The U.S. Supreme Court this month extended to third parties the Mobile-Sierra presumption that an electricity rate set by a freely negotiated wholesale-energy contract meets the Federal Power Act's “just and reasonable” requirement. NRG Power Mktg., LLC v. Me. Pub. Utils. Comm'n, 558 U.S. (2010).

The challenge in NRG Power Marketing arose out of generation-capacity shortages in the New England Independent System Operator's service territory. After several years of litigation and negotiation, FERC, New England generators, electricity providers, and power customers reached an agreement to resolve the capacity issues. The agreement established rate-setting mechanisms for sales in a Forward Capacity Market. Of particular importance, the agreement noted that the Mobile-Sierra public-interest standard would govern rate challenges. FERC approved the agreement and found that it presented a just and reasonable outcome consistent with the public interest.

Of more than 100 parties involved in the settlement agreement, eight objected and sought review in the U.S. Court of Appeals for the D.C. Circuit. The D.C. Circuit largely agreed with FERC's decision, but did agree with the objectors that when a challenge to a contract rate is brought by noncontracting third parties, Mobile-Sierra's public interest standard does not apply. The Supreme Court addressed this issue on appeal.

Rhetorically, the Court asked, “[I]f FERC itself must presume just and reasonable a contract rate resulting from fair, arms-length negotiations, how can it be maintained that noncontracting parties nevertheless may escape that presumption?” In response, the Court stated:

Mobile-Sierra holds sway … because well-informed wholesale-market participants of approximately equal bargaining power generally can be expected to negotiate just-and-reasonable rates, and because “contract stability ultimately benefits consumers”. These reasons for the presumption explain why FERC, surely not legally bound by a contract rate, must apply the presumption and, correspondingly, why third parties are similarly controlled by it. Id.

That is, applying the Mobile-Sierra presumption only to contracting parties — but not to consumers, advocacy groups, and state utility commissions — undermined the stability of the industry. The Court reasoned that extending the Mobile-Sierra presumption to noncontracting third parties promotes stability of supply arrangements necessary for the health of the energy industry.

As a practical matter, this decision affirms Mobile-Sierra's presumption that rates negotiated at arms-length are “just and reasonable,” even if later challenged by third parties.

The Court did not address, however, whether the rates at issue were indeed “contract rates” that qualified for the Mobile-Sierra presumption, or whether they were rates of general applicability, and if they were rates of general applicability whether FERC had the discretion to treat them analogously to contract rates. The Supreme Court remanded that issue back to the D.C. Circuit. The distinction between contract rates and rates of general applicability is likely to control whether contracting parties can bind third parties to their contract.