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Associations: Contract Sanctity Threatened by Recent Decision

The Electric Power Supply Association (EPSA) was joined by the Natural Gas Supply Association (NGSA) and six other industry groups in urging the U.S. Supreme Court to reverse a lower court's decision that they claim threatens the integrity of privately negotiated energy contracts when challenged by any entity that is not a party to the contract.

The groups' brief is in support of a petition by NRG Power Marketing LLC, et al. seeking reversal of a decision by the U.S. Court of Appeals for the DC Circuit in Maine Public Utilities Commission (PUC) v. Federal Energy Regulatory Commission. The industry groups claim the decision fashions a new exception to the Mobile-Sierra doctrine when contracts are challenged by noncontracting third parties.

This past spring a federal appeals court in Washington, DC, affirmed most of FERC's decision approving a 2006 comprehensive settlement that redesigned the New England electric capacity market. However, the court rejected and remanded a portion of the settlement that "unlawfully deprived nonsettling parties" of the right to challenge rates under the more lenient "just and reasonable" standard.

The Maine PUC and the attorneys general for Connecticut and Massachusetts had petitioned for review of the 2006 settlement, claiming that FERC's approval was "arbitrary and capricious, contrary to law and beyond the Commission's jurisdiction," according to the DC Circuit Court. "We reject most of these arguments, but we agree with the petitioners that the Commission has unlawfully deprived nonsettling parties of their rights under the Federal Power Act" to challenge settlement rates, a three-judge appellate panel ruled.

In their brief the industry groups said the decision "will have dramatic, far-reaching consequences for the nation's energy markets" and pointed to a recent decision in a case involving Morgan Stanley.

"In its Morgan Stanley decision issued this past summer, the Supreme Court acknowledged that upholding the integrity of contracts is vital to the development and preservation of this nation's bulk power markets, particularly in promoting needed capital investments," said EPSA CEO John E. Shelk. "Similarly, the lower court's decision in this case must be reversed in order to help consumers avoid the risk premium that would help drive up energy prices if contract integrity is uncertain."

The industry groups said both the Federal Power Act and the Supreme Court's recent decision in Morgan Stanley clearly recognize the importance of upholding the integrity of privately negotiated contracts. The Mobile-Sierra doctrine allows for contract modification only in extraordinary circumstances of unequivocal public necessity, EPSA asserted.

However, this past spring the court was adamant that Mobile-Sierra did not apply in this particular case. "This case is clearly outside the scope of the Mobile-Sierra doctrine...Mobile-Sierra is invoked when 'one party to a rate contract on file with FERC attempts to effect a unilateral rate change by asking FERC to relieve its obligations under a contract whose terms are no longer favorable to that party.' Here, the settling parties are attempting to thrust the 'public interest' standard of review upon nonsettling third parties who have vociferously objected to the terms of the settlement agreement," the court said. Eight of 115 parties involved in the settlement negotiations opposed the agreement.

"When a rate challenge is brought by a noncontracting third party, the Mobile-Sierra doctrine simply does not apply; the proper standard of review remains the 'just and reasonable' standard in Section 206 of the Federal Power Act."

The EPSA brief argues that the DC Circuit's decision carves out a new and unjustified exception to the Mobile-Sierra doctrine, narrowing its field of application to the point of effectively nullifying its protections. "If not corrected, the DC Circuit's new exception will gut Morgan Stanley, effectively consigning that decision and the Mobile-Sierra doctrine to a footnote in the regulation of the energy industry, and upending the stability of long-term contracts on which this nation's energy markets depend," the the industry groups' brief said.

"Regulatory certainty, including the assurance that contracts for Commission-jurisdictional services are protected from modification, has played a central role in the development of this nation's bulk power markets."

In June, while upholding the use of the Mobile-Sierra doctrine of contract sanctity, the Supreme Court said the Federal Energy Regulatory Commission did not do an adequate job of evaluating harm to consumers, nor in reviewing the possible role of alleged unlawful market manipulation, in its decision to uphold long-term contracts signed by utilities with power suppliers in the midst of the implosion of the California power market in 2000 and 2001. The case involved contracts signed by the Snohomish County Public Utility District (PUD) in Washington state and by Las Vegas, NV-based Nevada Power Co., which is owned by Sierra Pacific Resources, with marketers, the Morgan Stanley Capital Group (06-1457) and American Electric Power Service Corp. (06-1462).

In a 5-2 decision, with Judge Antonin Scalia writing the majority opinion, the Court remanded the case to the Commission and the Ninth Circuit for further review (see NGI, June 30, 2008). Last month FERC set a paper hearing on the remand of the seven-year-old case (see NGI, Dec. 22, 2008).

In Maine PUC v. FERC, EPSA and NGSA were joined in the brief by the Colorado Independent Energy Association, the Electric Power Generation Association, the Independent Power Producers of New York, the New England Power Generators Association Inc., the Northwest and Intermountain Power Producers Coalition and the Western Power Trading Forum.

The complete brief is available at www.epsa.org.

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