The decades old Mobile-Sierra doctrine has captured the attention of decision makers and energy law practitioners in great measures recently, prompted by the examination of various nuances long overdue for clarification.[1] Under the Mobile-Sierra doctrine, the Federal Energy Regulatory Commission (“FERC” or “Commission”) must presume that an electricity rate set in a freely negotiated wholesale-energy contract meets the “just and reasonable” requirement of the Federal Power Act, and the presumption may be overcome only if FERC concludes that the contract seriously harms the public interest.  Many have viewed this standard as “practically insurmountable.”

In Morgan Stanley Capital Group, Inc. v. Public Utility District No. 1[2] (“Morgan Stanley”) and NRG Power Marketing, LLC v. Maine Public Utilities Commission[3] (“MPUC”), the United States Supreme Court granted certiorari to review several questions concerning the scope of the Mobile-Sierra doctrine:  (1) does the presumption apply only when FERC has had an initial opportunity to review a contract rate without the presumption? (2) does the presumption impose as high a bar to challenges by purchasers of wholesale electricity as it does to challenges by sellers? and (3) is the Mobile-Sierra presumption limited to challenges to contract rates brought by contracting parties, or does it apply as well to challenges initiated by non-contracting parties?

In Morgan Stanley, the respondents were western utilities that purchased power under long-term contracts during the Western Energy Crisis of 2000-2001 under market-based rate tariffs.  The contracts between the parties included rates that were very high by historical standards.  After the crisis passed, the respondents requested that FERC modify those contracts.  The respondents argued that the rates in the contracts should not be presumed to be just and reasonable because they had never been initially approved by the Commission without the presumption, and because the contract rates were so high that they violated the public interest.  FERC refused to modify the contract rates, and the United States Court of Appeals for the Ninth Circuit set aside FERC’s orders.  In its decision issued on June 26, 2008, the Supreme Court held that the Mobile-Sierra presumption applies even when FERC has not had an opportunity to review the contract without the presumption, and that the presumption applies equally to sellers seeking to raise rates and buyers seeking to lower rates.  Furthermore, the Court held that the presumption may be reviewed “down the line” during the term of the contract and not just at the time of the formation of the contract.

The Court further elaborated that the just and reasonable standard is the only statutory standard for assessing wholesale electricity rates, whether set by contract or tariff.  It noted that over the years, the Commission began to refer to two modes of review – one with the Mobile-Sierra presumption and the other without – as the “public interest standard” and the “just and reasonable standard.”  However, according to the Court, instead of representing a wholly different standard, the Mobile-Sierra “public interest standard” refers to the differing application of the just and reasonable standard to contract rates.  The Supreme Court remanded the case for reconsideration of the contracts by FERC under the correct standard.

In MPUC, the Supreme Court examined whether Mobile-Sierra’s public-interest standard applies when the entity challenging a contractual rate is not a party to the contract at issue.  That case arose in the context of a contested settlement establishing the structure of the market for electric capacity in New England.  The settlement contained a provision stating that future challenges to certain rates established under the settlement would be governed by the Mobile-Sierra “public interest” standard of review.  The Commission approved the Settlement, arguing that Mobile-Sierra rests on a presumption that rates set out in a freely-negotiated wholesale energy contract are just and reasonable, and nothing in the Mobile-Sierra doctrine or Morgan Stanley limits its applicability to contracting parties.  In the decision below, the court of appeals held that when a rate challenge is brought by a non-contracting third party, the Mobile-Sierra doctrine does not apply.

On January 13, 2010, the Supreme Court issued its decision holding that the Mobile-Sierra presumption is not limited to challenges to contract rates brought by contracting parties, but applies as well to challenges initiated by non-contracting parties.  Accordingly, the Supreme Court reversed the judgment of the D.C. Circuit to the extent that it rejected the application of Mobile-Sierra to non-contracting parties, and remanded the case for further proceedings.  It identified two questions concerning Mobile-Sierra that had been raised before, but not ruled on by, the D.C. Circuit, and remanded those issues for its consideration: (1) whether the auction results and transition payments arising from the settlement constitute “contract rates” where challenges can only be reviewed by the Commission under the Mobile-Sierra “public interest” standard; and (2) if the auction results and transition payments are not “contract rates,” whether the Commission may act within its discretion in nevertheless approving the settlement provision imposing the Mobile-Sierra “public interest” standard on certain future challenges to the auction results and transition payments.[4] Because the Commission failed to address those issues in the challenged orders, the D.C. Circuit remanded those issues to FERC.

On March 17, 2011, the Commission issued its order on remand, concluding that the settlement rates at issue are not “contract rates” where future challenges would necessarily be subject to a Mobile-Sierra “public interest” presumption.  However, the Commission found that it may properly exercise its discretion to apply the more rigorous application of the statutory “just and reasonable” standard of review, making future challenges to the settlement rates subject to the “public interest” standard.  The Commission explained that although the capacity auction results and transition payments addressed in the Settlement possess certain characteristics of contracts, the results and payments applied to all suppliers and purchasers of capacity within the ISO New England market, not just to the settling parties.  A non-settling party wishing to participate in the New England capacity market was as bound by the auction as a settling party, and, thus, a non-settling party’s obligation to make a payment was not based on a contract executed by that party.  Furthermore, the rates set by the forward capacity auctions represent tariff, not contract, rates.

Nonetheless, the Commission found that it has discretion to apply a more rigorous application of the “just and reasonable” standard of review to future challenges to rates and that it was appropriate to exercise that discretion in the MPUC case.  The Commission underscored that it had approved the Settlement, including application of the “public interest” standard in limited circumstances, because, as a package, it presented a just and reasonable outcome for the proceeding.  Moreover, although the auctions will not result in contracts between buyers and sellers, the Commission found that they shared with freely-negotiated contracts certain market-based features that tend to assure just and reasonable rates.  FERC concluded that these findings amply supported its decision to approve the Settlement provision that made it more difficult to prevail on a certain challenge to the auction results.

On October 20, 2011, the Commission issued an order on rehearing1 affirming its determinations on remand from the D.C. Circuit.  First, the Commission reaffirmed its finding that the rates set by the forward capacity auctions represent tariff, not contract, rates.  The Commission underscored that although conventional auctions can result in a contract between buyers and sellers, the rates produced by the forward capacity auction are determined unilaterally by ISO New England Inc.’s (“ISO-NE”) tariff.  Moreover, non-settling parties are equally obligated to pay the rates derived from the rate methodology resulting from the settlement, not because they are subject to any contractual obligations under the settlement, but because they choose to purchase capacity through the forward capacity auctions, which obligate non-settling parties to make payments under ISO-NE’s tariff.  Accordingly, the Commission affirmed that the auction results and transition payments are tariff rates.5

Second, the Commission affirmed that it has discretion to accept application of a Mobile-Sierra “public interest” standard of review.  According to FERC, the Supreme Court made clear in Morgan Stanley that the “public interest” presumption applies only to contract rates, and Morgan Stanley does not address the Commission’s discretion to accept different applications of the statutory “just and reasonable” standard for non-contract rates.  However, the Supreme Court has explained that the “just and reasonable” standard is the only statutory standard under the Federal Power Act for assessing wholesale rates, whether set by contract or tariff, and the Commission has the discretion to interpret how this statutory standard is to be implemented.

In this case, the Commission found that it is appropriate to accept the Mobile-Sierra “public interest” language, in part because of the similarities between the settlement rates and contract rates.  Further, the Commission reiterated that the “public interest” standard of review would promote consumer welfare by balancing the need for rate stability and the interests of the diverse entities who participate in the Forward Capacity Market.  Finally, FERC noted that the settlement might not have been reached without the inclusion of the “public interest” standard of review.

Petitions for review of the Commission’s order on remand and rehearing order were filed at the D.C. Circuit on October 31, 2011, by the New England Power Generators Association, Inc., and on November 29, 2011 by the Attorneys General of the State of Connecticut and Commonwealth of Massachusetts and the Maine Public Utilities Commission.  The cases were consolidated and are pending at the D.C. Circuit in case no. 11-1422.

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[1] United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332 (1956) (Mobile); FPC v. Sierra Pac. Power Co., 350 U.S. 348 (1956) (Sierra).

[2] Morgan Stanley Capital Group, Inc. v. Public Utility District No. 1, 554 U.S. 527 (2008).

[3] NRG Power Marketing, LLC v. Maine Public Utilities Commission, 130 S.Ct. 693 (2010).

[4] Me. Pub.Utils. Comm’n v. FERC, 625 F.3d 754 (D.C. Cir. Nov. 5, 2010).