On May 22, 2015, the Federal Energy Regulatory Commission (“Commission”) issued Opinion No. 537,[1] reversing the March 28, 2014 Initial Decision[2] in part and remanding for clarification and further findings by the Administrative Law Judge (ALJ). The issues on which the Commission sought clarification through the remand related to the Mobile-Sierra presumption, which the Commission had determined applied to the contracts at issue which had been made pursuant to the WSPP Agreement.[3] The Mobile-Sierra presumption holds that qualifying contracts are just and reasonable under the Federal Power Act unless a complaining person can make a specific showing that either unlawful acts by its contract counterparty had a direct impact on contract negotiations, which rendered the contract not the product of fair arms-length negotiations, or that the impact of the contract was so great that the public interest demands it be altered.[4]

With regard to the remanded portion of the Initial Decision, the Commission directed the ALJ to “make findings . . . on what constitutes an individual contract and to apply that definition consistently in the analysis of whether” there were unlawful activities “that directly affected the rates under specific contracts.”[5] The Commission specified that the ALJ should carry out the task by (1) using a consistent definition of “contract” to “conclusively identify which, if any of the contracts was affected” by specific unlawful acts and (2) discussing “the evidence that demonstrates the causal link between any unlawful activity and the effect it had on a specific contract rate.”[6]

On January 8, 2016, the ALJ issued a Revised Initial Decision in which he concluded that the Mobile-Sierra presumption would not apply to the contracts he identified.[7] The Revised Initial Decision does not appear to have followed the directives of the Commission in considering either contract formation or the direct impact of activities on contract negotiations. The matter is pending before the Commission on exceptions.

However, the story does not stop there. Alarmed by the apparent core defects in the Revised Initial Decision and the significant potential for material problematic precedent if it is affirmed, industry groups have taken the very unusual step of filing letters in the docket apprising the Commission of the significance of the issues.

For example, on April 7, 2016, WSPP filed a letter with the Commission noting “the potential significance to WSPP’s 260 electric utility members and their need for clear and certain contract formation rules”[8] in a Commission order on the Revised Initial Decision. WSPP went on to state:

[T]he Revised Initial Decision does not refer to the WSPP Agreement’s detailed contract formation provisions; nor does it refer to formation on a contract-by‐contract basis. WSPP is concerned that the absence of such context and analysis could be understood to indicate that a WSPP transaction could occur and be legally binding without conformity to those detailed provisions. Such a precedent could expose WSPP members to unexpected results, potentially creating risk that parties’ communications could create binding obligations even when not fulfilling WSPP contract formation requirements. The resulting uncertainty could diminish the utility of the WSPP Agreement and the liquidity it adds to Western markets. Further, because the WSPP Agreement is filed with the Commission, the Commission’s statements regarding formation of binding obligations under the WSPP Agreement would likely have great weight in future disputes before this Commission or the courts—potentially greater weight than pronouncements regarding an agreement format that is not filed.[9]

Previously, on February 8, the Western Power Trading Forum (“WPTF”) and the Electric Power Supply Association (“EPSA”) (together, “Trade Associations”) filed a joint letter expressing concern regarding the Revised Initial Decision’s failure to properly apply the Mobile-Sierra standards as directed by the Commission.[10] WPTF and EPSA stated:

The Trade Associations have become concerned that the January 8 Revised Initial Decision does not apply the Mobile-Sierra presumption as set forth by the Supreme Court . . . . The Commission’s orders in this proceeding are consistent with these recent Supreme Court decisions, and affirmed the Mobile-Sierra presumption as [a] general matter and its application to the contracts at issue in this proceeding. The Revised Initial Decision, on the other hand, appears to find that the Mobile-Sierra presumption can be avoided based upon different and less stringent grounds than those articulated by the Court or the Commission.[11]

The Mobile-Sierra presumption has been established precedent since the 1950’s and has recently been reaffirmed by the Supreme Court;[12] the issue of contract sanctity is a lynchpin of the Commission’s market-based rates program. The need to recognize the contract-specific nature of the Mobile-Sierra analysis and to faithfully require complainants to carry the burden that analysis imposes is critical to confidence in contracts entered into under the Federal Power Act and subject to Commission regulation.

The fact that these industry groups undertook the unusual action of alerting the Commission to the risk that this Revised Initial Decision has raised issues that go to the core of power market participants’ confidence that they can enter into enforceable contracts that will be upheld as negotiated absent a proper Mobile-Sierra showing is notable. The Commission’s treatment of the issues raised by the letters will be of significant import in determining the sanctity of power contracts.