In a nearly unanimous opinion authored by Justice Ginsburg, the Supreme Court issued its decision in NRG Power Marketing, LLC v. Maine Public Utilities Commission (NRG)1 on January 13, 2010, in which it further strengthened the protection afforded to contracts under the Mobile-Sierra doctrine.2 The Supreme Court previously interpreted Mobile and Sierra in June 2008 when it held that the Federal Energy Regulatory Commission (FERC) “must presume that the rate set out in a freely negotiated wholesale-energy contract meets the ‘just and reasonable’ requirement imposed by law,” and that “[t]he presumption may be overcome only if FERC concludes that the contract seriously harms the public interest”3 or “the consuming public.”4 The Court has previously explained that FERC’s primary regulatory responsibility “[i]s not to relieve a contracting party of an unreasonable rate,… but to protect against potential discrimination by favorable contract rates between allied businesses to the detriment of other wholesale customers.”5 In NRG, the Court held that the Mobile-Sierra doctrine also applies to “challenges to contract rates brought by noncontracting parties as well as contracting parties.”6 The Supreme Court signaled that it views contract stability of utmost importance and that, in order to preserve the sanctity of contracts, FERC must apply the Mobile-Sierra presumption and that third parties must be controlled by it.7 While the Supreme Court announced this general rule regarding the applicability of the Mobile-Sierra presumption to noncontracting third parties when challenging negotiated contract rates, the Supreme Court remanded to the Court of Appeals the issues of whether rates that are “prescriptions of general applicability rather than ‘contractually negotiated rates,‘” are also subject to the Mobile-Sierra presumption.8
NRG is a very significant opinion in that it allows a party to a negotiated contract to not only impose a higher burden to overturn the agreement on it and its counter-party, but also upon third parties (including FERC). The Supreme Court has previously determined that the Mobile-Sierra presumption applies even when FERC has not had an initial opportunity to review a contract rate without the presumption and that “only when the mutually agreed-upon contract rate seriously harms the consuming public may the Commission declare it not to be just and reasonable.”9 Thus, merely because a contract has been negotiated, it will automatically be entitled to greater protection from third parties, including purchasers or FERC absent a reservation of rights that the contract is not entitled to the Mobile-Sierra presumption. The protection afforded under Mobile-Sierra, however, is not absolute. The Supreme Court previously determined that “FERC has ample authority to set aside a contract where there is unfair dealing at the contract formation stage—for instance, if it finds traditional grounds for the abrogation of the contract such as fraud or duress.”10 NRG did not overturn this aspect of Morgan Stanley.
The Court explained in Morgan Stanley that the Mobile-Sierra presumption is rooted in the notion that “‘[i]n wholesale markets, the party charging the rate and the party charged [are] often sophisticated businesses enjoying presumptively equal bargaining power, who could be expected to negotiate a ‘just and reasonable’ rate as between the two of them.’”11 The Court further emphasized that the “just and reasonable” standard and the “public interest” standard are not separate standards, but rather that the public interest standard defines “what it means for a rate to satisfy the just-and-reasonable standard in the contract context.”12
In NRG, the Supreme Court clarified that the Mobile-Sierra presumption is also applicable to contract challenges brought by noncontracting parties. There, the Court reviewed the Court of Appeals for the DC Circuit’s decision in Maine PUC13 regarding whether the Commission may “approve a settlement agreement that applies the highly-deferential ‘public interest’ standard to rate challenges brought by non-contracting third parties.”14 Maine PUC involved a petition for review of an underlying FERC proceeding in which FERC approved a contested settlement agreement that redesigned New England’s capacity market. The settlement made all future challenges to the rates established by the settlement subject to the Mobile-Sierra standard of review. The Maine Public Utilities Commission and the Attorneys General of Connecticut and Massachusetts sought review of the FERC order approving the settlement arguing, among other things, that “FERC unlawfully accepted a ‘Mobile-Sierra’ provision that imposed the deferential ‘public interest’ standard of review on rate challenges brought by non-settling parties.”15 The Court of Appeals found that “when a rate challenge is brought by a noncontracting third party, the Mobile-Sierra doctrine simply does not apply; the proper standard of review remains the ‘just and reasonable’ standard.”16 The Court of Appeals explained that “the settling parties [were] attempting to thrust the ‘public interest’ standard of review upon non-settling third parties who [had] vociferously objected to the terms of the settlement agreement,”17 and found that “‘[i]t goes without saying that a contract cannot bind a nonparty.’”18 Accordingly, the Court of Appeals found that when a rate challenge is brought by a non-contracting third party, the proper standard of review is the just and reasonable standard.19
Maine PUC was issued approximately three months before Morgan Stanley. As indicated above, the Supreme Court rejected the DC Circuit’s rationale in Maine PUC, finding that by “confin[ing] …Mobile-Sierra to rate challenges by contracting parties diminishes the animating purpose of the doctrine: promotion of ‘the stability of supply arrangements which all agree is essential to the health of the [energy] industry.’”20 The Court reasoned 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 stability Mobile-Sierra aimed to secure.”21 While the Supreme Court agreed with the DC Circuit’s finding in Maine PUC that parties are not bound by a contract to which they are not a party, the Court nonetheless determined that in order to promote contract stability, the Mobile-Sierra presumption must be equally applicable to rate challenges brought by noncontracting third parties.22 Reiterating its view that market participants with equal bargaining power can be expected to negotiate just and reasonable rates,23 the Court concluded that FERC and noncontracting parties alike must presume that the negotiated contract is just and reasonable. The Supreme Court therefore held that “[t]he presumption is not limited to challenges to contract rates brought by contracting parties. It applies, as well, to challenges initiated by third parties.”24 In reaching this holding, the Court reemphasized its holding from Morgan Stanley that, contrary to the finding of the DC Circuit, “the Mobile-Sierra public interest standard is not an exception to the statutory just-and-reasonable standard; it is an application of that standard in the context of rates set by contract.”25 Thus, noncontracting third parties who seek to challenge rates set forth in a contract must demonstrate that the contract “seriously harms the public interest.” While it is unclear based on prior precedent what one must precisely demonstrate to make such a showing, it is clear that the standard is more difficult to meet.
While the Supreme Court announced the general rule that noncontracting parties must overcome the Mobile-Sierra presumption when challenging negotiated contract rates, the Court did not rule precisely on whether the rates set forth in the contested FERC settlement are subject to the Mobile-Sierra presumption. The Court noted that the challengers to the underlying FERC settlement argued that the rates set forth in the settlement are not traditional bilateral contract rates but instead are rates of general applicability that more closely resemble tariff rates.26 The Court noted that FERC agreed that the rates set forth in the settlement are not themselves rates to which FERC must apply Mobile-Sierra. Finding that the issue was not before it, however, the Court did not address whether the rates set forth in the settlement were “prescriptions of general applicability rather than ‘contractually negotiated rates.’”27 The Court noted that this issue, as well as whether the settlement rates are also subject to the Mobile-Sierra presumption, are still open for the Court of Appeals’ decision on remand.28 The Supreme Court remanded the proceeding to the Court of Appeals for further consideration on this issue. Therefore, while it is clear from NRG that noncontracting parties who seek to challenge a contract which sets forth contractually negotiated rates will be held to the Mobile-Sierra presumption, it is less clear whether rates of general applicability qualify as “contract rates” subject to the Mobile-Sierra presumption.
Justice Stevens dissented from the majority opinion, maintaining that the majority’s holding conflates the Mobile-Sierra presumption by imposing an additional burden on third parties exercising their statutory right to object to unjust and unreasonable rates. Justice Stevens expressed skepticism that the Mobile-Sierra doctrine “will protect third parties’ interests, and the public interest, just as well as the so-called ‘ordinary’ just-and-reasonable standard,”29 since the Mobile-Sierra doctrine requires parties to show greater harm to the public than would be required under the just and reasonable standard. Specifically, Justice Stevens opined that FERC may not be able to do anything to correct a rate that harms the public where the challenger cannot demonstrate that the rate seriously harms the public interest. While Justice Stevens believes the policy underlying Mobile-Sierra—“requir[ing] a contracting party to show something more than its own desire to get out of what proved to be a bad bargain before FERC could abrogate the parties’ bargain”—was sensible, he concludes that it is not sensible nor authorized by statute to change the standard of review for rates set forth in negotiated contracts in order to protect contract stability.30