Nearly all the electricity used by New York consumers must be purchased in wholesale markets because many of the state’s electric utilities sold most of their power plants in recent years. Previously, local utilities generated much of the power used by their customers, at cost, and purchased from others when it was available at lower cost. Now they must buy electricity at market prices demanded by sellers in poorly regulated wholesale markets under Federal Energy Regulatory Commission (FERC) jurisdiction. A major issue has arise regarding FERC’s failure to assure that all contracts for the sale of wholesale electricity are reasonable, as required by the Federal Power Act. See Energy Contracts Spark High-Stakes Supreme Court Case, and U.S. Supreme Court to Decide Electricity Market Rate Refund Case.
The Morgan Stanley Case
On January 14, 2008 PULP filed an amicus brief in a case to be argued in the United States Supreme Court regarding the review by FERC of contract charges for wholesale electricity. FERC assumes that any prices set by sellers are reasonable if they lack “market power.” The contracts were formed during a period of rampant market manipulation, were not filed, and were never reviewed by FERC for reasonableness. The issue in the case is whether a Ninth Circuit ruling, which basically required FERC to review contract rates for reasonableness, is in conflict with longstanding Supreme Court decisions in United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332 (1956), and Federal Power Commission v. Sierra Pacific Power Co., 350 U.S. 348 (1956), together known as the Mobile-Sierra cases. Those cases made it very difficult for sellers to revise upward the prices they previously agreed to charge in contracts.
FERC, represented by the U.S. Solicitor General, agrees with Morgan Stanley Capital Group and other wholesale electricity sellers that the Mobile-Sierra cases make it nearly impossible to revise rates downward. Represented by luminaries of the bar, including three former Solicitors General, energy producers, traders, dealers in financial derivatives, economists and others are asking the Supreme Court to reverse the Ninth Circuit order. They argue that the “sanctity” of contracts is at stake, that the Mobile-Sierra doctrine applies, and that FERC cannot modify contract rates except in extreme circumstances.
PULP’s Amicus Brief
PULP’s amicus brief points out that the Mobile-Sierra cases both involved situations where the contracts had been filed publicly in advance as required by Section 205(d) of the Federal Power Act. Thus, the contract rates in those cases already had been subject to public scrutiny and review by the regulator for reasonableness before they took effect. Only then did the doctrines favoring repose of contract rates apply.
In contrast, the contract rates in the case now before the Supreme Court are “market-based rates.” Under FERC’s regime, these contracts were not filed in advance as required by the Federal Power Act, and thus the rates and charges were never subject to public scrutiny or review for reasonableness by FERC before the contract sales began.
PULP urges the Supreme Court to affirm the Ninth Circuit order because unfiled rates and contracts for wholesale electricity have always been subject to subsequent revision by FERC if they are unreasonable, without regard to the Mobile-Sierra doctrine. PULP also rebuts the claim that FERC’s determination that a seller lacks market power satisfies the utilities‘ statutory obligation to file all rates and contracts publicly, in advance. The statute does not give FERC power to grant blanket waiver of the utilities’ filing duties. The Supreme Court in MCI v. AT&T in 1994 held that federal regulatory agencies have no power to relax utility filing requirements. The court said filing requirements are utterly central to filed rate regulation schemes similar to that of the Federal Power Act. See May the FERC Rely on Markets to Set Electric Rates?
Public Citizen’s Amicus Brief
Public Citizen, the Colorado Office of Consumer Counsel, the New Mexico Attorney General, and the National Consumer Law Center also submitted an amicus brief supporting affirmance of the Ninth Circuit order. It provides an historical perspective on the reasons why the Federal Power Act and the recently repealed Public Utility Holding Company Act were enacted to protect utility customers. A premise of these statutes is that it cannot be assumed — as FERC now does — that utilities and energy traders will act in the interest of consumers when they make contracts for the sale and purchase of wholesale electricity. The brief also shows why accepting the extreme position of the sellers would allow all electricity contracts to escape any meaningful review for reasonableness.
Other briefs are available at the ABA website. The case will be argued February 19, 2008.