U.S. SUPREME COURT CLARIFIES THAT

THE MOBILE-SIERRA DOCTRINE APPLIES TO NON-CONTRACTING PARTIES 

James McGrew, Partner, Bruder Gentile & Marcoux, L.L.P.

          In NRG Power Marketing, LLC et al. v. Maine Public Utilities Commission, et al., ____ S.Ct. ____, 2010 WL 98876 (January 13, 2010) (“NRG”), the Supreme Court held that the presumption that rates established by contract are just and reasonable (the “Mobile-Sierra” doctrine) is not limited to challenges brought by contracting parties but applies equally to challenges initiated by non-contracting parties.  The Court reversed an opinion of the U.S. Court of Appeals for the D.C. Circuit holding that the presumption established by the Mobile-Sierra doctrine does not apply to non-contracting parties challenging contractually established rates.

I.        Procedural History of NRG

          For years, participants in NEPOOL and the New England ISO have fought about the rules that should govern installed capacity (“ICAP”) markets.In 2006, in one of the many FERC ICAP proceedings, a settlement was reached after months of negotiations.  Of the 115 negotiating parties, eight opposed the settlement.  The Settlement Agreement established a “forward capacity market” under which annual auctions would set prices.  Load-serving entities would be required to purchase sufficient capacity to meet their share of the “installed capacity requirement.”  For the three-year time gap between the first auction and the date on which the capacity procured at auction would be provided, the Settlement Agreement prescribed a series of fixed, transition-period payments to generators supplying capacity.

          The Settlement Agreement contained a Mobile-Sierra provision, requiring challenges to be adjudicated under the “public interest” standard of review set forth in United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332 (1956) (“Mobile”), and FPC v. Sierra Pacific Power Co., 350 U.S. 348 (1956) (“Sierra”), the two cases that established the Mobile-Sierra doctrine.  The Settlement Agreement provided that the Mobile-Sierra doctrine would apply to challenges by a Settling Party, a non-Settling Party, and FERC acting sua sponte.  FERC approved the Settlement Agreement over the protests of the non-settling parties, and six of the eight parties protesting the settlement sought review in the D.C. Circuit.

          The D.C. Circuit held that the Mobile-Sierra doctrine applies only to contracting parties.  Maine Pub. Util. Comm’n v. FERC, 520 F.3d 464, 478 (2008).  The Supreme Court granted certiorari.  Before the Supreme Court, FERC joined with the petitioners in asking the Court to reverse the D.C. Circuit on this point.

II.       The Status of the Mobile-Sierra Doctrine Prior to NRG

          As mentioned above, the Mobile-Sierra doctrine originated with the 1956 Mobile and Sierra cases.  Mobile held that a pipeline could not file a rate schedule in violation of a lawful contract between the pipeline and one of its customers.  Sierra added a further gloss that, to increase a rate established by a lawful contract, a public utility would have to show that the contract adversely affected the “public interest.”

          In 2008, the Supreme Court revisited the Mobile-Sierra doctrine in Morgan Stanley Capital Group Inc. v. Public Util. Dist. No. 1 of Snohomish Cty., 554 U.S. ___ (“Morgan Stanley”).  Morgan Stanley clarified that the Mobile-Sierra doctrine establishes a presumption that freely negotiated contracts meet the statutory just and reasonable standard; that the presumption applies even when FERC has not had an opportunity to review the contract without the presumption; and that the presumption applies equally to sellers seeking to raise rates and buyers seeking to lower rates.  Morgan Stanley also held that the presumption may be reviewed “down the line” during the term of the contract and not just at the time of the formation of the contract and that the presumption would not apply in those cases in which one party’s market power materially limited the bargaining power of the other party.

III.      The NRG Opinion 

          Although Morgan Stanley provided welcome reaffirmation and clarification of the Mobile-Sierra doctrine, it left open an important question addressed in NRG:  Does the “public interest” standard established by the Mobile-Sierra doctrine apply when a contract rate is challenged by an entity that was not a party to the contract?  The Supreme Court’s answer is an emphatic “Yes.”

          The Court explained in NRG that the public interest standard is an integral part of the just and reasonable standard and defines what it means to satisfy the just and reasonable standard when a rate is contractually established.  The Court further emphasized that FERC itself is bound by the public interest standard, and it would be unreasonable to allow non-contracting parties to escape the public interest standard when FERC itself cannot do so.

          The Court further elaborated that an essential rationale for the Mobile-Sierra doctrine is the stability of contracts.  The Court agreed with FERC that stability of contracts is essential for the energy industry and noted that a presumption applicable only to contracting parties would fail to provide such stability.  However, the Court held that the issue of whether the Settlement Agreement actually established “contract rates” subject to the Mobile-Sierra doctrine was not ruled on by the D.C. Circuit and remained open for that court’s consideration on remand.

IV.       Implications of the NRG Opinion

          The need for stability of contracts has become even more important in the energy industry since the Supreme Court’s two decisions in 1956.  Marketers and independent energy sellers play a critical role in today’s industry.  Also, if FERC-approved settlement contracts cannot have Mobile-Sierra protection, the value of settlements would be destroyed.  In the absence of Mobile-Sierra protection, parties would simply avoid joining in settlement agreements, later claiming that the public interest standard does not apply to them as non-contracting parties.

          In short, if the Mobile-Sierra doctrine were not extended to non-contracting parties, there would be no stability of contracts, including settlement contracts.  All rates would be subject to litigation and re-litigation at FERC under the just and reasonable standard, and the energy industry would become increasingly unstable and chaotic.  The NRG decision was decided with an 8-1 majority, with only Justice Stevens dissenting.  NRG provides strong support for the stability of contracts, and that support will assist the resolution of numerous commercial disputes by contracts that can enjoy the protection of the public interest standard.