NRG POWER MARKETING, LLC, ET AL. v. MAINE PUBLIC UTILITIES COMMISSION ET AL.
No. 08-674
Supreme Court of the United States
January 13, 2010
558 U.S. 165
Argued November 3, 2009
Eric D. Miller argued the cause for the Federal Energy Regulatory Commission urging reversal. With him on the briefs were Solicitor General Kagan, Deputy Solicitor General Kneedler, Cynthia A. Marlette, Robert H. Solomon, and Lona T. Perry.
JUSTICE GINSBURG delivered the opinion of the Court.
The Federal Power Act (FPA or Act), 41 Stat. 1063, as amended,
This case stems from New England‘s difficulties in main
We reverse the D. C. Circuit‘s judgment to thе extent that it rejects the application of Mobile-Sierra to noncontracting parties. Our decision in Morgan Stanley, announced three months after the D. C. Circuit‘s disposition, made clear that the Mobile-Sierra public interest standard is not an exception to the statutory just-and-reasonable standard; it is an application of that standard in the context of rates set by contract. The “venerable Mobile-Sierra doctrine” rests on “the stabilizing force of contracts.” Morgan Stanley, 554 U. S., at 548; see id., at 551 (describing contract rates as “a key source of stability“). To retain vitality, the doctrine must control FERC itself, and, we hold, challenges to contract rates brought by noncontracting as well as contracting parties.
I
In a capacity market, in contrast to a wholesale-energy market, an electricity provider purchases from a generator an option to buy a quantity of energy, rather than purchasing the energy itself. To maintain the reliability of the grid,
In 2003, a group of generators sought to enter into “reliability must-run” agreements with the New England Independent System Operator (ISO), which operates the region‘s transmission system.1 In its orders addressing those agreements, FERC directed the ISO to develop a new market mechanism that would set prices separately for various geographical subregions. Devon Power LLC, 103 FERC ¶ 61,082, pp. 61,266, 61,271 (2003).
In March 2004, the ISO proposed a market structure responsive to FERC‘s directions. See Devon Power LLC, 107 FERC ¶ 61,240, p. 62,020 (2004). FERC set the matter for hearing before an Administrative Law Judge (ALJ), who issued a 177-page order largely accepting the ISO‘s proposal. Devon Power LLC, 111 FERC ¶ 63,063, p. 65,205 (2005). Several parties filed exceptions to the ALJ‘s order; on September 20, 2005, the full Commission heard arguments on the proposed market structure, and thereafter established settlement procedures. Devon Power LLC, 113 FERC ¶ 61,075, p. 61,271 (2005).
After four months of negotiations, on March 6, 2006, a settlement was reached. Of the 115 negotiating parties, only 8 opposed the settlement.
The issue before us centers on § 4.C of the Agreement (hereinafter Mobile-Sierra provision). Under that provision, challenges to both transition-period payments and auction-clearing prices would 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)[,] and [FPC] v. Sierra Pacific Power Co., 350 U. S. 348 (1956) (the ’Mobile-Sierra’ doctrine).” App. 95. Mobile-Sierra applies, § 4.C instructs, “whether the [price is challenged] by a Settling Party, a non-Settling Party, or [by] the FERC acting sua sponte.” Ibid.
FERC approved the Settlement Agreement, “finding that as a package, it presents a just and reasonable outcome for this proceeding consistent with the public interest.” 115 FERC, at 62,304. The Mobile-Sierra provision, FERC explicitly determined, “appropriately balances the need for rate stability and the interests of the diverse entities who will be subject to the [forward capacity market‘s auction system].” Id., at 62,335.
Because of the importance of the issue, and in light of our recent decision in Morgan Stanley, we granted certiorari, 556 U. S. 1207 (2009), to resolve this question: “[Does] Mobile-Sierra‘s public-interest standard appl[y] when a contract rate is challenged by an entity that was not a party to the contract[?]” Brief for Petitioners i. Satisfied that the answer to that question is yes, wе reverse the D. C. Circuit‘s judgment insofar as it rejected application of Mobile-Sierra to noncontracting parties.
II
The FPA gives FERC authority to regulate the “sale of electric energy at wholesale in interstate commerce.” See
The Sierra case involved a further issue. Not only had the Commission erroneously concluded that a newly filed tariff superseded a contract rate. In addition, the Commission had suggested that, in any event, the contract rate, which the utility sought to escape, was itself unjust and unreasonable. The Commission thought that was so “solely because [the contract rate] yield[ed] less than a fair return on the [utility‘s] net invested capital.” 350 U. S., at 355.
The Commission‘s suggestion prompted this Court to home in on “the question of how the Commission may evaluate whether a contract rate is just and reasonable.” Morgan Stanley, 554 U. S., at 533. The Sierra Court answered the question this way:
“[T]he Commission‘s conclusion appears on its face to be based on an erroneous standard. . . . [W]hile it may be that the Commission may not normally impose upon a public utility a rate which would produce less than a fair return, it does not follow that the public utility may not itself agrеe by contract to a rate affording less than a fair return or that, if it does so, it is entitled to be relieved of its improvident bargain. . . . In such circumstances the sole concern of the Commission would seem
to be whether the rate is so low as to adversely affect the public interest—as where it might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory.” 350 U. S., at 354-355 (some emphasis added).
In a later case, we similarly explained: “The regulatory system created by the [FPA] is premised on contractual agreements voluntarily devised by the regulated companies; it contemplates abrogation of these agreements only in circumstances of unequivocal public necessity.” Permian Basin Area Rate Cases, 390 U. S. 747, 822 (1968).3
Two Terms ago, in Morgan Stanley, 554 U. S. 527, the Court reaffirmed and clarified the Mobile-Sierra doctrine. That case presented two questions: First, does the Mobile-Sierra presumption (that contract rates freely negotiated between sophisticated parties meet the just-and-reasonable standard imposed by
Morgan Stanley did not reach the question presented here: Does Mobile-Sierra‘s public interest standard apply to challenges to contract rates brought by noncontracting parties? But Morgan Stanley‘s reasoning strongly suggests that the D. C. Circuit‘s negative answer misperceives the aim, and diminishes the force, of the Mobile-Sierra doctrine.
In unmistakably plain language, Morgan Stanley restated Mobile-Sierra‘s instruction to the Commission: FERC “must presume that the rate set out in a freely negotiated wholesale-energy contract meets the ‘just and reasonable’ requirement imposed by law. The presumption may be overcome only if FERC concludes that the contract seriously harms the public interest.” 554 U. S., at 530. As our instruction to FERC in Morgan Stanley conveys, the public interest standard is not, as the D. C. Circuit presented it, a standard independent of, and sometimes at odds with, the “just and reasonable” standard, see 520 F. 3d, at 478; rather, the public interest standard defines “what it means for a rate to satisfy the just-and-reasonable standard in the contract context,” Morgan Stanley, 554 U. S., at 546. And if FERC itself must presume just and reasonable a contract rate re
Moreover, the Mobile-Sierra doctrine does not overlook third-party interests; it is framed with a view to their protection. The doctrine directs the Commission to reject a contract rate that “seriously harms the consuming public.” Morgan Stanley, 554 U. S., at 545-546; see Verizon Communications Inc. v. FCC, 535 U. S. 467, 479 (2002) (When a buyer and a seller agree upon a rate, “the principal regulatory responsibility [i]s not to relieve a contracting party of an unreasonable rate, . . . but to protect against potential discrimination by favorable contract rates between allied businesses to the detriment of other wholesale customers.” (emphasis added)).
Finally, as earlier indicated, see supra, at 173-174, the D. C. Circuit‘s confinement of Mobile-Sierra to rate challenges by contracting parties diminishes the animating purpose of the doctrine: promotion of “the stability of supply arrangements which all agree is essential to the health of the [energy] industry.” Mobile, 350 U. S., at 344. That dominant concern was expressed by FERC in the order on review: “Stability is particularly important in this case, which was initiated in part because of the unstable nature of [installed capacity] revenues and the effect that has on generating units, particu-
We therefore hold that the Mobile-Sierra presumption does not depend on the identity of the complainant who seeks FERC investigation. The presumption is not limited to challenges to contract rates brought by contracting pаrties. It applies, as well, to challenges initiated by third parties.
III
The objectors to the settlement appearing before us maintain that the rates at issue in this case—the auction rates and the transition payments—are prescriptions of general applicability rather than “contractually negotiated rates,” hence Mobile-Sierra is inapplicable. See Brief for Respondents 15-17, and n. 1 (internal quotation marks omitted). FERC agrees that the rates covered by the settlement “are not themselves contract rates tо which the Commission was required to apply Mobile-Sierra.” Brief for FERC 15. But, FERC urges, “the Commission had discretion to do so,” id., at 28; furthermore, “[t]he court of appeals’ error in creating a third-party exception to the Mobile-Sierra presumption is a sufficient basis for reversing its judgment,” id., at 22. Whether the rates at issue qualify as “contract rates,” and, if not, whether FERC had discretion to treat them analogously are questions raised before, but not ruled upon by, the Court of Appeals. They remain open for that court‘s consideration on remand. See Tr. of Oral Arg. 16.
It is so ordered.
JUSTICE STEVENS, dissenting.
The opinion that the Court announces today is the third chapter in a story about how a reasonable principle, extended beyond its foundation, becomes bad law.
In the first chapter the Court wisely and correctly held that a seller who is a party to a long-term contract to рrovide energy to a wholesaler could not unilaterally repudiate its contract obligations in response to changes in market conditions by simply filing a new rate schedule with the regulatory commission. Only if the rate was so low that the seller might be unable to stay in business, thereby impairing the public interest, could the seller be excused from performing its contract. That is what the Court held in United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U. S. 332 (1956), and FPC v. Sierra Pacific Power Co., 350 U. S. 348 (1956).
In the second chapter the Court unwisely and incorrectly held that the same rule should apply to a buyer who had been forced by unprecedеnted market conditions to enter into a long-term contract to buy energy at abnormally high prices. The Court held the Federal Energy Regulatory Commission (FERC) could not set aside such a contract as unjust and unreasonable, even though it saddled consumers with a duty to pay prices that would be considered unjust and unreasonable under normal market conditions, unless the purchaser could also prove that “the contract seriously harms the public interest.” Morgan Stanley Capital Group Inc. v. Public Util. Dist. No. 1 of Snohomish Cty., 554 U. S. 527, 530 (2008).
As I explained in my dissent in Morgan Stanley, the imposition of this additional burden on purchasers challenging rates was not authorized by the governing statute. Under the Federal Power Act (FPA), all wholesale electricity rates must be “just and reasonable.”
But even accepting Morgan Stanley as the law, the Court unwisely goes further today. In this third chapter of the Mobile-Sierra story, the Court applies a rule—one designed initially to protect the enforceability of freely negotiated contracts against parties who seek a release from their obligations—to impose a special burden on third parties exercising their statutory right to object to unjust and unreasonable rates. This application of the rule represents a quantum leap from the modest origin set forth in the first chapter of this tale. As the Court of Appeals correctly concluded in the opinion that the Court sets aside today: “This case is clearly outside the scope of the Mobile-Sierra doctrine.” Maine Pub. Util. Comm‘n v. FERC, 520 F. 3d 464, 477 (CADC 2008) (per curiam).
As the D. C. Circuit noted,2 “[c]ourts have rarely mentioned the Mobile-Sierra doctrine without reiterating that it is premised on the existence of a voluntary contract between the parties.” Ibid. But, the Court asks, “if FERC itself must presume just and reasonable a contract rate resulting from fair, arm‘s-length negotiations, how can it be maintained that noncontracting parties nevertheless may escape that presumption?” Ante, at 174-175. This Court‘s under-
The Court further reasons that “confinement of Mobile-Sierra to rate challenges by contracting parties diminishes the animating purpose of the doctrine,” which is ensuring the stability of contract-based supply arrangements. Ante, at 175. Maybe so, but applying Mobile-Sierra to rate challenges by noncontracting parties loses sight of the animating purpose of the FPA, which is “the protection of the public interest.” Sierra, 350 U. S., at 355. That interest is “the interest of consumers in paying ‘the “lowest possible reasonаble rate consistent with the maintenance of adequate service in the public interest.“‘” Morgan Stanley, 554 U. S., at 561 (STEVENS, J., dissenting) (quoting Permian Basin, 390 U. S., at 793). I do not doubt that stable energy markets are important to the public interest, but “under the FPA, Congress has charged FERC, not the courts, with balancing the short-term and long-term interests of consumers” under the just-and-reasonable standard of review. Morgan Stanley, 554 U. S., at 563 (STEVENS, J., dissenting). The Court
The Court assures respondents that the “public interest standard” does not “overlook third-party interests” and is “framed with a view to their protection.” Ante, at 174, 175. Perhaps in practice the Mobile-Sierra doctrine will protect third parties’ interests, and the public interest, just as well as the so-called “ordinary” just-and-reasonable standard. But respondents are rightly skeptical. The Mobile-Sierra doctrine, as interpreted by the Court in Morgan Stanley, must pose a higher bar to respondents’ rate challenge—that is, it requires them to show greater harm to the public.4
It was sensible to require a contracting party to show something more than its own desire to get out of what proved to be a bad bargain before FERC could abrogate the parties’ bargain. It is not sensible, nor authorized by the statute, for the Court to change the de facto standard of review whenever a rate is set by private contract, based solely on the Court‘s view that contract stability should be preserved unless there is extraordinary harm to the public interest.
For these reasons, I respectfully dissent.
Notes
Briefs of amici curiae urging affirmance were filed for the American Public Power Association et al. by Scott H. Strauss, Susan N. Kеlly, Wallace F. Tillman, and Richard Meyer; for Public Citizen, Inc., et al. by Scott L. Nelson, Lynn Hargis, and Barbara Jones; and for the California Public Utilities Commission by Kevin K. Russell, Frank R. Lindh, Elizabeth M. McQuillan, and Karen P. Paull.