electrical generation capacity shortage. After several attempts, FERC approved a comprehensive settlement agreement that established rate-setting mechanisms for sales of generating capacity. Several parties who objected to the settlement (including some state entities) petitioned for review in the D.C. Circuit, and argued that rate challenges of nonsettling parties shouldn’t be controlled by Mobile-Sierra. A panel of the D.C. Circuit (Rogers, Garland, Silberman) (per curiam) agreed, holding that “when a rate challenge is brought by a non-contracting third party, the Mobile-Sierra doctrine simply does not apply.”
The Court today reversed by a lopsided 8-1 margin. The critical point of the Court’s analysis in the text consists of simply a rhetorical question—“[I]f FERC itself must presume just and reasonable a contract rate resulting from fair, arms-length negotiations, how can it be maintained that noncontracting parties nevertheless may escape that presumption?” (slip op. 9)—and the actual analysis is in a footnote. There, the Court said:
Mobile-Sierra holds sway * * * because well-informed wholesale-market participants of approximately equal bargaining power generally can be expected to negotiate just-and-reasonable rates, and because “contract stability ultimately benefits consumers”. These reasons for the presumption explain why FERC, surely not legally bound by a contract rate, must apply the presumption and, correspondingly, why third parties are similarly controlled by it.
Slip op. 9 n.4 (quoting Morgan Stanley). Thus, the Court extended the market-friendly rationale of Morgan Stanley to the context of third-party challenges. The Court added (in the text) that “[a] presumption applicable to contracting parties only, and inoperative as to everyone else—consumers, advocacy groups, state utility commissions, elected officials acting parens patriae—could scarcely provide the stability that Mobile-Sierra aimed to secure.” Id. at 10.
Significantly, the Court sidestepped an issue flagged by the Solicitor General: whether the rates at issue were indeed “contract rates” that would qualify for the Mobile-Sierra presumption. The SG had argued in its brief that they were not contract rates, but FERC nonetheless had discretion to treat them as if they were. Rather than reaching that issue, or dismissing the case as improvidently granted, the Court left that issue for the D.C. Circuit on remand.
Justice Stevens, who dissented in Morgan Stanley, again dissented, arguing that Mobile-Sierra doctrine is properly viewed as a presumption against letting a party out of its own contract, rather than a presumption reflecting faith in the fairness of market-set rates.
By way of full disclosure, I mooted the prevailing party, but it’s not because I have any “skin in the game”—they just asked first.