July 1, 2008
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U.S. Supreme Court Overturns Ninth Circuit Snohomish Decision Related to FERC Review of Electricity Contracts
By:
Craig Enochs and Kevin Page
The United States Supreme Court recently affirmed the applicability of the Mobile-Sierra doctrine and the "public interest"
standard of review to bilaterally negotiated energy contracts in the case of Morgan Stanley Capital Group Inc. v. Public Utility
District No. 1 of Snohomish County et al., Case No. 06-1457 (decided June 26, 2008).
Because of a dramatic increase in electricity prices in the western United States in 2000 and 2001, the Public Utility District No.
1 of Snohomish County (Snohomish) entered into long-term electricity contracts with Morgan Stanley Capital Group Inc. (Morgan Stanley).
Because of the state of the electricity market at such time, the rates under the Morgan Stanley-Snohomish tariff were extremely high
by historical standards for the area. Snohomish subsequently petitioned the Federal Energy Regulatory Commission (FERC) to modify the
contracts, claiming that the applicable rates should not be presumed to be "just and reasonable" and were contrary to the public
interest standard of the Mobile-Sierra doctrine.
Under the Mobile-Sierra doctrine, FERC must presume that electricity rates set forth in freely-negotiated wholesale-energy
contracts it has previously reviewed satisfy the "just and reasonable" requirements of the Federal Power Act (FPA).1
Such presumption may be overcome only if FERC determines that the contract is contrary to the public interest.2
In reviewing Snohomish's request to modify the rates under the long-term electricity contracts with Morgan Stanley, both the
Administrative Law Judge and FERC concluded that the rates were not contrary to the public interest. On appeal, the Ninth Circuit
held that contract rates are presumptively reasonable only when FERC has had an initial opportunity to review such contracts without
applying the Mobile-Sierra doctrine. Because the Morgan Stanley-Snohomish "market-based" rate tariff was not initially
reviewed by FERC before the contract was formed, the Ninth Circuit concluded that the "just and reasonable" standard should not apply.
In addition, the Ninth Circuit articulated a different standard for overcoming the Mobile-Sierra presumption when a purchaser
(e.g., Snohomish) challenges an electricity contract: whether the contract exceeds the "zone of reasonableness."
The United States Supreme Court (the Court) rejected the Ninth Circuit's conclusions, holding that FERC was required to apply the
Mobile-Sierra presumption in analyzing the rates under the Morgan Stanley-Snohomish contracts. Moreover, the Court dismissed
the "zone of reasonableness" test promulgated by the Ninth Circuit, finding that the standard necessary to challenge a
wholesale-electricity contract is the same for the purchaser and the seller: the contract rate must seriously harm the public
interest.
Despite the Court's rejection of the Ninth Circuit's decision, the Court did remand the case to FERC for further consideration of
whether FERC considered the appropriate time frame for examining the burden on the public interest and whether Morgan Stanley
participated in market manipulation that affected the price of the contracts with Snohomish.
For more information about this topic or any other questions, please feel free to contact
Craig Enochs at 713.752.4315 or
cenochs@jw.com or
Kevin Page at 713.742.4227 or
kpage@jw.com.
1 See 16 U.S.C. §824d(a). FERC has determined that the filing of market-based rate tariffs with FERC constitutes
FERC's prior review and approval of the contracts entered into under such tariff, even if the underlying contracts are never actually
reviewed by FERC.
2 See United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332; FPC v. Sierra Pacific Power Co.,
350 U.S. 348.
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