SCOTUS: Mobile Sierra Run Riot

One thing we now know for sure: The U.S. Supreme Court does not understand ISO New England's forward capacity market.

That market, as established by an agreement of 115 parties from around New England, is the subject of the Supreme Court's January 13 opinion in NRG Power Marketing LLC v. Maine Public Utilities Commission. Eight parties to the underlying FERC proceeding opposed the settlement, whereupon they lost before the FERC, prevailed in the U.S. Court of Appeals for the District Columbia Circuit, and have now lost most (but, happily, not all) of their case thanks to Justice Ginsburg's opinion -- joined by all of her colleagues except Justice Stevens.

According to Justice Ginsburg, when a load-serving entity purchases forward capacity through the ISO-New England market, it acquires an "option to buy a quantity of energy, rather than purchasing the energy itself." Alas, this is wrong. A party purchasing forward capacity in New England has no rights whatsoever to the underlying energy, just as a purchaser of a Renewable Energy Credit has no such rights.

One might hypothesize that this misconception informs the Court's regrettably misguided opinion, except that Justice Stevens' otherwise incisive dissent adopts the same erroneous view of forward capacity. Stevens makes the mistake in an aside, buried in footnote 4 (noting that at least one of the non-settling parties "did not negotiate the [forward capacity] rate but must nonetheless purchase electricity at that price in the forward capacity market unless it self supplies its capacity").

The case itself is the latest expansion of the so-called Mobile Sierra doctrine, which has now, as Justice Stevens notes, morphed from "reasonable principle" to "bad law" that is inconsistent with the mandate in the Federal Power Act for just and reasonable wholesale electricity rates. Once upon a time, Mobile Sierra meant simply that a seller could not automatically wriggle out of a wholesale contract merely by filing a new rate schedule with the FERC. The seller was stuck with its bargain, however improvident in light of ensuing circumstances, unless it could demonstrate some broader harm to the "public interest." If, for example, honoring the contract would force the seller to declare bankruptcy and shut down, thereby plunging all of New England into darkness, then the rates in the contract might be unjust and unreasonable within the meaning of the FPA.

In 2008, the Supreme Court turned this principle on its head by holding, in Morgan Stanley Capital Group, that the Mobile Sierra principle applies to a wholesale buyer -- even when the purchaser entered into the agreement because a shotgun had been applied to its head (in the form of the market manipulation that afflicted California and its environs in 2000 and 2001). And now the Supreme Court has ruled that Mobile Sierra applies even to parties that are neither the buyer nor the seller but have reason to argue that the rates in question do not meet the just-and-reasonable standard.

Among other things, there is a temporal problem here. It's one thing to conclude that a wholesale contract cannot ordinarily be abrogated in light of subsequent circumstances, but quite another to say, as the Court does here, that a wholesale agreement cannot be contemporaneously challenged as unjust and unreasonable by a non-signatory. (Though the Court maintains that in such circumstances a third party could still make the "unjust and unreasonable" argument, Justice Stevens correctly points out that the Mobile Sierra "public interest" standard raises the bar -- and, indeed, if it did not then the whole controversy would be meaningless.)

A related problem -- and here the Court's misconception is implicated -- is that the price arrangements at issue here are fundamentally different than the two-party power purchase-and-sale contracts at issue in Mobile, Sierra and Morgan Stanley. NRG Power Marketing is concerned with clearing prices in the forward capacity auction established by the settlement agreement as well as so-called "transition payments" designed to make power producers whole in light of the switch from paying for current capacity to paying for capacity that will exist three years into the future. Concerns about such transactions are only conceivable as after-the-fact issues and are completely untethered from scenarios in which subsequent developments yield buyer's and/or seller's remorse.

If there is a silver lining here, it is the majority's acknowledgement that the auction rates and transition payments might not be "contractually negotiated rates" in the sense contemplated by the Mobile Sierra doctrine. The Court invited the D.C. Circuit to chew on that, which might well be helpful to the non-settling eight. But this will be cold comfort to those who are suffer ill-effects from wholesale contracts they never signed but who are left virtually without recourse, the Federal Power Act notwithstanding, in light of a Lochner-esque devotion to contractual stability above all else. Consumer advocates, state regulators, and others with the interests of retail customers at heart, come readily to mind.

Congressional action, anyone?