In a decision issued February 15, 2013 (New England Power Generators Assn., Inc. v. FERC, No. 11-1422 (D.C. Cir. Feb. 15, 2013)), the United States Court of Appeals for the District of Columbia held that in fulfilling its statutory obligation to ensure that rates charged for sales of electric generation capacity resulting from ISO New England’s capacity auction process are “just and reasonable,” the Federal Energy Regulatory Commission (FERC) may apply the Mobile-Sierra public interest standard.  In accordance with the Mobile-Sierra doctrine, which originated from with the Supreme Court’s rulings in United Gas Pipe Line Co. v. Mobile Gas Serv. Corp. (Mobile), 350 U.S. 332 (1956), and Fed. Power Comm’n v. Sierra Pac. Power Co. (Sierra), 350 U.S. 348 (1956), a freely negotiated contract rate is presumed to be “just and reasonable” under the Federal Power Act and such rate may only be upset if that presumption is rebutted by evidence demonstrating that the contract rate is contrary to the public interest.  Sierra, 350 U.S. at 355; see also Morgan Stanley Capital Grp., Inc. v. Pub. Util. Dist. No. 1 of Snohomish Cnty., 554 U.S. 527, 533-35 (2008).  As a basis for Commission action to modify rates, the Mobile-Sierra public interest standard, intended to promote stable energy supply arrangements, is more difficult to satisfy than the traditional just and reasonable standard.

The ISO New England administers a capacity market, called the Forward Capacity Market (FCM), in which load serving entities must purchase sufficient capacity for reliable system operation.  FCM capacity rates are set via a “descending clock auction” pursuant to which generators commit themselves to selling a certain amount of capacity at a particular price three years in advance.  FERC concluded that, although the FCM capacity rates are not technically contract rates for purposes of Mobile-Sierra, because the rates possess certain characteristics of contracts and the FCM was a “market-based mechanism,” it would adopt the Mobile-Sierra presumption of contract validity in exercising its statutory rate review. 

This ruling upset two groups of petitioners for opposite reasons.  The New England Power Generators Association (NEPGA) liked the result but not the reasoning: it argued the auction results, as contract rates, must receive the Mobile-Sierra presumption. Another group, comprising the Maine Public Utilities Commission and the Attorneys General of Massachusetts and Connecticut (collectively, the State Petitioners), supported much of FERC’s reasoning but not the result: they contended that because the auction results are not contract rates, FERC cannot presume them just and reasonable and uphold them under the public interest standard.

The D.C. Circuit dismissed NEGPA’s petition for lack of standing and denied the State Petitioners’ petition on the merits.  The court affirmed that FERC was within its statutory authority to review the FCM rates under the Mobile-Sierra public interest standard even if they were not contract rates.  The D.C. Circuit stated that simply because the existence of a contract rate mandates application of the Mobile-Sierra standard, the absence of a contract rate does not necessarily preclude it; rather, the use of the public interest standard is one method by which FERC may assure itself that a rate is just and reasonable.  Because FERC’s interpretation of “just and reasonable” is subject to Chevron deference, the court stated that the only question was whether FERC “exceeded the bounds of its considerable discretion by adopting the public interest standard for deciding whether a given Forward Capacity Auction rate is just and reasonable.”  The court concluded that FERC had properly supported its position.

Unless overturned by the Supreme Court, the D.C. Circuit’s decision could have a significant impact on participants in organized energy markets.  The decision lays the groundwork for FERC to extend the Mobile Sierra presumption to other capacity markets, day-ahead or real-time energy markets, ancillary services markets and other markets administered by ISOs/RTOs.  Challenges to the rates under the Mobile-Sierra public interest standard will have a higher burden than would have been applied under the traditional just and reasonable standard.