Morgan Stanley Capital Group, Inc. V. Public Utility District No. 1 Revisits the Mobile-Sierra Doctrine: Some Answers, More Questions

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Synopsis:

In Morgan Stanley Capital Group, Inc. v. Public Utility District No. 1 of Snohomish County, Washington, the Supreme Court provided its most detailed exposition of the Mobile-Sierra doctrine since the Court decided the doctrine's namesake cases in 1956. This article describes the Morgan Stanley ruling, including the relevant aspects of the underlying proceedings before the Federal Energy Regulatory Commission (FERC) and the United States Court of Appeals for the Ninth Circuit.

Morgan Stanley clarifies a number of important issues related to the Mobile-Sierra doctrine, and, in so doing, reaffirms the role of contracts in the regulatory scheme established by the Federal Power Act (FPA) and the Natural Gas Act (NGA). Further, while explicitly declining to reach the issue of whether the FERC's market-based rate program for electricity sales complies with the FPA, Morgan Stanley indicates that the Mobile-Sierra presumption applies to bilateral market-based rate contracts and finds that market dysfunction that affects a contract rate is alone not sufficient grounds to refuse to apply the Mobile-Sierra presumption of justness and reasonableness.

The ruling, however, leaves unanswered questions concerning the scope of the FERC's authority to modify jurisdictional contracts under Mobile-Sierra. In particular, the Court's conclusion that the Mobile-Sierra presumption-that a contract is just and reasonable-does not depend on the FERC having had an initial opportunity to review the contract without applying the presumption may prompt arguments that the FERC has limited authority to reject contracts-including negotiated settlements-even where the contracts fail to adhere to the FERC's policies and regulations. The Court's ruling on the "initial opportunity" issue also raises the stakes with respect to the issue of whether non-parties to a contract must overcome the Mobile-Sierra presumption of justness and reasonableness in challenging a jurisdictional contract. Similarly, the Court's discussion of the circumstances where the Mobile-Sierra presumption does not apply, and the showing necessary to overcome the presumption, presents issues that will need to be resolved by the FERC in the years to come.

I. INTRODUCTION

On June 26, 2008-the final day of the 2007 term-the U. S. Supreme Court issued its eagerly-awaited ruling in Morgan Stanley Capital Group, Inc. v. Public Utility District No. 1 of Snohomish County, Washington2 The ruling, which reviewed a decision by the United States Court of Appeals for the Ninth Circuit addressing orders of the FERC, represented the Court's most detailed exposition-in more than fifty years-of its seminal decisions in United Gas Pipe Line Co. v. Mobile Gas Service Corp.3 and Federal Power Commission v. Sierra Pacific Power Co.*

Considering FERC orders on complaints filed under Section 206 of the Federal Power Act (FPA)5 which challenged wholesale contracts to purchase electricity executed during the 2000-2001 power crisis in the western United States, four justices endorsed the principle that the "Mobile-Sierra doctrine" generally requires the FERC to "presume that the rate set out in a freely negotiated wholesale-energy contract meets the 'just and reasonable' requirement imposed by law. The presumption may be overcome only if the FERC concludes that the contract seriously harms the public interest."6 The presumption, the Court explained, is grounded in the notion that the sophisticated parties to a wholesale energy transaction can be expected to negotiate a just and reasonable rate between them, and the presumption is not dependent upon the FERC having had a prior opportunity to review the contract.7

Although finding fault with two aspects of the FERC orders at issue and affirming the judgment of the Ninth Circuit that a remand was necessary, the Supreme Court's Morgan Stanley decision, on balance, represents a strong endorsement of contract integrity under the regulatory scheme governed by the FPA and the Natural Gas Act (NGA). …