Activist Supreme Court Reaches Out to Limit Consumer Objections to Wholesale Power Rates

Yesterday the Supreme Court reversed a decision of the Court of Appeals for the District of Columbia Circuit that had allowed states and consumers to challenge a deal establishing new rules for expensive electric capacity auctions in New England. We previously wrote about the case: FERC Asks Supreme Court to Limit Maine’s Challenge to Wholesale Utility Rates in NRG Power Marketing Case, PULP Network November 02, 2009.

In its opinion in NRG Power Marketing v. State of Maine Public Utility Commission, the Supreme Court extended its 2008 ruling in the Morgan Stanley case where it limited review of inter-utility wholesale power contracts by presuming them to be reasonable.

The new case involves a deal brokered at FERC over the rules of the New England ISO for operating its forward capacity market auctions, the results of which then establish prices paid to owners of power plants for their availability, whether or not it is used. The D.C. Circuit has explained in its opinions that “In a “capacity” market – as opposed to a wholesale electricity market – “the [transmission provider] compensates the generator for the option of buying a specified quantity of power irrespective of whether it ultimately buys the electricity.”

The deal was not agreed to by all the parties in the case, as it will raise rates paid by consumers, and administrative litigation followed at FERC over whether the settlement would establish new ISO market rules and rates that are just and reasonable. FERC approved the settlement, presuming it to be reasonable under the “Mobile-Sierra” standard that makes it very difficult for objectors like the Maine Public Utility Commission to overcome.

The Circuit Court rejected FERC’s standard of review in its opinion, saying “we agree with the petitioners that the Commission has unlawfully deprived non-settling parties of their rights under the Federal Power Act.”

NRG Power Marketing appealed to the Supreme Court seeking to reverse the Circuit Court decision. Their position was supported amicus briefs from by power marketers, pro deregulation economists, and Morgan Stanley and the Swaps and Derivatives Association.

Maine argued for affirmance.

Public Citizen and AARP in their amicus brief stated:

the positions taken by FERC and the petitioners in this case are, if anything, even more dam-aging to the protection of the public than FERC’s embrace of “market-based rates.” The expansion of the Mobile-Sierra doctrine that FERC and petition-ers advocate would effectively nullify the consumer protection goals of the FPA by imposing a virtually insurmountable obstacle to challenging wholesale electricity contracts that result in unjust and unreasonable rates paid by consumers.

At oral argument, Connecticut Attorney General Blumenthal made the point that the cases are quite different:

what’s involved here are tariff rates. And the D.C. Circuit’s ruling in our view was correct, and its reasoning was correct, insofar as Mobile-Sierra binds contracting parties, as Justice Scalia has just articulated and Morgan Stanley reiterated. It [Mobile – Sierra] involved parties trying to escape an improvident bargain.

What we have here is an auction system that sets rules of general applicability.

The Supreme Court, however, applied the same deferential review standard (Mobile-Sierra) to the contested ISO market rules tariff that it had approved for wholesale power contracts in last year’s ruling, and reversed the Circuit Court’s judgment.

In its opinion, the Supreme Court did not resolve the issue of the difference between the partial settlement for ISO rates and bilateral contracts:

The objectors to the settlement appearing before us maintain that the rates at issue in this case — the auction rates and the transition payments — are prescriptions of general applicability rather than “contractually negotiated rates,” hence Mobile-Sierra is inapplicable.**** Whether the rates at issue qualify as “contract rates,” and, if not, whether FERC had discretion to treat them analogously are questions raised before, but not ruled upon by, the Court of Appeals. They remain open for that court’s consideration on remand.

Thus, if the D.C. Circuit decides that the New England ISO settlement agreement was not a “contract rate,” the Supreme Court’s decision that there is a higher burden for those who would challenge a wholesale contract was completely unnecessary, dealt with a hypothetical situation, and was an advisory opinion without the benefit of a real case or controversy where objectors to a real wholesale electricity contract could have framed the issue.

The Supreme Court’s decision is likely to haunt states and consumer advocates in the future.

For example, in some areas, retail utilities buy large amounts of wholesale power from their wholesale affiliates, which are rubber stamped by FERC, which has jurisdiction over them. (Indeed, review is so lax, FERC does not even require such contracts to be filed so that they can be rubber stamped). See Nonregulated” Sellers of Electricity Become “Market-Regulated” Under New FERC Rule, PULP Network, June 26, 2007.

Generally, state regulators cannot disallow costs for wholesale power purchases under FERC jurisdiction. FERC’s market rate system has made it difficult for potential objectors to see or protest proposed contracts. Now, if they or consumer advocates or state attorney generals object at FERC to the terms of wholesale contracts, they will run into the obstacles placed in their way by the latest Supreme Court opinion — which came about in a case having nothing to do with a wholesale power contract.

Congress has power to fix what has been broken, and undo the damage to consumers done by deregulation ideology embraced by FERC and allowed by the Supreme Court. See Lynn Hargis, Supreme Court Stands Consumer Utility Protection Law on Its Head; Congress Must Act, Public Citizen, January 14, 2010.

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