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High Court Schedules Oral Argument in Contract Sanctity Case

October 26, 2009
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The U.S. Supreme Court is scheduled to hear oral arguments next month in a case that could have far-reaching ramifications for the sanctity of electricity and natural gas contracts.

NRG Power Marketing LLC, and others are seeking reversal of an April 2008 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 more lenient "just and reasonable" standard.

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 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 industry groups claim the decision provides a new exception to the stricter 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.

The Supreme Court oral arguments in the case are scheduled for Nov. 3.

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