The following summary was written by Jerry E. Rothrock, a partner in the energy division at the Akin Gump office in Washington, DC.

The Supreme Court has granted certiorari in two cases involving regulatory and contract disputes growing out of the western energy crisis of 2000-01. In each case, a purchaser of wholesale electric energy filed a complaint with the Federal Energy Regulatory Commission ("FERC" or "the Commission") seeking reformation of a long term contract with a market based rate that was entered into during the western energy crisis. In their FERC complaints, the purchasers argued that their contracts were tainted by market power or dysfunction, resulting in contract terms and conditions that were not "just and reasonable" within the meaning of the Federal Power Act ("FPA"), 16 U.S.C. 791a et seq.

In response, FERC denied the complaints. According to the Commission, the appropriate standard for review of the contracts was not the FPA's "just and reasonable" standard but rather the "public interest" standard established by the Supreme Court in United Gas Pipe Line Co. v. Mobile Gas Service Corp. (1956) (Mobile) and FPC v. Sierra Pacific Power Co. (1956) (Sierra). Since the purchasers had not shown that the contracts were contrary to the public interest, FERC denied the complaints.

On appeal, the Ninth Circuit found both procedural and substantive errors in FERC's application of the Mobile-Sierra doctrine. According to the court, the Mobile-Sierra doctrine is simply one means of review under the "just and reasonable" standard of the FPA and is applicable in only certain limited circumstances. Specifically, the Court concluded that, in the case of a contract with a market based rate, Mobile-Sierra applies only when the following three conditions are met: (1) the terms of the contract must not preclude its application; (2) the regulatory scheme in which the contract is formed must provide FERC with an opportunity for initial review of the contracted rate; and (3) the scope of review by FERC must permit consideration of the factors relevant to the contract's formation.

The court of appeals concluded that FERC erred in its application of the Mobile-Sierra doctrine to market based rate the contracts at issue in these cases. After agreeing with the Commission that the contracts did not preclude review under the Mobile-Sierra standard, the Court held that FERC did not have an opportunity for the timely review of the contract rates. The Court also held that FERC failed to consider evidence concerning the market conditions in which the contracts were formed, including findings in a FERC staff report concerning price manipulation and dysfunction in western power markets.

The court of appeal went on to conclude that, even if Mobile-Sierra applied, the Commission had used an erroneous standard for determining whether the challenged contracts affected the "public interest." Specifically, the Court found that FERC improperly applied the public interest factors in Sierra because that case involved a challenge that the contract rates were too low rather than a challenge that the contract rates were too high. FERC should have instead considered whether the contract terms were outside the "zone of reasonableness" and resulted in retail rates that were higher than would be the case if that zone were not exceeded. Under that revised "public interest" standard, the purchaser might be entitled to reformation of its contract even if it resulted in lower rates than the purchaser had been paying.

The court remanded both cases to the Commission to determine, first, whether Mobile-Sierra review of the challenged contracts is appropriate; second, if so, to apply the modified form of Mobile-Sierra review outlined in its opinion; and finally, if not, to apply full just and reasonable review to the challenged contracts. Thereafter, each seller filed a petition for certiorari. In general, the sellers argued that the court of appeals' decision was inconsistent with both Mobile and Sierra. The petitions also argued that the Ninth Circuit's decision conflicted with the decisions of the other circuits concerning market based rates.

The petitions for certiorari were opposed by the purchasers and by FERC. In opposing review, FERC argued that the court of appeals decision was not inconsistent with Mobile or Sierra but instead applies the principles of those cases to the highly unusual context of the western energy crisis of 2000-01. The Commission also argued that, taken as a whole, the decision of the court of appeals allows the Commission sufficient discretion on remand to consider all relevant factors in determining whether the market based rate contracts at issue should be upheld or reformed. The Commission further argued that review was premature because the agency had not yet applied the decision to any of the disputed contracts. Similar arguments were made by the purchasers.

On Sept. 25, the Supreme Court granted the petitions for certiorari filed by Morgan Stanley (No. 06-1457) and Calpine Energy Services, (No. 06-1462). The Court also consolidated these petitions for briefing and argument.

As of this date, the Supreme Court has taken no action with respect to the petitions for certiorari filed by Sempra Generation (No. 06-1454) and Dynegy Power Marketing, Inc. (No. 06-1468) with respect to a companion decision that was issued by the Ninth Circuit on the same day and involved long term contracts with the California Department of Water Resources. It appears that these two cases may remain pending until the Court resolves the two petitions that were granted.

Posted in Morgan Stanley Capital Group, et al. v. Public Utility 1, Everything Else