Report of the Judicial Review Committee

Energy Law Journal, January 1, 2011 | Go to article overview

Report of the Judicial Review Committee


This report summarizes cases reviewing decisions by the Federal Energy Regulatory Commission and other cases pertinent to energy regulation. The time frame covered by this report is January 2009 through December 2010.*

I. ADMINISTRATIVE LAW

A. The Mobile-Sierra Doctrine

In NRG Power Marketing,1 the Supreme Court addressed the question whether the Mobile-Sierra doctrine applies when wholesale electric capacity rates set by contract are challenged as unjust and unreasonable under section 206 of the Federal Power Act (FPA).2 The case arose from the Commission's approval of a contested settlement agreement creating a "forward capacity market" in New England Independent System Operator.3

According to the settlement agreement, auctions would set capacity prices three years in advance of the time when the capacity would be needed, and a series of "transition-period payments" would be made to capacity-supplying generators for the three year gap between the first auction and initial provision of capacity pursuant to that auction's results.4 The settlement agreement further provided that any challenge to either the auction-clearing prices or the transition payments would be governed by the "public interest" standard set forth four decades earlier in the Mobile-Sierra cases.5

As the Supreme Court explained in 2008,

[u]nder the Mobile-Sierra doctrine, the Federal Energy Regulatory Commission (FERC or Commission) must presume that the rate set out in a freely negotiated wholesale-energy contract meets the "just and reasonable" requirement imposed by law . . . [and the] presumption may be overcome only if FERC concludes that the contract seriously harms the public interest.6

The forward capacity market settlement agreement was contested by various parties, many of whom petitioned for review in the U.S. Court of Appeals for the D.C. Circuit. They argued that Mobile-Sierra's heightened "public interest" standard could not apply to rate challenges brought by persons who had not joined the settlement agreement; instead, they argued, non-settling parties retain statutory rights to challenge the resulting rates under the lower unjust-and-unreasonable standard. The D.C. Circuit agreed, overruling the Commission and holding that to apply the Mobile-Sierra presumption to those not parties to the contract would violate the rule that "a contract cannot bind a nonparty."7

Only three months after the D.C. Circuit issued its decision, the Supreme Court decided Morgan Stanley Capital Group,8 another case involving proper application of the Mobile-Sierra presumption. There, the Court rejected arguments that the Mobile-Sierra presumption did not protect contractual rates that had not been filed and approved as just and reasonable by the Commission.9 The Court held, categorically, that the "FERC may abrogate a valid contract only if it harms the public interest."10 The Court also rejected the notion that the Mobile-Sierra doctrine unjustifiably departed from the text of the FPA, explaining that "the term 'public interest standard' refers to the differing application of that just-and-reasonable standard to contract rates."11

Thus, relying heavily on Morgan Stanley's characterization of the Mobile-Sierra doctrine, the Supreme Court in NRG Power Marketing reversed the D.C. Circuit, and held that the Mobile-Sierra doctrine applied to all challenges to contract rates, whether brought by settling or non-settling parties.12

In the course of the litigation, however, a dispute arose as to whether rates established by the forward capacity market auctions would qualify as contractually negotiated rates for purposes of Mobile-Sierra.13 The objectors to the settlement asserted that they were not, "hence Mobile-Sierra is inapplicable."14 The FERC argued, in response, that the rates "are not themselves contract rates to which the Commission was required to apply Mobile-Sierra," but "the Commission had discretion to do so.

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