Appearing before the U.S. Supreme Court last Tuesday, Connecticut Attorney General (AG) Richard Blumenthal suggested that the court modify the more stringent Mobile-Sierra doctrine to make it more accommodating for noncontracting third parties to challenge contract rate cases. The court's ruling could have far-reaching ramifications for the sanctity of electricity and natural gas contracts.
At issue is whether the well settled Mobile-Sierra doctrine -- which bars the Federal Energy Regulatory Commission (FERC) from modifying or abrogating electricity and natural gas contracts unless they are shown to be contrary to the public interest -- applies when a contract is challenged by someone who is not party to a contract. Under Mobile-Sierra FERC may only set aside a contract for the most compelling reasons.
Before the high court is a decision by the U.S. Court of Appeals for the DC Circuit in Maine Public Utilities vs. Federal Energy Regulatory Commission, which would allow noncontracting third parties to challenge rates under the ordinary and more lenient "just and reasonable" standard rather than the stricter Mobile-Sierra public interest standard. NRG Power Marketing LLC and the states of Connecticut and Massachusetts are seeking reversal of the April 2008 ruling, arguing that it would threaten the sanctity of power and natural gas contracts. Blumenthal, who represented the Maine Public Utilities Commission and New England states, defended the appellate court's decision before the higher court.
The case is a complex one and the associate justices were all over the map with their opinions and questions. From the tenor of the oral arguments, some believe the lower court's ruling may be on shaky ground.
"At oral argument the court appeared set to find that the public necessity standard [Mobile-Sierra] does apply to all third parties as well as to parties to a contract..." a finding that "would overturn 74 years of the practice under the Federal Power Act (and Natural Gas Act) by not only reversing the burden of proving the rates to be just and reasonable, which the statute imposes on the utility seller, but also [would] establish such a high standard of proof" which Associate Justice Antonin Scalia, prior to being named to Supreme Court, once called "virtually insurmountable," the watchdog group Public Citizen said in a letter to Sen. Barbara Boxer (D-CA) last week.
Blumenthal suggested that the Supreme Court take a middle-of-the-road approach. "If the court were to modify or clarify the public interest standard [Mobile-Sierra] to make it more accommodating to the kinds of challenges [by third parties that] we've been discussing, that could be one outcome," said Blumenthal.
"That's a third standard between just and reasonable and public interest. You want us to add another tier?" Associate Justice Ruth Bader Ginsburg asked Blumenthal. "Well simply to clarify that it involves not necessarily an insurmountable barrier," the Connecticut AG responded.
Chief Justice John Roberts interrupted to note that this was a "third question that's not presented" before the high court.
While defending the the lower court's decision, Blumenthal suggested that "perhaps" the D.C. Circuit should have "said in its opinion -- Mobile-Sierra does not apply to noncontracting parties when there are contracts that 'produce tariff rates.'
"[That] one modifier would have spared this court and ourselves the difficulties that we now have," Blumenthal said. But the circuit court "didn't say that," Ginsburg added.
The question before the court "is whether there is a broad-based, third-party exception to Mobile-Sierra. and the answer is 'no.' Mobile-Sierra can't be the energy law equivalent of the Maginot Line, that protects against direct results from the [contracting] parties themselves, but provides no protection, [none] whatsoever, against complaints by non contracting parties," said Jeffrey A. Lamken, attorney for NRG Power Marketing. He noted that FERC agreed with NRG's position that there is no third-party exception to the Mobile-Sierra Doctrine.
"This case concerns a bedrock principle of federal energy law -- whether Mobile-Sierra's public interest standard ceases to apply whenever a contract rate is challenged by a noncontracting party," Blumenthal said.
"I actually think the answer to the question so far...presented is 'sometimes,'" the Mobile-Sierra standard applies to third-party challengers and other times it doesn't, said Associate Justice Stephen G. Breyer. "It depends on a lot of things, situations, circumstances, arguments to commissions, what they held, et cetera. So maybe that's the thing to do...Send it [lower court decision] back, say it depends on circumstances, time, et cetera, and then they can argue these things out that we've just been hearing," he said.
"The 'sometimes' is absolutely right from our standpoint," but not in the case before the court, Blumenthal responded. But Roberts interjected that "if we ruled that -- if we decided it on that basis, we would be giving FERC a victory on the question of its authority to depart from Mobile-Sierra, even though that [question] wasn't presented in this case."
Scalia didn't like the "sometimes" approach. "Has anybody before even suggested that Mobile-Sierra is a sometimes thing? Does any of our opinions say that it's a sometimes thing?" he asked. The justice questioned how a "sometimes" doctrine could "produce the stability in the industry that Mobile-Sierra was intended to produce.
"That was the whole purpose of Mobile-Sierra. People had to be able to predict whether they can take natural gas out of the ground, how much they can make on it, and once they entered into an arm's-length contract, [that] they would be able to rely on it...And now you want us to say, well sometimes, it will work, and sometimes it won't. And we're not going to say when, we're going to leave it to the D.C. Circuit to invent some 'sometimes.'"
But Breyer thought there was merit to the approach. "I guess you could mount a challenge on the grounds that to apply the contract regime system to circumstances X, Y and Z, without permitting your challenge that you want is, in fact, a violation of the APA [Administrative Procedure Act]. Now that's why I say "sometimes."...If you want it [right to challenge contracts under lenient standards] all the time...you're not getting sympathy from me," Breyer told Blumenthal.
In its decision, "the D.C. Circuit Court's reasoning was very simple: You're a contracting party, [so] you're bound to it [Mobile-Sierra]. Why should the others who didn't agree to this term be bound by Mobile-Sierra. That's the essence of their holding," Associate Justice Sonia Sotomayor said.
"Nobody is arguing that a noncontracting party is bound to terms that it didn't agree to in a contract. The question is that, when a noncontracting party comes in to challenge the terms that...a buyer and seller have agreed to, what is the standard that should apply for that outsider to come in and challenge the rate the two people have agreed to.
"Mobile-Sierra and [the high court's ruling in] Morgan Stanley all provide the answer, and that is the public interest standard" should bind third parties that want to challenge contracts, Lamken said.
"The court of appeals ruling can't be reconciled with Mobile-Sierra foundation and the need for contractual certainty. The whole point is to provide certainty of contract...But few could risk entering into such contracts and make those investments if...the Mobile-Sierra doctrine applied only to contracting parties, the two people who signed the contracts" and not to third-party challengers, he 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," Roberts observed.
Ginsburg pointed out that the case before the court doesn't involve bilateral contracts, but rather settlement rates, and questioned whether Mobile-Sierra was even applicable. "That's quite a different picture than the bilateral contracts that were at issue in Sierra and Mobile," she said. The lower court, however, did not address this question, and the Supreme Court did not grant certiorari on it.
Eric D. Miller, assistant to the solicitor general for the Department of Justice who represented FERC, urged the court to reverse the lower court's ruling and remand issues that were unresolved by the D.C. Circuit.
Based on the lower court decision, Lamken said FERC "has actually gone back and rewritten more than 50 contracts to create an exemption for noncontracting parties," Lamken told the court.
"I'm sorry. What do you mean, an exemption for noncontracting parties?" Roberts asked. It simply says that the "Mobile-Sierra doctrine can't apply when the challenge is brought by a noncontracting party, but rather what FERC wrote into the contracts effectively was the highest standard permitted by law" to be applied to them, Lamken said.
In support of NRG, the Electric Power Supply Association (EPSA), the Natural Gas Supply Association and six other industry groups filed a brief in late 2008 urging the high court to reverse the lower court's decision, which they claim threatens the integrity of privately negotiated energy contracts when challenged by any entity that is not a party to the contract. The industry groups claim that the decision provides a new exception to the stricter, higher threshold Mobile-Sierra doctrine when contracts are challenged by noncontracting third parties (see NGI, Jan. 5).
In the April 2008 ruling the federal appeals court 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 lenient "just and reasonable" standard.
In their brief the industry groups said the appellate court's decision "will have dramatic, far-reaching consequences for the nation's energy markets" and pointed to a 2008 court decision in a case involving Morgan Stanley.
The industry groups said both the Federal Power Act and the Supreme Court's decision in the Morgan Stanley case 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.
But the DC appeals 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 appeals court said at the time.
The EPSA brief argued 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 industry groups' brief said.
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