The decades old MobileSierra 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.  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 (“Morgan Stanley”) and NRG Power Marketing, LLC v. Maine Public Utilities Commission (“MPUC”), the United States Supreme Court granted certiorari to review several questions concerning the scope of the Mobile-Sierra doctrine:

  • Does the presumption apply only when FERC has had an initial opportunity to review a contract rate without the presumption?
  • Does the presumption impose as high a bar to challenges by purchasers of wholesale electricity as it does to challenges by sellers?
  • 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 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, and that the just and reasonable standard is the only statutory standard for assessing wholesale electricity rates, whether set by contract or tariff. Thus, 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.

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.  On January 13, 2010, the Supreme Court held 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.  Because the Commission failed to address certain 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.  On October 20, 2011, the Commission issued an order on rehearing affirming its determinations on remand from the D.C. Circuit.

The Morgan Stanley and NRG rulings may impact the willingness of parties to enter settlement agreements, as it is now clear that the Mobile-Sierra doctrine applies to non-contracting parties as well as the signatories to settlement agreements.  Moreover, the Commission’s application of these holdings has been swiftly challenged at the U.S. Court of Appeals for the D.C. Circuit.  Petitions for review of the Commission’s order on remand and rehearing order are pending in consolidated Case Nos. 11-1422 and 11-1465, and briefing should begin later this month.