Insights

Supreme Court Strengthens Mobile-Sierra Doctrine

On January 13, 2010, the United States Supreme Court, by a majority of 8 to 1 (Justice Stevens dissenting), issued its decision in NRG Power Marketing, LLC. v. Maine Public Utilities Commission, No. 08-674 (Oct. Term 2009), in which it ruled that the "public-interest" standard of the Mobile-Sierra doctrine, which applies to wholesale power contracts subject to the jurisdiction of the Federal Energy Regulatory Commission under section 205 of the Federal Power Act, 16 U.S.C. § 824d, binds not only signatories to such contracts but nonsignatories as well.

 

The longstanding Mobile-Sierra doctrine, named after a pair of 1956 Supreme Court decisions addressing challenges to rates within the jurisdiction of the then Federal Power Commission,[1] generally obligates the FERC to treat any freely negotiated wholesale transaction as satisfying the requirement of the Federal Power Act and the Natural Gas Act that rates be "just and reasonable,"[2] and permits that presumption to be overcome only where the Commission finds that the agreed-upon arrangements seriously harm the public interest.

 

The dispute addressed by the Supreme Court in the January 13 NRG decision arose over the FERC's actions in approving a settlement among some 115 negotiating parties that installed a "forward capacity market" to govern the pricing of capacity sales in the New England region through an auction mechanism. The auction would be conducted three years in advance of the time when the capacity would be needed. For the three-year gap between the initial auction and the delivery of the procured capacity, the settlement agreement provided for a series of fixed, transition-period payments to capacity-supplying generators. The agreement further provided that any future challenges to transition-period payments or auction-clearing prices would have to be adjudicated under the difficult-to-satisfy public-interest standard articulated in the Court's 1956 decisions. In approving the Mobile-Sierra language of the settlement, the FERC determined that the provision appropriately balanced the need for rate stability and the interests of the diverse entities subject to the new auction system.

 

Approval of the settlement came over the objection of eight parties who declined to join in the agreement. Six of those objectors took their case to the United States Court of Appeals for the District of Columbia Circuit. One of the issues they raised before that court was the FERC's ruling that any challenge to the transition payments and the clearing prices from the auction would be tested under the public-interest standard of Mobile-Sierra. Although the objectors were not successful in having the D.C. Circuit overturn the settlement, the court did side with them on the Mobile-Sierra issue, saying that the public-interest standard applied only to signatories to the agreement. The Supreme Court subsequently granted certiorari because of the importance of the issue and in light of its recent decision in Morgan Stanley Capital Group Inc. v. Public Util. Dist. No. 1 of Snohomish County, 554 U.S. __, 128 S.Ct. 2733 (2008).

 

Prior to addressing the merits of the issue before it, Justice Ginsberg, author of the majority opinion, provided a quick synopsis of the history of the Mobile-Sierra doctrine, starting with the 1956 cases wherein the Court ruled that the providers of wholesale gas and electric energy under the Natural Gas Act and the Federal Power Act cannot invoke the filing requirements or the rate change provisions of those two statutes as a means of superseding otherwise valid contract rates. The rates may be changed only if they are so low as to cause serious impairment of the financial ability of the service provider to continue its service, or they cast upon other consumers an excessive burden, or they are unduly discriminatory. In other words, a litigant could obtain changes in agreed-upon, approved rates only when the public interest so required.

 

With regard to its more recent decision in Morgan Stanley, the Court described that case as one in which it reaffirmed and clarified the Mobile-Sierra doctrine, holding that application of the doctrine that contract rates freely negotiated between sophisticated parties meet the just-and-reasonable standard of 16 U.S.C. § 824d(a) does not require the FERC to have had an initial opportunity to review a contract rate without the presumption. The Court further determined that the presumption imposes as high a bar to challenges by purchasers as by sellers of wholesale electricity. The Court directed attention to the part of its decision in Morgan Stanley that emphasized the essential role of contracts as a key factor in fostering stability in the electricity market and attracting the necessary capital to build facilities required to meet a competitive market, all for the long-run benefit of consumers.

 

Turning to the issue raised in the NRG case of whether the Mobile-Sierra doctrine's public-interest standard applies to contract rates to which noncontracting parties object, the Court, with a look back to its reasoning in Morgan Stanley, stated that the D.C. Circuit's negative answer to that question misperceived the aim, and diminished the force, of the Mobile-Sierra doctrine. First, the Court, quoting from Morgan Stanley, stated that the Mobile-Sierra doctrine directs the FERC to presume that the rate set out in a freely negotiated wholesale-energy contract meets the just-and-reasonable standard, a presumption that may be overcome only if the FERC concludes that the contract seriously harms the public interest.

 

The Court went on to fault the lower court for having interpreted the public-interest standard as being a standard independent of, and sometimes at odds with, the just-and-reasonable standard. Rather, said the Court, the public-interest standard defines "what it means for a rate to satisfy the just-and-reasonable standard in the contract context," quoting from Morgan Stanley. Continuing, the Court commented that if the FERC itself must presume as just and reasonable a contract resulting from fair, arm's-length negotiations, then there seemed to be little basis on which to maintain that noncontracting parties may escape that presumption. As the FERC always retains the obligation to reject a contract rate that seriously harms the consuming public, that obligation, said the decision, ensures that the doctrine provides for the protection of third parties.

 

Lastly, the Court focused on the "animating purpose" of the doctrine: promotion of the stability of supply arrangements essential to the health of the energy industry, a concept dating back to the Mobile decision in 1956. The Court declared that a presumption of just and reasonable rates applicable to contracting parties only, and inoperative as to everyone else, could scarcely provide the stability Mobile-Sierra aimed to secure. Accordingly, the Court held that the Mobile-Sierra presumption does not depend on the identity of the complainant and is not limited to challenges to contract rates brought by contracting parties; rather, it also applies to challenges initiated by third parties.

 

The Court's decision did not resolve completely the issues raised by the six litigants contesting the settlement. In addition to their claim that they had the right to challenge the settlement without meeting the public-interest standard of Mobile-Sierra, the nonsignatories maintained that the auction rates and transition payments were prescriptions of general applicability, rather than contractually negotiated rates, and therefore Mobile-Sierra did not apply. The FERC had agreed that the rates covered by the settlement were not contract rates to which the Mobile-Sierra presumption must be applied, but that, in the circumstances presented by the settlement, the Commission had the discretion on an analogous basis to apply the standard. Those issues were remanded back to the D.C. Circuit for further consideration.

 

The Supreme Court's NRG decision has buttressed the underlying purpose of the Mobile-Sierra doctrine by declaring once again that power supply agreements reached between sophisticated parties are presumed to be just and reasonable and are to be modified only if the contracted rate is shown to be injurious to the public interest. Previously, the Court had held that the doctrine is applicable to both sides of an agreement—buyer and seller. To that prior reading, the Court has now added that the doctrine bars challenges to a contract rate by nonsignatories as well. In these days of competitive energy markets, the decision's strengthening of the sanctity of contracts in a regulated business sector should provide comfort and stability to a wide range of market participants.

 

Even though more than 50 years have passed since the Court first announced the Mobile-Sierra doctrine, the principles enunciated then remain vital. Left for future resolution is whether the doctrine applies not only to dollars and cents spelled out in the contract, but also to a method spelled out in the contract by which those dollars and cents are derived.

 

Lawyer Contact

 

For further information, please contact your principal Firm representative or the lawyer listed below. General email messages may be sent using our "Contact Us" form, which can be found at www.jonesday.com.

 

Brian J. McManus

+1.202.879.5452

bjmcmanus@jonesday.com

 

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[1] United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332 (1956); Federal Power Comm'n v. Sierra Pacific Power Co., 350 U.S. 348 (1956).

[2] See 16 U.S.C. § 824d(a) and 15 U.S.C. § 717c(a).

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