NRG Power Marketing, LLC v. Maine Public Utilities Commission

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Argued November 3, 2009.

Authorship: Scott Johnson of Akin Gump

Docket: 08-674

Issue: Whether the principles of the Mobile-Sierra doctrine apply to the Federal Energy Regulatory Commission’s review of wholesale electricity rates set by contract when those rates are challenged by a non-contracting party.

[Akin Gump represented a party to the settlement agreement in the proceedings before FERC, but was not involved in the proceedings in either the D.C. Circuit or the Supreme Court. An attorney from Howe & Russell also filed an amicus brief on behalf of the respondents in the case.]

Contents

Briefs and Documents

Decision

AFFIRMED in an 8-1 decision by Justice Ginsburg. Justice Stevens dissented. (January 13, 2010)

Oral Argument

Transcript (November 3, 2009)

Merits Briefs

Amicus Briefs

Certiorari-Stage Documents

Opinion Recap

The Federal Power Act (“FPA”) requires rates for the sale of electricity in interstate commerce to be “just and reasonable.” In United Gas Pipe Line Co. v. Mobile Gas Service Corp. and FPC v. Sierra Pacific Power Co. in 1956 and Morgan Stanley Capital Group v. Pub. Util. Dist. No. 1 of Snohomish County in 2008, the Supreme Court held that the Federal Energy Regulatory Commission (“FERC”) must presume that rates set by freely negotiated wholesale energy contracts meet the “just and reasonable” requirement; FERC thus cannot modify or abrogate such rates unless it concludes that the contract seriously harms the public interest. This presumption is known as the Mobile-Sierra public interest standard of review.

On January 13, 2010, the Supreme Court held, in NRG Power Marketing, LLC v. Maine Public Utilities Commission (No. 08-674), that the Mobile-Sierra public interest standard is not limited to challenges brought by contracting parties, but instead applies to all challenges to contract rates, regardless of the challenger’s identity. The Court’s decision will help shield contract rates from regulatory intervention and reduce the likelihood of success of third-party challenges.

The case arose from FERC’s approval in 2006 of a settlement among 115 parties that established a new mechanism for establishing electric generating capacity prices in New England. Eight parties objected to the settlement; six of those parties then sought review of FERC’s approval in the D.C. Circuit. The D.C. Circuit held that applying the Mobile-Sierra public interest standard to third-party challenges to contract rates deprives those third parties of their rights under the FPA, and it concluded that “when a rate challenge is brought by a non-contracting third party, the Mobile-Sierra doctrine simply does not apply.” NRG Power Marketing, LLC, supported by various suppliers, utilities, and industry stakeholders, appealed, arguing that the D.C. Circuit decision threatened the integrity of energy contracts and the stability of the industry.

The Court on January 13 reversed the D.C. Circuit to the extent that its 2008 decision rejected the application of Mobile-Sierra review to third-party challenges in favor of a less stringent “just and reasonable” review. Chief Justice Roberts and Justices Scalia, Kennedy, Thomas, Breyer, Alito, and Sotomayor joined Justice Ginsburg’s opinion for the Court. Justice Stevens dissented.

The Mobile-Sierra presumption, wrote Justice Ginsburg, “does not depend on the identity of the complainant,” but instead applies equally to challenges by non-contracting parties. Morgan Stanley “made clear that the Mobile-Sierra public interest standard is not an exception” to the just and reasonable standard, but an application of that standard in the contract context. To remain vital, the Mobile-Sierra doctrine must control in challenges to contract rates by non-contracting parties, contracting parties, and FERC itself. Limiting Mobile-Sierra review to challenges by contracting parties “diminishes the animating purpose of the doctrine,” which is to promote the stability of agreements essential to the health of the industry.

Justice Ginsburg asked rhetorically, “[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?” Quoting Morgan Stanley, she responded: “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.” Voiding the presumption “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.”

Finally, the Court held that certain other issues related to the case were raised before, but not decided by, the D.C. Circuit and “remain open for that court’s consideration on remand.”

Writing alone in dissent, Justice Stevens, who also dissented in Morgan Stanley, described the majority decision as “a quantum leap from the modest origin” of the Mobile-Sierra doctrine and argued that a higher bar for third-party challenges in fact will hinder protection of the public interest. And he lamented the process by which this “third chapter in a story about how a reasonable principle, extended beyond its foundation, becomes bad law.” The Mobile-Sierra doctrine, Stevens wrote, was “designed initially to protect the enforceability of freely negotiated contracts against parties who seek a release from their obligations”; it was certainly not intended to place additional burdens on third parties “exercising their statutory right [under the FPA] to object to unjust and unreasonable rates.” While it made sense “to require a contracting party to show something more than its own desire to get out of what proved to be a bad bargain before could abrogate [it],” Stevens argued that “[i]t is not sensible, nor authorized by the [FPA], for the court to change the de facto standard of review [for contract rates] based solely on the court’s view that contract stability should be preserved unless there is extraordinary harm to the public interest.” Quoting from his Morgan Stanley dissent, Justice Stevens agreed that “stable energy markets are important to the public interest, but ‘under the FPA, Congress has charged FERC, not the courts, with balancing the short-term and long-term interests of consumers’ under the just and reasonable standard of review.”

Oral Argument Recap

On Tuesday, November 3, the Supreme Court heard oral argument on the standard of review the Federal Energy Regulatory Commission (“FERC”) should apply to challenges by non-contracting parties to rates set by contract. In the decision below, the D.C. Circuit held that the stringent “public interest” standard established in United Gas Pipe Line Co. v. Mobile Gas Service Corp. (1956) and FPC v. Sierra Pacific Power Co. (1956), as interpreted in Morgan Stanley Capital Group v. Public Utility District No. 1 of Snohomish County (2008), does not apply to third-party challenges and that FERC must instead apply the Federal Power Act’s less rigorous “just and reasonable” standard. The question presented here was whether the Mobile-Sierra public interest standard, under which FERC can only modify a contract in the extraordinary circumstance that the contract would harm the public interest, applies to third-party challenges to contract rates.

Jeffrey A. Lamken of Molo Lamken LLP argued for petitioners NRG Power Marketing, LLC and certain of its affiliates, which were parties to a FERC-approved settlement providing for Mobile-Sierra review of future challenges to certain rates for electric generating capacity in New England. Lamken argued that applying a less stringent standard than Mobile-Sierra review to third-party challenges would threaten contract stability and chill infrastructure investment. Chief Justice Roberts and Justice Sotomayor, however, seemed unconvinced. The Chief Justice noted: “It’s a bit much to say that the importance is to preserve the stability of two parties’ contract, and therefore a third party who didn’t sign the contract is bound to the two parties’ contract.” Lamken also contended that the standard should not depend on the identity of the challenger, especially one not directly affected by the contract, and concluded that the D.C. Circuit “got everything wrong” and that the Court should reverse because FERC already has directed revision of many contracts “to create an exemption [from Mobile-Sierra review] for noncontracting parties, including [for] contracts that are clearly bilateral contracts.”

Richard Blumenthal, Attorney General for the State of Connecticut, argued for the Maine Public Utilities Commission and other respondents (together, “MPUC”), who did not agree to have future challenges to the rates at issue be subject to Mobile-Sierra review. Blumenthal argued that it is unfair to restrict the rights of third parties to challenge rates to which they did not agree and that Mobile-Sierra review should not apply when, as here, the rates are not traditional bilateral contract rates but instead are rates of general applicability that more closely resemble tariff rates. The D.C. Circuit, however, did not reach the specific nature of the rates, and Justices Ginsburg and Scalia were not keen to expand the issue. Justice Breyer suggested (and Blumenthal agreed) that perhaps Mobile-Sierra review should only “sometimes” apply to third-party challenges, depending on the identity of the challenger. Justice Scalia balked at this possibility. Mobile-Sierra is designed to assure parties that contract rates will not be modified lightly, he remarked, and asked: “Has anybody before even suggested that Mobile-Sierra is a sometimes thing?” Scalia continued: “You say [contract rates] should be upheld only between the two contracting parties. What good does that do?”

Eric D. Miller, Assistant to the Solicitor General, argued for FERC in support of NRG, but asked the Court only to affirm that FERC had the discretion to approval of the settlement providing for Mobile-Sierra review. Miller agreed with MPUC that when contracts create tariff rates, Mobile-Sierra should not apply, but he asked the Court to rule for NRG here and to remand any other matters to the D.C. Circuit.

Some early commentary on the oral argument suggested that neither side convinced the Court of much, other than that the scope of the D.C. Circuit decision and the limited question presented here misses certain core issues, such as the nature of the rates. Others opined that MPUC, which supports the D.C. Circuit decision, appeared to lose the day. Indeed, the Chief Justice noted that MPUC is “in a very tough position because of the way this has progressed. I think you can make a strong argument that you shouldn’t be bound by these contract rates if FERC doesn’t have a lot of discretion to let you go. If FERC has a lot of discretion to let you go, your argument that you shouldn’t be bound is a lot weaker.”

Argument Preview

Background

The Federal Power Act (“FPA”) requires rates for the wholesale sale of electricity to be “just and reasonable.” In United Gas Pipe Line Co. v. Mobile Gas Service Corp. (1956) and FPC v. Sierra Pacific Power Co. (1956), as interpreted in Morgan Stanley Capital Group v. Public Utility District No. 1 of Snohomish County (2008), the Supreme Court held that the Federal Energy Regulatory Commission (“FERC”) must presume that rates established by contract (as opposed to those established by a unilateral rate filing) are just and reasonable. There are two limited exceptions to this general presumption: if FERC concludes that the contract “seriously harms the public interest” or if the parties to the contract agree that the Mobile-Sierra public interest standard will not apply, then FERC may abrogate or modify contract rates. Tomorrow in No. 08-674, NRG Power Marketing, LLC v. Maine Public Utilities Commission, the Court will address whether the Mobile-Sierra public interest standard applies when a contract rate is challenged by an entity that was not a party to the contract.

This case arose from a FERC proceeding in which ISO New England Inc., the bulk power system operator for New England, reformed its mechanism for procuring electric generating capacity (i.e., the option to purchase energy rather than wholesale energy itself). After two years of litigation, all but eight of the 115 parties to the proceeding reached a settlement that created a Forward Capacity Market (“FCM”) for New England, whereby annual Forward Capacity Auctions (“FCA”) would both establish prices for capacity for one-year periods three years in the future and set transition payments for existing capacity resources during the three-year period after the first FCA. The costs arising from the FCA rates and transition payments would be prorated across New England utilities serving end-use customers based on their load. The settlement also made all future challenges to the FCA rates and transition payments subject to Mobile-Sierra public interest review, regardless of the identity of the challenger, but provided that FERC would use the “just and reasonable” standard to review the terms of the settlement.

FERC issued an order approving the FCM settlement. It reasoned that it could still protect non-contracting parties and contract stability by applying the public interest standard to future challenges to the FCM rates and transition payments. FERC subsequently denied rehearing of that order; in so doing, it rejected arguments that (1) rates covered by the settlement’s Mobile-Sierra provision are not “contracts” to which Mobile-Sierra review applies; and (2) the public interest standard cannot apply to rate challenges by non-contracting parties.

In an opinion issued prior to the Court’s opinion in Morgan Stanley, the D.C. Circuit largely upheld FERC’s orders, but it also held that that stringent, “nearly insurmountable” Mobile-Sierra review applies only when a party to a contract attempts a unilateral rate change; it does not apply when a third party challenges a contract rate. In other words, the public interest standard does not apply to future challenges to the FCA rates and transition payments by non-contracting parties; such challenges must instead be reviewed under the FPA’s just and reasonable standard. In the D.C. Circuit’s view, applying the public interest standard would deprive third parties of their statutory right to challenge rates as unjust and unreasonable. Moreover, it reasoned, contracts cannot bind non-parties, and the Mobile-Sierra doctrine protects contract stability only as between counterparties. After the D.C. Circuit denied rehearing, NRG Power Marketing, LLC and various affiliates (together, “NRG”) filed a petition for certiorari, which the Court granted on April 27, 2009.

Brief of Petitioners

First, NRG asserts that Morgan Stanley affirmed the Mobile and Sierra holdings that contract rates set by sophisticated parties are presumptively just and reasonable and that FERC can modify such rates only where the contract seriously harms the public interest – for example, it impairs a utility’s ability to provide service, casts an excessive burden on consumers, or is unduly discriminatory. The decision below, NRG argues, would enable anyone to challenge a contract rate under a standard that is less stringent than the one that would apply to a challenge by a party – even if the challenger is only indirectly affected by the rate. If the public interest standard protects contract stability only as between counterparties, it provides no stability at all.

Second, NRG argues that the D.C. Circuit’s decision is inconsistent with the Court’s holding in Morgan Stanley that public interest review is merely an application of the “just and reasonable” standard and does not deprive any challenger of just and reasonable review. FERC must presume contract rates are just and reasonable regardless of the challenger. The D.C. Circuit’s decision, NRG continues, cannot be reconciled with the rationales underlying Morgan Stanley, which are implicated whenever FERC considers contract rate modification. These rationales –that rates agreed to by sophisticated parties are presumptively reasonable, that such rates benefit all consumers, and that contract stability is essential to the industry – are independent of the challenger’s identity.

Third, NRG argues, public interest review only restricts FERC’s authority to modify a contract rate, rather than any entity’s ability to challenge such a rate. That authority does not depend on the challenger, but instead is based on harm to the public interest – including non-party interests. Indeed, even for party challenges, FERC can grant relief only when the challenger’s private interest coincides with the public interest. The D.C. Circuit’s decision stands the Mobile-Sierra doctrine on its head by exempting from public interest review challenges by the very public it protects.

Fourth, NRG argues, the D.C. Circuit misunderstood basic contract law. Contracts do not “bind” non-parties merely because they indirectly affect such parties by, for example, affecting utility costs and thus retail rates. Rather, the existence of a contract is merely a fact that makes the rate more likely to be reasonable. Applying public interest review to a non-party challenge does not “bind” that non-party to the contract. To the extent that they are even relevant, NRG explains, basic contract issues cannot be reconciled with the D.C. Circuit’s decision because non-parties lack standing to challenge contracts at all.

Finally, NRG argues, the Court need not address the respondents’ argument that, even if public interest review does apply to non-party challenges, the FCA rates and transition payments are not “contract rates.” Rather, the rates arose from the FCM settlement, which by its terms was subject to just and reasonable review. Because the settlement provided for Mobile-Sierra review only of future challenges to the FCA rates and transition payments, the Court need not now decide whether those rates are “contract rates” subject to Mobile-Sierra review. In any event, NRG contends, FCA rates establish binding, voluntary contracts subject to Mobile-Sierra review.

Respondents’ Brief

The Maine Public Utilities Commission, several New England attorneys general, one public utility, and two consumer groups (together, “MPUC”) frame the issue as whether FERC can approve a contested settlement that deprives non-contracting entities of the right to challenge contract rates as unjust and unreasonable except under the public interest standard of review.

First, MPUC asserts both that the FCM rates are not established by “run-of-the-mill” contracts and that non-contracting parties are more than “indirectly affected” by those rates. Because the FCA rates apply to all New England market participants, the settlement binds them to the same degree as the parties. Mobile-Sierra review of non-party challenges thus would enable contracting parties to use the Mobile-Sierra doctrine to bind third parties to rates to which they never agreed. MPUC further argues the FCA rates are not contract rates to which public interest review applies – a position that, it contends, FERC has acknowledged. Instead, because the rates apply to all to New England market participants, they are tariff rates. Making tariff rates subject to public interest review would subsume all tariff rates under the Mobile-Sierra doctrine, eviscerating the Morgan Stanley distinction between contract and tariff rates.

Second, MPUC argues, even if the FCA rates are “contract” rates, public interest review does not apply to non-party challenges. While the Mobile-Sierra doctrine properly limits the ability of a contract party to bring a unilateral challenge, non-parties remain entitled to “just and reasonable” review under the FPA because the Mobile-Sierra doctrine presupposes a willing buyer and willing seller, contract rates are presumptively reasonable only as between counterparties, and contracts cannot bind non-parties. MPUC contends that the respondents, as non-settling parties, did not relinquish their statutory right to challenge rates under the just and reasonable standard.

Third, although FERC contends that it has authority to approve contested settlements when it believes that they will produce just and reasonable rates, MPUC counters that FERC in fact lacks discretion to apply public interest review outside the contract context. Contract rates, MPUC argues, are not inherently reasonable, but remain subject to just and reasonable review – a standard, MPUC contends, that is separate from public interest review. FERC cannot, MPUC argues, “rewrite” the FPA based on what it believes will produce just and reasonable rates and cannot abrogate statutory rights by determining that public interest review applies outside the contract context. If there is no contract, any challenge must be reviewed under the just and reasonable standard of the FPA.

Finally, MPUC argues that the D.C. Circuit decision does not threaten reasonable expectations of contract stability, industry stability, or electric reliability. The settling parties could not have reasonably expected that the FCA rates would be free from uncertainty or immune to litigation, because not all of the parties to a complex, multiparty proceeding agreed to the settlement. Moreover, even in light of any purported litigation uncertainty that might arise from just and reasonable review of non-party challenges, capacity in New England is increasing, capacity prices are decreasing, and entities in other circumstances continue to enter into rate contracts, notwithstanding that public interest review does not apply. FERC has applied the public interest standard to non-party challenges only since 2002, and it has failed to do so consistently. Yet, the electric industry was stable before the shift and remains so. In addition, under just and reasonable review, non-party challengers still must prove a contract rate is not just and reasonable; even applying this standard, FERC has resisted abrogating private contracts. Non-parties, MPUC argues, should not be forced to prove grave public necessity to obtain relief from unjust and unreasonable rates to which they did not agree.

FERC Brief

In its brief on the merits, FERC argues that, although it is not compelled by the FPA to do so, it permissibly exercised its discretion to approve the contested settlement making future challenges to the FCM rates subject to Mobile-Sierra review because the Mobile-Sierra doctrine fully applies to all challenges to contract rates regardless of the challenger, Congress did not specify the precise standard of review FERC is to apply to contract rates under the FPA, and the public interest standard is an application of, and thus consistent with, the just and reasonable standard. FERC further argues that it acted reasonably in approving the FCM settlement because the overall result of the settlement is just and reasonable.

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