Issues
Does Mobile-Sierra’s public interest standard applies for reviewing challenges to contract rates apply to cases in which when non-contracting third parties challenge energy rates?
The Federal Energy Regulatory Commission (“FERC”) declared that future challenges to contract rates relating to New England's energy market will be evaluated under Mobile-Sierra’s public interest standard, which presumes that freely negotiated rates are just and reasonable as long as there is no serious threat to the public interest. Petitioners, NRG Power Marketing, LLC, et al. (“NRG Power”) support FERC’s use of the public interest standard. However, respondents, Maine Public Utilities Commission, et al. (“Maine Public Utilities”) contend that the use of the public interest standard deprives non-contracting third party challengers of their statutory right to evaluation under a more scrutinizing just and reasonable standard. Maine Public Utilities finds the statutory standard preferable because challengers merely have to prove that a rate is unjust and unreasonable to succeed in challenging the contract rate. The D.C. Circuit Court of Appeals agreed with Maine Public Utilities that the just and reasonable standard is the appropriate standard of review when challenges are initiated by non-contracting third parties. The Supreme Court's decision in this case will impact the stability of the electrical energy market, influence future investments in it, and, ultimately, affect New England’s supply of electricity.
Questions as Framed for the Court by the Parties
Section 206 of the Federal Power Act (FPA), 16 U.S.C. §824e(a), requires that rates for the transmission and sale of electricity in interstate commerce be "just and reasonable." Under the Mobile-Sierra doctrine-named for this Court's decisions in United Gas Pipeline Co. v. Mobile Gas Service Corp., 350 U.S. 332 (1956), and FPC v. Sierra Pacific Power Co., 350 U.S. 348 (1956)-the Federal 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 "presumption may be overcome only if FERC concludes that the contract seriously harms the public interest." Morgan Stanley Capital Group Inc. v. Pub. Util. Dist. No. 1, 128 S. Ct. 2733, 2737 (2008). 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 simply does not apply." The question presented is:
Whether Mobile-Sierra's public-interest standard applies when a contract rate is challenged by an entity that was not a party to the contract.
Facts
The D.C. Circuit Court of Appeals challenged the FERC’s approval of a comprehensive settlement that redesigned the structure of New England’s electricity market.See Maine Public Utilities Commission v. FERC, 520 F.3d 464, 467 (D.C. Cir. 2008). In a “capacity” market, a transmission provider reserves the right to a specified quantity of power by paying the generator of the electricity for the option to use that electricity, even though he may not end up buying all of it.See Id. at 467. The standard industry practice is for transmission providers to purchase more capacity than is necessary to meet their customers’ needs, so as to ensure availability of electricity in the event of an unexpected increase in demand. See Id. at 467.
For several years, New England’s capacity market has had difficulty keeping pace with its consumer’s electricity demands. See Me. Pub. Util. Comm'n, 520 F.3dat 467. A number of solutions were considered, and in 2004, FERC directed the New England Independent System Operator (“ISO”), to develop a locational capacity market structure. See Id. at 467-468. Such a structure includes a “location requirement” whereby prices are set separately for each geographical sub-region.See Id. at 468. A locational market encourages new entry by setting prices highest in the regions with the most severe capacity shortages, thereby creating an incentive for providers to invest in those markets and provide more electricity.See Id.
In executing this plan, the ISO initially devised a locational market mechanism with four sub-regions, each of which would hold a monthly auction to establish the price and quantity of capacity for each sub-region.See Me. Pub. Util. Comm'n, 520 F.3dat 468. However, auction prices were pegged to a demand curve devised by the ISO. See Id.The ISO intended the demand curve to improve the stability and predictability of revenues and price movements. See Id. at n. 3.However, the parties argued extensively over the appropriate ways to structure the curve. See Id. at 468.
An Administrative Law Judge (“ALJ”) approved the structure of the demand curve proposed by the ISO in June 2005, but many parties challenged the decision, claiming that the ALJ failed to respond to their objections about flaws in the structure of the demand curve. See Me. Pub. Util. Comm'n, 520 F.3dat 469. FERC then stepped in and established settlement procedures to devise a new market structure that would eliminate the demand curve. See Id. at 469. After four months of negotiation involving 115 parties, a settlement was finally reached.See Id. The settlement replaced the ISO’s earlier system and the demand curve with a Forward Capacity Market (“Forward Market”).See Id.The Forward Market holds annual auctions for capacity, which are held three years in advance of when the energy is needed. See Id.The agreement also created a set of fixed “transition payments” to be paid to electricity generators from late 2006 through 2010 as an intermediary measure during the three-year gap between the first auction and the time when the energy would be provided according to those rates.See Id.On June 16, 2006, FERC approved this settlement agreement, finding it was a just and reasonable outcome of the bargaining process and was consistent with public interest.See Id.
Eight parties opposed the settlement. See Me. Pub. Util. Comm'n, 520 F.3dat 469. The main point of contention surrounding the settlement agreement is that challenges to the transition payments and the rates arrived at through the auction process will be reviewed under the highly-deferential “public interest” standard of review, as opposed to the “just and reasonable standard,” regardless of whether the challenging party was a contracting party to this settlement agreement or not.See Me. Pub. Util. Comm'n, 520 F.3dat 469. The Federal Power Act (“FPA”) provides that parties can challenge contract rates on the basis of whether they are “just and reasonable,” which provides an easier standard to challenge rates than the public interest standard. See 16 U.S.C § 824e(a); see also Question Presented.
The “public interest” standard is a method of review established by a set of Supreme Court opinions that has come to be known as the Mobile-Sierra doctrine. See Question Presented. This standard presumes that freely negotiated rates are just and reasonable as long as they pose no serious threat to the public interest. See Id.The doctrine derives from two Supreme Court decisions: United Gas Pipe Line Co. v. Mobile Gas Service Corp. and FPC v. Sierra Pacific Power Co. See Id.; see also Brief for Petitioner, NRG Power Marketing, LLC, et al. at 21. However, the D.C. Circuit Court of Appeals determined that the Mobile-Sierra “public interest” standard of review applies when contract rates are challenged by parties to the contract itself, and that when a rate challenge is brought by a third party who was not a signatory to the contract, the proper standard of review remains the “just and reasonable” standard established by the FPA. See Me. Pub. Util. Comm'n, 520 F.3d at 478.
The Supreme Court granted certiorari in April of 2009 and will determine whether Mobile-Sierra’s public interest standard applies to cases in which non-contracting third parties challenge energy rates. See Question Presented.
Analysis
The FPA requires that all contract rates subject to the jurisdiction of the FERC must meet the “just and reasonable” standard. 16 U.S.C § 824d(a). The Mobile-Sierra doctrine, which established the more rigorous public interest standard, states that FERC must “presume” that a freely negotiated contract rate is just and reasonable. See Question Presented (citing Morgan Stanley Capital Group Inc. v. Pub. Util. Dist. No.1, 128 S. Ct. 2733, 2737 (2008)). Under Mobile-Sierra's public interest standard, a challenge to a contract rate will be successful “only if FERC concludes that the contract seriously harms the public interest.” See Id.
The D.C Circuit Court of Appeals restricted the applicability of Mobile-Sierra's public interest standard to challenges brought by contracting parties. Usually, Mobile-Sierra's standard applies in situations where a contracting party seeks to change a contract rate because that party no longer feels that the rates are in their favor. See Maine Public Utilities Commission v. FERC, 520 F.3d 464, 478 (D.C. Cir. 2008). The D.C. Circuit Court held that the Mobile-Sierra doctrine “simply does not apply” when a non-contracting third party challenges a contract rate. See id. The Circuit Court found instead the just and reasonable standard is the appropriate standard of review in such contexts. See Id.
The Supreme Court will determine whether the D.C Circuit Court was correct to rule that the just and reasonable standard is the appropriate standard to review a non-contracting third party challenge. An affirmation of the Circuit Court’s decision means that any non-contracting party's complaint requesting a rate modification need only prove that the contested rate is unjust and unreasonable, rather than having to prove that it significantly threatens the public interest. See Brief for Petitioner, NRG Power Marketing, LLC, et al. at 3.
Conflicting Interpretations of Case Precedent: Does the Mobile-Sierra Doctrine Apply to Others besides the Contracting Parties?
Petitioners, NRG Power Marketing, LLC, et al. (“NRG Power”), assert that the court of appeals’ decision diverges from the Supreme Court’s holding in Morgan Stanley Capital Group Inc. v. Pub. Util. Dist. No. 1. See Brief for Petitioner at 25-26. NRG Power points out that in Morgan Stanley, the Court found that the “public interest” and “just and reasonable” standards dove-tailed, rather than departed, from each other, indicating that “only when the mutually agreed-upon contract rate seriously harms the consuming public may the Commission declare it not to be just and reasonable.” See Id.; see also Morgan Stanley, 128 S. Ct. at 2736. According to NRG Power, Mobile-Sierra's public interest standard is simply a method of application of the just and reasonable standard in a contract context. See id. at 26 (citing Morgan Stanley v. Pub. Util. Dist. at 2740, 2746). Therefore, they argue that evaluating a rate challenge under the public interest standard does not deprive third parties of their right to evaluation under the just and reasonable standard pursuant to 16 U.S.C § 824e(a). See id.
Additionally, NRG Power argues that the DC Circuit Court’s analysis conflicts with the purpose of Mobile-Sierra’s deferential public interest standard of review. See Brief for Petitioner at 27. NRG Power explains that purpose of applying the public interest standard of review is to protect the interests of the public from excessive rates for public utilities. See Id. at 27-28. The public interest standard operatesby approving contract changes only when the rates are such that they would harm the public. See id. at 27-28. NRG Power argues that the intent of Mobile-Sierra's public interest standard is not to restrict private parties, but rather to reserve FERC’s authority to abrogate contracts to only the most extraordinary circumstances. See Id. at 30. NRG Power argues that since Mobile-Sierra's public interest standard is meant to restrict FERC—not the parties—it is inconsequential if the party bringing the complaint is not a party to the contract. See id.
FERC agrees that Morgan Stanley does not limit the applicability of the public interest standard to complaints initiated by contracting parties. See Brief of Amicus Curiae the Federal Energy Regulatory Commission ("FERC") at 14-15. Echoing NRG Power’s argument, FERC explains that Mobile-Sierra’s public-interest standard is indeed designed to protect third parties—members of the public. See Id. at 19. According to FERC, its regulating responsibilities are not to make sure that contracting parties do not get a bad deal, but to ensure that unreasonable rates are not levied on third parties. See id. As such, FERC believes that there is no reason why the standard applying to contracting parties should be any different from that applied to third parties. See id.
On the other hand, respondents, Maine Public Utilities Commission, et al. (“Maine Public Utilities”), agrees with the D.C. Circuit Court’s finding that when a non-contracting party challenges a rate, the just and reasonable standard pursuant to § 206 of the FPA is the proper standard to evaluate the challenge—not Mobile-Sierra's more deferential public interest standard. See Brief for Respondent, Maine Public Utilities Commission, et al. at 30. Maine Public Utilities argues that the decision is not inconsistent with precedent because no court had previously addressed the exact issue presented here. See id. at 29. They point out that in previous cases, a contracting party initiated the challenge, not a non-contracting third party, as is the case here. See Id.Maine Public Utilities believes that the cases cited by NRG Power involve entirely different circumstances than the one present here. See Id. at 30-31. Maine Public Utilities also alleges that FERC has engaged in an inconsistent application of the public interest standard, and cites instances where FERC rejected other agreements that applied the Mobile-Sierra doctrine to non-contracting third parties in disputed settlement agreements. See id. at 32.
Do the Rates at Issue Automatically Trigger Protection under Mobile-Sierra’s Public Interest Standard?
An additional reason why Maine Public Utilities does not believe the Mobile-Sierra public interest standard of review should apply here is because under the terms of the settlement agreement, the rates at issue were determined through an auction process which, Maine Public Utilities contends, is fundamentally different from the privately negotiated bilateral contracts at issue in Morgan Stanley and Mobile-Sierra. See Brief for Respondent at 16-17. Maine Public Utilities argues that the Mobile-Sierra doctrine enacts a more deferential standard of review because sophisticated business parties could be expected to negotiate a just and reasonable contract at the bargaining table, but here, the resulting rates from the auction are not the result of such a process. See id. at 16-18. They reject NRG Power’s characterization of auction rates as contracts, stating that an auction rate “is a tariff rate regardless of whether the consumer chooses to accept service under the tariff rate.” See id. at 18.
Conversely, NRG Power asserts that the auction rates, and the transition payments set to balance prices in between the three year period until auction rates take effect, are contract rates entitled to Mobile-Sierra’s public interest standard of review. See Brief for Petitioner at 47, 50. They argue that the auction rates are contracts in that the participants’ bids qualify as a contractual “offers” that the auctioneer “accepts” via “the fall of the hammer.” See id. Thus, NRG Power argues that capacity auctions produce voluntary, multilateral contracts in which a buyer agrees to purchase electricity from a seller at a certain rate. See Id. at 49-50. According to NRG Power, these auctions may be a “sophisticated and competitive” contracting process, but the rates arrived at through this process—and the transition payments agreed upon to act as an intermediary stopgap until the auction rates can take effect—are not unilateral tariffs subject to the ordinary just and reasonable standard. See id. 49-50. Accordingly, NRG Power believes, “the settlement agreement sets forth a fixed schedule of rates that settling buyers agree to pay sellers for capacity for specified periods—a classic Mobile-Sierra contract.” See Id.
Does FERC Have “Discretion” to Apply Mobile-Sierra’s Public Interest Standard Even If the Auction Rates and Transition Payments Are Not Contracts?
While FERC agrees with Maine Public Utilities that the auction rates and transition payments are not contracts automatically requiring the public interest standard of protection, they argue an alternative rationale for its application. FERC claims that §§ 824d and 824e of the FPA grant FERC discretion to apply Mobile-Sierra's public interest standard in such an instance, since it is just one application of the more general just and reasonable standard. See Brief for the FERC at 32. After reviewing the totality of the circumstances, the FERC determined that it was reasonable to apply the public interest standard to third party challenges to auction and transition payments rates. See Id. at 36, 38-39. They maintain that the use of Mobile-Sierra's public interest standard was reasonable because this higher standard of review promotes stability, both generally within the industry and to this settlement in particular. See id. at 39.
However, Maine Public Utilities rejects FERC’s argument that it has discretion to apply the public interest standard against non-contracting third parties. See Brief for Respondent at 37. Maine Public Utilities rejects FERC’s argument in a preliminary basis because, in raising this argument, FERC raises an issue of first impression that they failed to raise in any of their previous filings with the court. See id. at 37. Maine Public Utilities also rejects FERC's argument on the merits. See id. at 38. Maine Public Utilities argues that the Supreme Court's decision in Morgan Stanley determined that the public interest standard only applies in contract contexts. See id. They conclude that the rates here are not part of a contract and thus warrant evaluation under the just and reasonable standard only. See id. Moreover, Maine Public Utilities asserts that to allow FERC to apply Mobile-Sierra's public interest standard would be to ignore the language of § 206 of the FPA that allows modification of rates upon a showing that the rates are merely unjust. See id. at 39.
Conversely, NRG Power argues that the question as to whether the auction and transition payment rates are contract rates is essentially a non-issue. They point out that the court of appeals did not address whether the contested rates were contract rates and, therefore, there is no reason for the Supreme Court to address the matter. See Reply Brief for Petitioner, NRG Power Marketing, LLC, et al. at 4. Since FERC already determined that these rates are contract rates, NRG Power reminds the Court that the issue is narrowly limited to whether Mobile-Sierra's public interest standard applies to challenges initiated by non-contracting third parties. See id.
Discussion
This case will determine how difficult it will be for third parties to challenge contract rates made for the interstate sale of electricity. The Court’s decision here will impact the stability of the electrical energy market, influence future investments in it, and, ultimately, affect New England’s supply of electricity.
Petitioners, NRG Power Marketing, LLC, et al. (“NRG Power”), contend that the D.C. Circuit Court of Appeals’ finding that the Mobile-Sierra doctrine does not apply to challenges by non-contracting third parties poses a significant threat to contract stability by undermining the process through which FERC addresses third-party harm. See Brief for Petitioner, NRG Power Marketing, LLC, et al. at 40. The FERC intentionally set up this framework to provide for regulatory certainty, without which competitive power markets cannot attract the investments necessary to build adequate infrastructure. See Brief of Amicus Curiae the Federal Energy Regulatory Commission at 11-12.
Respondents, Maine Public Utilities Commission, et al. (“Maine Public Utilities”), contend that the D.C. Circuit Court was correct in finding that Mobile-Sierra does not apply to challenges by non-contracting third parties, and that the decision will not impair contract stability. See Brief for Respondent, Maine Public Utilities Commission et al. at 40. Maine Public Utilities argues that it is reasonable for FERC to presume that the rate for which two parties negotiated and agreed to is just and reasonable under the Mobile-Sierra doctrine. See Id. at 22. However, they argue that it is unreasonable to apply that same presumption when the rate is imposed upon a third party who is not a contracting party and was not a part of the bargaining process. See Id. at 24.
NRG Power contends that the D.C. Circuit Court’s decision would destroy Mobile-Sierra’s role in ensuring contract stability. See Brief for Petitioner at 40. Demand for electricity is expected to grow substantially in New England, and amici for NRG Power point out that contract stability is especially crucial in such volatile power markets. See Brief of Amici Curiae the Electric Power Supply Association, et al. in Support of Petitioner 7. Without long-term contract stability, power markets cannot attract the capital needed to build the infrastructure necessary to deal with heightened electricity demands. See Brief of Amici Curiae Morgan Stanley Capital Group, Inc., et al. in Support of Petitioner at 15-16. NRG Power and its amici therein argue that application of the deferential public interest standard of review under the Mobile-Sierra doctrine is a key aspect of ensuring this essential contract security and stability, as investors need to know that FERC will not modify contracts unless there are extraordinary circumstances. See Brief of Morgan Stanley at 16; Brief of Amici Curiae Colin C. Blaydon, et al. in Support of Petitioner at 5-6; Brief for Petitioner at 37. NRG Power extends this reasoning to argue that the Mobile-Sierra doctrine also applies to third parties, since the third party public’s interest in adequate electricity supply is protected under this standard of review. See Brief for Petitioner at 27.
However, Maine Public Utilities argues that they are not just general third parties indirectly affected by the rates in question; rather, they are the parties who are actually charged the rates at issue here. See Brief for Respondent at 26-27. Amici for Maine Public Utilities argue that § 824 of the FPA provides protection for direct consumers, such as Maine Public Utilities, against excessive prices. See Brief of Amicus Curiae the Public Utilities Commission of the State of California ("CA Pub. Util. Comm'n") in Support of Respondent at 9. Amici argue NRG Power’s approach would make it more difficult to challenge contract rates under the public interest standard, and would revoke the “just and reasonable” standard guaranteed to these consumers under the FPA. See Brief of Amici Curiae American Public Power Assoc., et al. in Support of Respondentat 32. Maine Public Utilities therefore argues that to affirm the D.C. Circuit Court’s decision would merely allow consumers to bring their claims in accordance with the terms established under the FPA. See Brief for Respondent at 26.
In addition, Maine Public Utilities and its amici argue that concerns posed by NRG Power and its amici over contract stability are “grossly exaggerated.” See Brief for Respondentat 40-41. They argue contract stability is instead built into the FPA through protections such as “pre-implementation challenges” through which consumers can challenge rates prior to execution. See Brief of CA Pub. Util. Comm'n at 25; see also 16 U.S.C. § 824d.
The Supreme Court’s ruling in this case will thus determine the ease with which contract rates are challenged by third parties, as well as the future stability of electrical energy markets.
Conclusion
The Court’s decision in this case will clarify whether Mobile-Sierra’s public interest standard applies to cases where non-contracting third parties challenge energy rates. NRG Power and FERC contend that the D.C. Circuit Court of Appeals’ decision rejecting the applicability of the public interest standard conflicts with both case precedent and statutory intent. Conversely, Maine Public Utilities argues that the rates at issue are tariffs requiring only the just and reasonable standard of review. They also reject FERC’s discretionary authority to invoke the public interest standard. The Supreme Court’s ruling on the appropriate standard of review will impact the stability of New England's electrical energy market as well as the protection afforded non-contracting participants in that industry.