PUBLIC UTILITIES

Businesses that provide the public with necessities, such as water, electricity, natural gas, and telephone and telegraph communication.

Morgan Stanley Capital Group Inc. v. Public Utility Dist. No. 1

In June 2008, the U.S. Supreme Court resolved a dispute that arose about energy contracts that California utilities and others signed during the state's energy crisis in 2000 and 2001.

Officials in several states, including California, Washington, and Nevada, had asked officials with the Federal Energy Regulatory Commission (FERC) to allow utility companies to nullify or renegotiate deals that were struck when electricity prices were dramatically inflated due to illegal trading by Enron Corp. and other companies. The Court remanded the case so that FERC could reevaluate the contracts under standards that the Court established.

The Federal Power Act (FPA), 16 U.S.C. §§ 824 et seq. gives FERC (and its predecessor, the Federal Power Commission) the authority to regulate the sale of electricity in interstate commerce. Under the FPA, regulated utilities must file rate schedules, or tariffs, with FERC. FERC is also involved with setting the terms and prices for services to electricity purchasers. Utilities may additionally set rates with individual electricity purchasers through bilateral agreements. Both the rate schedules and the contracts must be filed with FERC.

Under the FPA, wholesale-electricity rates must be “fair and reasonable.” When FERC considers a rate change, either through a new rate schedule or through a contract, FERC may take up to five months to investigate whether the rate is fair and reasonable. On the other hand, the commission may allow the rate to go into effect without making a determination that the rate is fair and reasonable. This occurrence does not prevent FERC from concluding later, in response to its own motion or in response to a complaint, that the rate is not fair and reasonable. The Supreme Court has traditionally given FERC and its predecessor great deference in setting the utility rates.

In 1956, the Supreme Court decided two cases that together establish the principles that apply when the commission considers modifications through rates established bilaterally by contract rather than unilaterally through a rate schedule. United Gas Pipe Line Co. v. Mobile Gas Serv. Corp. (Mobile), 350 U.S. 332, 76 S. Ct. 373, 100 L. Ed. 373 (1956); Fed. Power Comm'n v. Sierra Pac. Power Co. (Sierra), 350 U.S. 348, 76 S. Ct. 368, 100 L. Ed. 388 (1956). These cases resolved the question of how the commission may evaluate whether a contract rate is just and reasonable. According to the Court:

[W]hile it may be that the Commission may not normally impose upon a public utility a rate which would produce less than a fair return, it does not follow that the public utility may not itself agree by contract to a rate affording less than a fair return or that, if it does so, it is entitled to be relieved of its improvident bargain…. In such circumstances the sole concern of the Commission would seem to be whether the rate is so low as to adversely affect the public interest-as where it might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory.

The Court, as well as lower federal courts , has further refined the Mobile-Sierra doctrine during the more than fifty years since it was decided. This doctrine stands for the principle that FERC must presume that an electricity rate established through a freely-negotiated, bilateral contract meets the “just and reasonable” requirement set forth in the FPA. This presumption may be overcome only if FERC determines that the contract causes serious harm to the public interest.

During the 1990s, California underwent a massive restructuring of its electricity market. This effort resulted in a program where the energy providers entered into short-term contracts (in a market known as the “spot” market), giving the providers only limited ability to enter into long-term agreements. The limitation on long-term contracts later caused problems when the State of California suffered through an energy crisis beginning in the summer of 2000. A variety of factors caused energy prices to skyrocket by as much as fifteen times their normal rates, and this price increase hit the spot market hard. The result was that utilities became buried in debt, and several parts of the state experienced rolling blackouts.

In response to the energy crisis, FERC effectively eliminated the reliance on the spot market and encouraged utilities to enter into long-term contracts. FERC likewise capped the price of wholesale electricity. Although prices fell to normal levels by June 2001, the long-term contracts that were executed prior to that time caused significant problems. Several utilities agreed to long-term contracts under which the utilities were required to pay several times the normal rate, even though these rates were much less than they were at peak times during the energy crisis. For example, one utility company purchased power from Morgan Stanley (the petitioner in the Supreme Court decision) at a rate of $105 per megawatt hour, compared with the historical average of $24 per megawatt hour.

After the energy crisis ended and the prices fell, several utilities were unhappy with the prices established in the long-term contracts. (The Supreme Court noted that “buyer's remorse set in”). The utilities asked FERC to modify the contracts, arguing that the commission should not presume the rates to be just and reasonable under the Mobile-Sierra doctrine. FERC determined that the Mobile-Sierra presumption applied and that the utilities were not entitled to have the contracts modified.

The Ninth Circuit Court of Appeals reviewed FERC's determination. A panel of the appellate court concluded that FERC had misapplied Mobile-Sierra because FERC had not provided sufficient oversight for the long-term contracts. Moreover, the court held that FERC had not properly considered the public interest of any of these long-term contracts. The court thus remanded the case to FERC for further consideration. Public Utility Dist. No. 1 v. FERC, 471 F.3d 1053 (9th Cir. 2006).

Morgan Stanley and other energy suppliers sought review from the U.S. Supreme Court, which granted a writ of certiorari . In a divided decision in which two justices did not participate, the Court disagreed with the Ninth Circuit's rationale but essentially agreed that the case should be remanded to FERC. Writing for a majority of four, Justice Antonin Scalia concluded that the Mobile-Sierra doctrine required the Ninth Circuit to presume that the contracts were just and reasonable. According to Scalia, the only circumstance where FERC could set aside the type of contract at issue would be where the commission found “unequivocal public necessity” or “extraordinary circumstances.” The Court's opinion directed FERC to review the contracts to determine whether unlawful market activity directly affected contract negotiations. If so, then the Mobile-Sierra presumption would not apply, and FERC could reform the contracts. Morgan Stanley Capital Group Inc. v. Pub. Util. Dist. No. 1, Nos. 06-1457, 2008 WL 2520522 (June 26, 2008).

Justice Ruth Bader Ginsburg agreed with the judgment but wrote a separate concurrence. She believed that the Court should have waited for FERC to reconsider the case before reviewing the commission's final decision . Justice John Paul Stevens, joined by Justice David Souter, argued that the Court “mangle[d] both the governing statute and precedent” in reaching the decision. Chief Justice John Roberts and Justice Stephen Breyer recused themselves from the case.