The Supreme Court (8-1) in a January 13 decision confirmed that the “Mobile-Sierra presumption” that rates and terms of a wholesale power or natural gas contract are presumed to be just and reasonable applies as against all challenges and challengers, including non-parties to the contract, so long as the contract was freely negotiated at arm’s length. In NRG Power Marketing, LLC v. Maine Pub. Utils. Comm’n (NRG), Justice Ginsburg writing for the majority reversed a 2008 DC Circuit ruling in Maine Pub. Utils. Comm’n v. FERC (Maine PUC) that the Mobile-Sierra presumption of lawfulness applied only to challenges from one of the parties to the contract and not to all other non-party challengers who, the lower court ruled, were entitled to a less-exacting standard of review. Rejecting the DC Circuit’s holding as undermining the stability of contracts in energy markets, the Supreme Court’s NRG decision makes clear that the applicability of the Mobile-Sierra presumption to contract rates “does not depend on the identity of the complainant who seeks FERC investigation.” NRG, slip op. at 10. The Supreme Court expressly declined, however, to determine whether the auction rates at issue in the instant case—to be set by a tariff mechanism adopted through a settlement agreement—qualify as “contract rates” to which the Mobile-Sierra presumption applies, leaving that question for the DC Circuit on remand.

The case arose out of FERC’s 2006 approval of a contested settlement agreement that empowered ISO New England to implement a transition and final capacity market through annual auctions. The settlement provided that the Mobile-Sierra presumption would protect the auction results against any and all challenges.

Interests opposed to the transition and auction mechanism appealed FERC’s approval of the settlement to the DC Circuit, arguing that a contested settlement could not control rate challenges by non-settling parties. The DC Circuit agreed, holding that “when a rate challenge is brought by a non-contracting third party the Mobile-Sierra doctrine simply does not apply.” The decision set off a wave of debate, as the industry sought to determine the implications of applying a more rigorous standard of review to challenges by contracting parties or the Commission, but a lesser, more easily met standard of review to challenges by third parties.

In NRG, the Supreme Court reversed. The Court reasoned that setting a lower bar for third-party challenges to contract rates would undermine the stability of contracts that Mobile-Sierra had long sought to protect. “To retain vitality, the [Mobile-Sierra] doctrine must control FERC itself, and, we hold, challenges to contract rates brought by noncontracting as well as contracting parties.” NRG, slip op. at 2. The Court reiterated its 2008 holding in Morgan Stanley Capital Group v. Public Utility District No. 1 of Snohomish County, WA, that the essential role of contracts is to foster stability in the electricity markets. Permitting non-contracting parties to set aside contract rates more easily than parties to the contract or the Commission would “misperceive[] the aim, and diminish[] the force, of the Mobile-Sierra doctrine.” NRG, slip op. at 8. The Court also emphasized that the Mobile-Sierra doctrine does not overlook third-party interests, but is “framed with a view to their protection,” as it requires FERC to reject a contract rate that “seriously harms the public interest.” Id. at 9.

The Court did not apply Mobile-Sierra directly to the New England capacity rates at issue, reserving for the DC Circuit on remand the question of whether the auction and transition rates set by the settlement were “contract rates.” The Court also indicated that, even if the DC Circuit concludes they were not contract rates, FERC could elect to treat them “analogously.” Id. at 11. How the DC Circuit answers that question, and how FERC applies the various decisions in future proceedings, could impact, among other things, the willingness of parties to enter into settlement agreements, if, for example, rates set through a settlement agreement are considered rates set by contract, while rates set by market rules adopted by FERC through resolution of a rate filing are not considered to be set by contract.

Justice Stevens dissented from the Court’s opinion, criticizing both the NRG and Morgan Stanley decisions as imposing an additional, impermissible burden on purchasers and consumers seeking to challenge contract rates. “[A]pplying Mobile-Sierra to rate challenges by noncontracting parties,” Justice Stevens wrote, “loses sight of the animating purpose of the [Federal Power Act], which is the protection of the public interest” in “consumers . . . paying the lowest possible reasonable rate consistent with the maintenance of adequate service. . . .”