Today the United States Supreme Court issued an 8-1 decision in an appeal known as NRG v. Maine PUC, holding that the Mobile-Sierra public interest standard applies to third-party challenges to a freely negotiated wholesale-energy contract. The "public interest standard" is important to persons defending a power contract because it has been held to create a high hurdle to anyone later challenging the contract rates. The standard thereby promotes contract stability and certainty.
In an earlier Supreme Court decision (known as the Morgan Stanley decision), the Supreme Court had held that Mobile-Sierra applied to power purchasers, as well as to power sellers. Today's decision made clear that the same Mobile-Sierra contract protections apply to a contract challenge by a third party, as well as to later review by the Federal Energy Regulatory Commission ("FERC") itself.
This decision will impact the ongoing California Energy Market contract challenges now before FERC, as well as other rate challenges, and provides contracting parties with greater certainty that their agreed-upon contract rates will be upheld.
The dispute underlying the Court's decision arose in New England, where in 2004 the New England Independent System Operator (the "ISO") addressed the region's electricity demands and scarce capacity supplies. In doing so, the ISO proposed a market structure for reliability must-run resources that set prices separately for various geographical sub-regions. The proposed market structure was filed at FERC, and after hearings before the FERC Commissioners, the parties to the docket were sent to settlement proceedings. A settlement was reached, with only 8 of 115 parties opposing the settlement. FERC approved the settlement agreement, but six of the eight objectors appealed FERC's determination that challenges to the rate-setting mechanism in the settlement would be adjudicated under the Mobile-Sierra public interest standard.
The primary purpose of the Mobile-Sierra doctrine is to direct how FERC may evaluate whether a contract rate is just and reasonable, as is required by Section 205 of the Federal Power Act. The Mobile-Sierra doctrine provides that FERC's sole concern should be whether the contract rates being challenged adversely affect the public interest, such that the rates may impair the ability of a public utility to provide service, excessively burden the public, or be unduly discriminatory. Today's ruling confirms that the public interest standard defines what it means for a rate to be just and reasonable.
In so ruling, the Court stated that "[a] presumption applicable to contracting parties only, and inoperative as to everyone else—consumers, advocacy groups, state utility commissions, elected officials acting parens patriae—could scarcely provide the [contractual] stability Mobile-Sierra aimed to secure."