Supreme Court Holds Mobile-Sierra Doctrine's Public Interest Standard Applies To Third Party Challenges

In an 8-1 decision, the Supreme Court has ruled that the Mobile-Sierra doctrine applies to third party challenges to negotiated contract rates under the Federal Power Act (“FPA”) and the Natural Gas Act (“NGA”). NRG Power Marketing, LLC v. Maine Public Utilities Commission, No. 08-674 (January 13, 2009) (“NRG”).  The Mobile-Sierra doctrine presumes that rates in freely negotiated wholesale contracts for electricity or natural gas are “just and reasonable” as required by sections 205 and 206 of the FPA, and sections 4 and 5 of the NGA.  Under the doctrine, FERC may alter the such negotiated contracts only if the presumption is rebutted by evidence establishing that the contract rate impairs the public interest.

THE MOBILE-SIERRA DOCTRINE

The Mobile-Sierra doctrine originated with twin decisions in 1956 rejecting attempts by regulated utilities to unilaterally file increased rates in place of previously agreed contract rates. United Gas Pipe Line Co. v. Mobile Gas Services Corp., 350 U.S. 332; FPC v. Sierra Pacific Power Co., 350 U.S. 348.  The two cases held that FERC may set aside a negotiated contract only if it finds that its rates, or terms and conditions affecting those rates, are inconsistent with the public interest.

In 2008, the Supreme Court ruled that the Mobile-Sierra cases establish a rebuttable presumption that contract rates freely negotiated between sophisticated business entities meet the statutory “just and reasonable” standard. Morgan Stanley Capital Group, Inc. v. Public Utility District No. 1, No. 06-1457, (June 26, 2008).  The Court held that Mobile-Sierra was not an exception to the “just and reasonable” standard.  Instead, the public interest standard defines “what it means for a rate to satisfy the just-and-reasonable standard in the contract context.” Id., slip op. at 17.  For more on the Morgan Stanley case, see July 1, 2008 Issue Alert “Supreme Court Clarifies the Mobile-Sierra Doctrine’s Public Interest Standard.”

THE NRG CASE

In 2004, the New England Independent System Operator (“ISO”) responded to FERC’s request that it develop a new market structure.  When several parties challenged an Administrative Law Judge’s Initial Decision accepting most of the ISO’s proposal, FERC approved a contested settlement reached by 107 of the 115 parties in the case.  Six non-settling parties challenged a provision of the approved settlement agreement that required application of the Mobile-Sierra public interest standard to any challenge to rates paid under the new market structure, whether by a settling party, non-settling party, or by FERC acting sua sponte.  The U.S. Court of Appeals for the D.C. Circuit Court agreed with the non-settling parties, holding that “when a rate challenge is brought by a non-contracting third party, the Mobile-Sierra doctrine simply does not apply.” Maine Public Utilities Commission v. FERC, 520 F.3d 464, 478 (D.C. Cir. 2008) (per curiam).

THE SUPREME COURT’S DECISION

The Majority Opinion

The Supreme Court granted certiorari to determine whether the Mobile-Sierra doctrine applies to non-contracting parties.  First, it first rejected the D.C. Circuit’s characterization of the Mobile-Sierra public interest standard as “independent of, and sometimes at odds with, the ‘just and reasonable’ standard.”  Instead, the Court reconfirmed its holding in Morgan Stanley that the public interest standard is an application of the statutory just and reasonable standard in the context of a negotiated contract. 

Responding to the D.C. Circuit’s statement that contracts bind only the contracting parties, the Court noted that FERC itself , while not a party to the contracts it reviews, is bound under Morgan Stanley by the Mobile-Sierra presumption.   It follows, the Court reasoned, that nonparties should not be able to challenge negotiated contract rates under a less restrictive standard.   The Court also rejected arguments that application of the Mobile-Sierra doctrine to third party challenges would leave the public interest unprotected.  It explained that because the doctrine is framed with a view to the protection of the “public interest,” FERC always retains the power to overturn a contract rate that “seriously harms the consuming public.”

The Court left unresolved the subsidiary questions of whether the rates established by the contested settlement in this particular case are in fact contract rates and, if not, whether FERC had discretion to treat them as contract rates.  It remanded those issues, which the D.C. Circuit has not reached, for initial consideration by the court of appeals.

Justice Stevens’ Dissent

Justice Stevens dissented.  In his view, the Court has extended the Mobile-Sierra doctrine beyond its original purpose to “impose a special burden on third parties exercising their statutory right to object to unjust and unreasonable rates.”

SIGNIFICANCE OF THE DECISION

The decision raises the bar for third party challenges to negotiated contract rates.  Such parties may be state utility commissions, consumer counsel or Attorney Generals, as well as consumer groups affected by the rates in issue.   In order to overcome the presumption that negotiated rates are just and reasonable, a third party challenger must now carry the same burden borne by the contracting parties, and demonstrate that the rate is inconsistent with the public interest.

The decision also solidifies the Court’s support of the Mobile-Sierra doctrine.  In Morgan Stanley, the recusals of Chief Justice Roberts and Justice Breyer left only a 5-2 majority in support of the Court’s decision.  The replacement of Justice Souter with Justice Sotomayor and the participation of the Chief Justice and Justice Breyer in this case produced a more robust 8-1 decision that has affirmed and expanded the application of the doctrine.