Morgan Stanley Capital Grp. Inc. v. Pub. Util. Dist. No. 1 of Snohomish Cnty.

• Decision Date: 26 June 2008
• Docket Number: 04–1462.,Nos. 06–1457,s. 06–1457
• Citation: 76 USLW 4619,21 Fla. L. Weekly Fed. S 486,554 U.S. 527,08 Cal. Daily Op. Serv. 8196,62 A.L.R. Fed. 2d 787,2008 Daily Journal D.A.R. 9598,128 S.Ct. 2733,171 L.Ed.2d 607
• Court: U.S. Supreme Court
• Parties: MORGAN STANLEY CAPITAL GROUP INC., Petitioner, v. PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH COUNTY et al.American Electric Power Service Corporation, et al., Petitioners, v. Public Utility District No. 1 of Snohomish County, Washington, et al.

08 Cal. Daily Op. Serv. 8196

128 S.Ct. 2733

171 L.Ed.2d 607

2008 Daily Journal D.A.R. 9598

21 Fla. L. Weekly Fed. S 486

554 U.S. 527

62 A.L.R. Fed. 2d 787

76 USLW 4619

MORGAN STANLEY CAPITAL GROUP INC., Petitioner,

v.PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH COUNTY et al.American Electric Power Service Corporation, et al., Petitioners,

v.Public Utility District No. 1 of Snohomish County, Washington, et al.

Nos. 06–1457

04–1462.

Supreme Court of the United States

Argued Feb. 19, 2008.Decided June 26, 2008.

Syllabus ^*

Under the Mobile–Sierra doctrine, the Federal Energy Regulatory Commission (FERC) must presume that the electricity rate set in a freely negotiated wholesale-energy contract meets the “just and reasonable” requirement of the Federal Power Act (FPA), see 16 U.S.C. § 824d(a), and the presumption may be overcome only if FERC concludes that the contract seriously harms the public interest. See United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332, 76 S.Ct. 373, 100 L.Ed. 373; FPC v. Sierra Pacific Power Co., 350 U.S. 348, 76 S.Ct. 368, 100 L.Ed. 388. Under FERC's current regulatory regime, a wholesale electricity seller may file a “market-based” tariff, which simply states that the utility will enter into freely negotiated contracts with purchasers. Those contracts are not filed with FERC before they go into effect. In 2000 and 2001, there was a dramatic increase in the price of electricity in the western United States. As a result, respondents entered into long-term contracts with petitioners that locked in rates that were very high by historical standards. Respondents subsequently asked FERC to modify the contracts, contending that the rates should not be presumed just and reasonable under Mobile–Sierra. The Administrative Law Judge concluded that the presumption applied and that the contracts did not seriously harm the public interest. FERC affirmed, but the Ninth Circuit remanded. The court held that contract rates are presumptively reasonable only where FERC has had an initial opportunity to review the contracts without applying the Mobile–Sierra presumption and therefore that the presumption should not apply to contracts entered into under “market-based” tariffs. The court alternatively held that there is a different standard for overcoming the Mobile–Sierra presumption when a purchaser challenges a contract: whether the contract exceeds a “zone of reasonableness.”

Held:

1. FERC was required to apply the Mobile–Sierra presumption in evaluating the contracts here. Sierra held that a rate set out in a contract must be presumed to be just and reasonable absent serious harm to the public interest, regardless of when the contract is challenged. FPC v. Texaco Inc., 417 U.S. 380, 94 S.Ct. 2315, 41 L.Ed.2d 141, distinguished. Also, the Ninth Circuit's rule requiring FERC to ask whether a contract was formed in an environment of market “dysfunction” is not supported by this Court's cases and plainly undermines the role of contracts in the FPA's statutory scheme. Pp. 2745 – 2747.

2. The Ninth Circuit's “zone of reasonableness” test fails to accord an adequate level of protection to contracts. The standard for a buyer's rate-increase challenge must be the same, generally, as the standard for a seller's challenge: The contract rate must seriously harm the public interest. The Ninth Circuit misread Sierra in holding that the standard for evaluating a high-rate challenge and setting aside a contract rate is whether consumers' electricity bills were higher than they would have been had the contract rates equaled “marginal cost.” Under the Mobile–Sierra presumption, setting aside a contract rate requires a finding of “unequivocal public necessity,” Permian Basin Area Rate Cases, 390 U.S. 747, 822, 88 S.Ct. 1344, 20 L.Ed.2d 312, or “extraordinary circumstances,” Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571, 582, 101 S.Ct. 2925, 69 L.Ed.2d 856. Pp. 2747 – 2749.

3. The judgment below is nonetheless affirmed on alternative grounds, based on two defects in FERC's analysis. First, the analysis was flawed or incomplete to the extent FERC looked simply to whether consumers' rates increased immediately upon conclusion of the relevant contracts, rather than determining whether the contracts imposed an excessive burden “down the line,” relative to the rates consumers could have obtained (but for the contracts) after elimination of the dysfunctional market. Sierra's “excessive burden” on customers was the current burden, not just the burden imposed at the contract's outset. See 350 U.S., at 355, 76 S.Ct. 368. Second, it is unclear from FERC's orders whether it found respondents' evidence inadequate to support their claim that petitioners engaged in unlawful market manipulation that altered the playing field for contract negotiations. In such a case, FERC should not presume that a contract is just and reasonable. Like fraud and duress, unlawful market activity directly affecting contract negotiations eliminates the premise on which the Mobile–Sierra presumption rests: that the contract rates are the product of fair, arms-length negotiations. On remand, FERC should amplify or clarify its findings on these two points. Pp. 2749 – 2751.

471 F.3d 1053, affirmed and remanded.

SCALIA, J., delivered the opinion of the Court, in which KENNEDY, THOMAS, and ALITO, JJ., joined, and in which GINSBURG, J., joined as to Part III. GINSBURG, J., filed an opinion concurring in part and concurring in the judgment. STEVENS, J., filed a dissenting opinion, in which SOUTER, J., joined. ROBERTS, C.J., and BREYER, J., took no part in the consideration or decision of the cases.

Edwin S. Kneedler, for the respondent Federal Energy Regulatory Commission, in support of petitioners.

Walter Dellinger, for petitioners.

Christopher J. Wright, for respondents.Paul D. Clement, Solicitor General, Counsel of Record, Department of Justice, Washington, D.C., for Federal Energy Regulatory Commission.Donald B. Ayer, Counsel of Record, Clark Evans Downs, Lawrence D. Rosenberg, Kenneth B. Driver, Shay Dvoretzky, Juliet J. Karastelev, Jones Day, Washington, DC, for Petitioner American Electric Power Service Corp., Robert F. Shapiro, Merrill L. Kramer, Chadbourne & Parke LLP, Washington, DC, for Petitioner Allegheny Energy Supply Company, LLC, Walter Dellinger, Counsel of Record, Sri Srinivasan, Mark S. Davies, Ryan W. Scott, Admitted only in Illinois, O'Melveny & Myers LLP, Washington, DC, Paul J. Pantano, Jr., Michael A. Yuffee, McDermott Will & Emery LLP, Washington, DC, Eric F. Grossman, Zachary D. Stern, Morgan Stanley Capital Group Inc., New York, NY, 10019 Counsel for Petitioner Morgan Stanley Capital Group Inc.Richard G. Taranto, Farr & Taranto, Washington, DC, for Nevada Power Co. and Sierra Pacific Power Co., Christopher J. Wright, Counsel of Record, Harris, Wiltshire & Grannis LLP, Washington, DC, for Snohomish County PUD No. 1.Paul J. Kaleta, Nevada Power Company, Las Vegas, NV, Roger Berliner, Berliner Law PLLC, Washington, DC, for Nevada Power Co. and Sierra Pacific Power Co.Eric P. Witkoski, Office of the Nevada Attorney General, Bureau of Consumer Protection, Las Vegas, NV, Eric Christensen, Everett, WA, John E. McCaffrey, David D'Alessandro, Kelly A. Daly, Stinson Morrison Hecker LLP, Washington, DC, for the Office of the Nevada Attorney General, Bureau of Consumer Protection.Randolph Lee Elliott, Counsel of Record, Milton J. Grossman, Jeffrey K. Janicke, Miller, Balis & O'Neil, P.C., Washington, DC, for Respondent Golden State Water Company.Randolph L. Wu, Mary F. McKenzie, Harvey Y. Morris, Elizabeth M. McQuillan, Public Utilities Commission of the State of California, San Francisco, CA, Counsel for the Public Utilities Commission of the State of California.William J. Kayatta, Jr. (Counsel of Record), Jared S. des Rosiers, Louise K. Thomas, Clifford H. Ruprecht, Catherine R. Connors, Lucus A. Ritchie, Pierce Atwood LLP, Portland, ME, for California Electricity Oversight Board.Cynthia A. Marlette, General Counsel, Robert H. Solomon, Lona T. Perry, Senior Attorney, Federal Energy Regulatory Commission, Washington, D.C., Paul D. Clement, Solicitor General, Counsel of Record, Edwin S. Kneedler, Deputy Solicitor General, Eric D. Miller, Assistant to the Solicitor General, Department of Justice, Washington, D.C., for Federal Energy Regulatory Commission.Eric F. Grossman, Zachary D. Stern, Morgan Stanley Capital Group Inc., New York, NY, Paul J. Pantano, Jr., Michael A. Yuffee, McDermott Will & Emery LLP, Washington, DC, Walter Dellinger, Counsel of Record, Sri Srinivasan, Mark S. Davies, O'Melveny & Myers LLP, Washington, DC, for Petitioner.Robert F. Shapiro, Merrill L. Kramer, Chadbourne & Parke LLP, Washington, D.C., for Petitioner Allegheny Energy Supply Company, LLC.Donald B. Ayer (Counsel of Record), Clark Evans Downs, Lawrence D. Rosenberg, Kenneth B. Driver, Shay Dvoretzky, Juliet J. Karastelev, Jones Day, Washington, D.C. for Petitioner American Electric Power Service Corp.Keith R. McCrea, Kent L. Jones, William H. Penniman, Sutherland Asbill & Brennan LLP, Washington, D.C., for Petitioner Calpine Energy Services, L.P.Michael J. Gergen, Jared W. Johnson, Latham & Watkins LLP, Washington, D.C., for Respondent (in support of Petitioners) Mirant Energy Trading, LLC.Justice SCALIA delivered the opinion of the Court.

Under the Mobile–Sierra doctrine, the Federal Energy Regulatory Commission (FERC or Commission) 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. These cases present two questions about the scope of the Mobile–sierra doctrine: first, does the presumption apply only when ferc HAs had an initial opportunity to review a contract rate without the presumption? Second, does the presumption impose as high a bar...