554 U.S. 527 (2008), 06-1457, Morgan Stanley Capital Group Inc. v. Public Utility District No. 1 of Snohomish County

Docket Nº:06-1457, 06-1462.
Citation:554 U.S. 527, 128 S.Ct. 2733, 171 L.Ed.2d 607, 76 U.S.L.W. 4619
Opinion Judge:Scalia, Justice
Party Name: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.
Attorney:Walter Dellinger argued the cause for petitioners in both cases. With him on the briefs for petitioner in No. 06-1457 were Sri Srinivasan, Mark S. Davies, Zachary D. Stern, Paul J Pantano, Jr., and Michael A. Yuffee. Donald B. Ayer, Lawrence D. Rosenberg, Shay Dvoretzky, Juliet J. Karastelev, Rob...
Judge Panel: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, post, p. 555. Stevens, J., filed a dissenting opinion, in which Sou...
Case Date:June 26, 2008
Court:United States Supreme Court
 
FREE EXCERPT

Page 527

554 U.S. 527 (2008)

128 S.Ct. 2733, 171 L.Ed.2d 607, 76 U.S.L.W. 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, 06-1462.

United States Supreme Court

June 26, 2008 [*]

Argued February 19, 2008.

Certiorari to the United States Court of Appeals for the Ninth Circuit No. 06-1457.

[128 S.Ct. 2734] 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., [128 S.Ct. 2735] 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."

Page 528

Held:

1. The Commission 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. 544-548.

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. 548-551.

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 [128 S.Ct. 2736] inadequate to support their claim that petitioners engaged in unlawful market manipulation that altered the playing field for contract negotiations. In such a case, the Commission 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. 552-555.

471 F.3d 1053, affirmed and remanded.

Page 529

[128 S.Ct. 2737] Walter Dellinger argued the cause for petitioners in both cases. With him on the briefs for petitioner in No. 06-1457 were Sri Srinivasan, Mark S. Davies, Zachary D. Stern, Paul J Pantano, Jr., and Michael A. Yuffee. Donald B. Ayer, Lawrence D. Rosenberg, Shay Dvoretzky, Juliet J. Karastelev, Robert F. Shapiro, Keith R. McCrea, Kent L. Jones, William H. Penniman, Michael J. Gergen, and Jared W. Johnson filed briefs for petitioners in No. 06-1462.

Deputy Solicitor General Kneedler argued the cause for respondent FERC in support of petitioners in both cases pursuant to this Court's Rule 12.6. With him on the brief were former Solicitor General Clement, Eric D. Miller, Cynthia A. Marlette, Robert H. Solomon, and Lona T. Perry.

Christopher J, Wright argued the cause for nonfederal respondents in both cases. With him on the brief for respondents Public Utility District No. 1 of Snohomish County et al. were Richard G. Taranto, Paul J Kaleta, Eric Christensen, John E. McCaffrey, David D'Alessandro, and Kelly A. Daly. Randolph Lee Elliott and Milton J. Grossman filed a brief in both cases for respondent Golden State Water Company. William J. Kayatta, Jr., Jared S. des Rosiers, Catherine R. Connors, Randolph L. Wu, Mary F. McKenzie, Harvey Y. Morris, and Elizabeth M. McQuillan filed a brief in both cases for respondents Public Utilities Commission of the State of California et al. [*]

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, post, p. 555. Stevens, J., filed a dissenting opinion, in which Souter, J., joined, post, p. 555. Roberts, C. J., and Breyer, J., took no part in the consideration or decision of the cases.

Page 530

OPINION

Scalia, Justice.

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

Page 531

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 to challenges by purchasers of wholesale electricity as it does to challenges by sellers?

I

A

Statutory Background

The Federal Power Act (FPA), 41 Stat. 1063, as amended, gives the Commission 1 the authority to regulate the sale of electricity in interstate commerce a market historically characterized by natural monopoly and therefore subject to abuses of market power. See 16 U.S.C. §824 et seq. (2000 ed., and Supp. V). Modeled on the Interstate Commerce Act, the FPA requires regulated utilities to file [128 S.Ct. 2738] compilations of their rate schedules, or "tariffs," with the Commission, and to provide service to electricity purchasers on the terms and prices there set forth. §824d(c). Utilities wishing to change their tariffs must notify the Commission 60 days before the change is to go into effect. §824d(d). Unlike the Interstate Commerce Act, however, the FPA also permits utilities to set rates with individual electricity purchasers through bilateral contracts. §824d(c), (d). As we have explained elsewhere, the FPA "departed from the scheme of purely tariff based regulation and acknowledged that contracts between commercial buyers and sellers could be used in ratesetting." Verizon Communications Inc. v. FCC, 535 U.S. 467, 479, 122 S.Ct. 1646, 152 L.Ed.2d 701 (2002). Like tariffs, contracts must be filed with the Commission before they go into effect. 16 U.S.C. §824d(c), (d).

The FPA requires all wholesale-electricity rates to be "just and reasonable." §824d(a). When a utility files a new

Page 532

rate with the Commission, through a change to its tariff or a new contract, the Commission may suspend the rate for up to five months while it investigates whether the rate is just and reasonable. §824d(e). The Commission may, however, decline to investigate and permit the rate to go into effect which does not amount to a determination that the rate is "just and reasonable." See 18 CFR §35.4 (2007)...

To continue reading

FREE SIGN UP