On Wednesday, the Supreme Court released a major decision impacting energy regulatory law, an area the Court only occasionally addresses. In an 8-1 decision in NRG Power Marketing v. Maine Public Utilities Commission, the Court held that “if FERC itself must presume just and reasonable a contract rate resulting from fair, arms-length negotiations, noncontracting parties may not escape that presumption.”1 The Court explained that the Mobile-Sierra doctrine must control challenges to contract rates brought by non-contracting parties (that is, third parties who did not enter into the contract at issue) as well as contracting parties. The Supreme Court left open the issue as to whether the rates at issue in the case are “contract rates.”
The Mobile-Sierra doctrine2 requires the Federal Energy Regulatory Commission (FERC) to presume that an electricity or gas rate set by a freely negotiated wholesale contract meets the Federal Power Act’s and Natural Gas Act’s “just and reasonable” standards, although this presumption may be overcome if FERC concludes that the contract rate harms or is against the public interest. While in the past this presumption had been applied to the FERC and to the parties to such contracts, the Supreme Court’s NRG Power Marketing opinion concludes that the presumption that the rate is “just and reasonable” and the need to demonstrate that the rate harms or is against the public interest applies to non-contracting parties as well.
The roots of this decision lie in the development of the forward-capacity market in the New England ISO. In 2006, FERC approved a contested Settlement Agreement that provided for the implementation of the forward-capacity market.3 The forward-capacity market establishes annual auctions for capacity products, which are sold on a per-megawatt of deliverable capacity basis.4 The Settlement Agreement provided that capacity resources, regardless of type, would receive the same auction clearing price.5 The resulting rates and transition payments from the forward-capacity market would then be prorated across New England utilities. The Settlement Agreement, which was opposed by 8 of the 115 parties, provided that any challenges to the Settlement – including challenges to forward-capacity auction rates – would be subject to the Mobile-Sierra standard of review, regardless of who brought the challenge.
The Maine Public Utility Commission, along with other non-settling parties, petitioned the D.C. Circuit for review of the Mobile-Sierra provision in the Settlement Agreement. The petitioners argued that the Mobile-Sierra presumption was inapplicable to non-contracting parties, and that challenges by non-contracting parties should be evaluated on a “just and reasonable” standard. The D.C. Circuit agreed with petitioners and held that “when a rate challenge is brought by a non-contracting third party, the Mobile-Sierra doctrine simply does not apply.”6
In Wednesday’s decision, the Supreme Court reversed “the D.C. Circuit’s judgment insofar as it rejected application of Mobile-Sierra to noncontracting parties,”7 and held that:
“the Mobile-Sierra presumption does not depend on the identity of the complainant who seeks FERC investigation. The presumption is not limited to challenges to contract rates brought by contracting parties. It applies, as well, to challenges initiated by third parties.”8
The Supreme Court noted in particular that confinement of the Mobile-Sierra doctrine to rate challenges by contracting parties would diminish the doctrine’s animating purpose: the promotion of “the stability of supply arrangements which all agree is essential to the health of the [energy] industry.”9
While the Court’s decision clarifies the applicability of the Mobile-Sierra presumption with regard to “contract rates,” the question remains as to whether the rates at issue are “contract rates.” The Connecticut Attorney General, arguing for the Maine PUC, contended that the forward capacity auction rates and transition payments resulting from the settlement agreement are not standard contract rates. During Oral Argument, all parties agreed that the D.C. Circuit’s decision did not establish whether the settlement agreement rate in question constitutes a contract rate to which the Mobile-Sierra presumption could attach at all. Rather than rule on this issue, the Court deferred a determination on this issue for consideration on remand.