High Court Ruling Embraced

By Published On: July 7, 2008

The U. S. Supreme Court’s ruling last week clarified and expanded the federal “just and reasonableness” standard for market-based energy contracts. Both sellers of power as well as state agencies attacking the underlying wholesale deals welcomed the decision. The High Court on June 26 affirmed but narrowed the test the Ninth Circuit Court of Appeals applied to contracts signed during the 2000-01 energy crisis. At the same time, it broadened the test that the Federal Energy Regulatory Commission must apply when evaluating wholesale power agreements. Late last week, the court sent the case back to FERC to reassess the contracts at issue. The case potentially involves about $1.4 billion. Generators embraced the ruling, saying it upheld the sanctity of contracts negotiated in the volatile market place. “This is excellent for the wholesale market,” said Jan Smutny-Jones, Independent Energy Producers executive director. Sources within state agencies, who declined to speak for attribution, also welcomed the long-awaited ruling. They said it sets needed and tangible parameters on the complex Mobile-Sierra legal test against which market-based contracts under FERC’s jurisdiction are measured. Under Mobile-Sierra, competitive contracts for wholesale power are presumptively reasonable unless found to seriously harm consumers. Getting a grip on what that test means in real time has been a major challenge. Five of the seven Supreme Court justices who voted on the matter held that market manipulation that impacts contracts should be considered when evaluating whether energy agreements are fair. They also concluded that federal regulators must evaluate whether the rates under the contracts are excessive not just at the time they are formed. Instead, regulators, according to the court, must look at the totality of circumstances in play. The U.S. Supreme Court rejected the Ninth Circuit’s application of different tests for power buyers and sellers under its “zone of reasonableness” holding. “Symmetry is very important,” said Smutny-Jones, noting that buyers and sellers should be treated equally. The language Supreme Court Justice Antonia Scalia, a self professed Libertarian, used in the majority opinion raised questions about whether it opens the door to a new reasonableness test. In some circles it challenges the fairness of deals reached in the so called “free-market.” Scalia stated, “We reiterate that we do not address the lawfulness of the FERC’s market based rates scheme, which assuredly has its critics. But any needed revision in that scheme is properly addressed as a challenge to the scheme itself, not through the disfigurement of the venerable Mobile-Sierra doctrine.” Whether the language opens the door to a new reasonableness test for competitive deals remains to be seen. State attorneys also expressed relief that the High Court declined to invalidate the Ninth Circuit’s Locker v. FERC ruling. That ruling detailed filings that sellers under competitive energy deals are required to file with federal regulators. The decision is Morgan Stanley Capital Group v. Public Utility District of Snohomish County. No. 06-1457.

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