Supreme Court will review whether FERC should apply Ninth Circuit’s modified public interest standard.

On September 25, 2007, the Supreme Court of the United States granted and consolidated the petitions for certiorari of Morgan Stanley Capital Group and Calpine Energy Services, each of which sought review of the U.S. Court of Appeals for the Ninth Circuit’s decision in Public Utility District No. 1 of Snohomish County Washington, et al. v. FERC. The consolidated cases involve unilateral attempts to modify forward contracts entered into by power companies during the western energy crisis of 2000-01.

In Snohomish, the Ninth Circuit held that the Federal Energy Regulatory Commission (FERC) erred in its procedural reliance on Mobile-Sierra (because its grant of market-based rate authority lacked a mechanism to provide effective, timely relief from unjust and unreasonable rates) and also in the substantive standard it used to determine that the contracts at issue did not adversely affect the public interest. The Mobile-Sierra doctrine provides that where parties have entered into a bilateral contract with a fixed rate or other fixed terms and conditions, FERC’s sole concern under the Federal Power Act or the Natural Gas Act is "whether the rate [could] adversely affect the public interest—as where it might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory."

The Ninth Circuit created a new standard of Mobile-Sierra review, applicable in a "high-rate" challenge, holding that the relevant inquiry is "whether the wholesale energy contract is outside the ‘zone of reasonableness’ and results in retail rates higher than would be the case if that zone were not exceeded." The Ninth Circuit Court remanded the case to FERC so that it can reassess whether Mobile-Sierra review or full just and reasonable review of the challenged contracts is appropriate.

The new standard of review for wholesale power contracts created by the Ninth Circuit appears to modify, and is inconsistent with, the long-standing standard set by the Supreme Court in the Mobile and Sierra cases. The power suppliers sought and FERC opposed certiorari.

The Supreme Court’s decision to review whether FERC should apply the Ninth Circuit’s modified public interest standard suggests the Supreme Court may not agree with the Ninth Circuit’s application of the Mobile-Sierra doctrine or with the balance the Ninth Circuit struck between the need for contract enforceability and the potential burden on retail customers of a unilateral rate change. Oral argument will be held early next year, and a decision is expected by June 2008.