Morgan Stanley Capital Group Inc. v. Public Utility District No. 1 of Snohomish County

PETITIONER: Morgan Stanley Capital Group Inc.
RESPONDENT: Public Utility District No. 1 of Snohomish County, Washington, et al.
LOCATION: Marion County Superior Court: Criminal Division

DOCKET NO.: 06-1457
DECIDED BY: Roberts Court (2006-2009)
LOWER COURT: United States Court of Appeals for the Ninth Circuit

CITATION: 554 US 527 (2008)
GRANTED: Sep 25, 2007
ARGUED: Feb 19, 2008
DECIDED: Jun 26, 2008

ADVOCATES:
Christopher J. Wright - on behalf of Respondents
Edwin S. Kneedler - on behalf of Respondent Ferc, in support of the Petitioners
Walter E. Dellinger, III - on behalf of the Petitioners

Facts of the case

The California Legislature deregulated the power industry in 1996, establishing a so-called "spot market" in which utilities purchased electricity on the day it was needed. Four years later, during an exceptionally hot summer, wholesale electricity prices skyrocketed. In response, several utilities on the Western power grid determined that they could no longer afford the spot market, and instead negotiated less expensive but still inflated long-term contracts with power suppliers. Once the crisis passed, the utilities asked the government to let them change the contracts to reflect newly lowered electricity prices. The government refused, citing a longstanding Supreme Court doctrine presuming that utilities' contracts are reasonable. The Ninth Circuit ultimately ordered the government to permit the changes.

Question

May the government permit utility companies to renegotiate long-term contracts with wholesale energy suppliers and, if so, what circumstances justify renegotiation?

Media for Morgan Stanley Capital Group Inc. v. Public Utility District No. 1 of Snohomish County

Audio Transcription for Oral Argument - February 19, 2008 in Morgan Stanley Capital Group Inc. v. Public Utility District No. 1 of Snohomish County

Audio Transcription for Opinion Announcement - June 26, 2008 in Morgan Stanley Capital Group Inc. v. Public Utility District No. 1 of Snohomish County

John G. Roberts, Jr.:

Justice Scalia has the opinion of the Court in page 06-1457, Morgan Stanley Capital Group versus Public Utility District and the consolidated case, 06-1462, American Electric Power versus Public Utility District.

Antonin Scalia:

These consolidated cases come to us on a writ of certiorari to the Ninth Circuit.

Like most cases involving the Federal Energy Regulatory Commission (FERC), they are very complicated.

They concern the interaction between an old administrative law doctrine and a new regulatory regime.

The old administrative law doctrine is called the Mobile-Sierra doctrine.

Under the Federal Power Act, companies that sell electricity at wholesale to purchasers such as state and local public utilities, must file a tariff with the -- with FERC, setting out the rates that they will charge to buyers, generally.

And the Commission determines whether those rates are, to use the statutory term, “just and reasonable”.

Traditionally, in reviewing these rates, FERC ensured that wholesalers receive a fair rate of return on their investment, but no more.

Aside from tariffs, the Federal Power Act also permits wholesalers to set rates with individual purchasers through bilateral contracts.

So, a wholesaler and a purchasing public utility may agree by contract to a rate different from what the wholesaler charges other purchasers under its tariff, and can lock that rate in for a period of time.

Those contracts must be filed with FERC before they go into effect.

Under the Mobile-Sierra doctrine, the name comes from two of the cases in this Court in 1956, under that doctrine, FERC must presume that these rates set by freely negotiated contracts between sophisticated wholesalers and public utilities, are just and reasonable.

The premise being, that these sophisticated parties can be expected to negotiate a just and reasonable rate.

Only where the rate seriously harms the public interest, may FERC and must FERC, set it aside.

So, that's the old administrative law doctrine.

The new regulatory regime is a recent FERC innovation called market-based tariffs.

A market-based tariff does not set out rates like traditional tariffs.

Rather, it allows the seller to enter into freely negotiated contracts with buyers in the energy market.

To qualify for a market-based tariff, a seller of electricity, a wholesaler, must show that it does not have excessive market power.

The key aspect of the market-based tariff, for purposes of this case, is that the contracts entered into under them do not have to be filed with FERC before they go into effect.

Instead, the wholesaler periodically reports to FERC after the fact, all contracts that it entered into.

FERC believes that the Federal Power Act's requirement that all rates be filed first with the Commission is satisfied by the filing of the market-based tariff itself.

In these cases, respondents are Western Utilities that entered into long-term contracts with petitioner wholesalers that had market-based tariffs on file with FERC.

The contracts set rates that were very high, by historical standards, because at the time, short-term prices in the Western United States had spiked to very high levels due to a variety of economic, natural and regulatory factors.

After that period of high prices had passed, the respondents here, having buyers' remorse, asked FERC to modify the contracts.

But FERC refused after determining under Mobile-Sierra that the public interest was not seriously harmed.

Respondents petitioned to the Ninth Circuit which granted the petitions for review and remanded to FERC on two alternative grounds.

First, the Ninth Circuit thought that because contracts entered into under market-based tariffs are never initially filed with the Commission, they are not entitled to the Mobile-Sierra presumption of validity, a presumption that their rates are just and reasonable.

In other words, the Ninth Circuit thought that the Mobile-Sierra presumption does not apply to FERC's first review of a contract.

Second, the Ninth Circuit held that even if the Mobile-Sierra presumption did apply, the standard for a challenge by a purchaser, the utilities here, is lower than the standard for a seller's challenge, namely, for the buyer, the standard is merely whether the contract causes consumer rates to exceed a zone of reasonableness.