U.S. Supreme Court Sends Refund Case Back to Ninth Circuit

By Published On: June 27, 2008

The U.S. Supreme Court ruled that a Ninth Circuit Court decision on energy crisis rebates was flawed June 26. However, the High Court did not shut the door entirely to rebates, agreeing with the Ninth Circuit Court that there is a “just and reasonable” standard for wholesale electric rates even under contracts. The case now goes back to the Ninth Circuit. “To be sure, Federal Energy Regulatory Commission has ample authority to set aside a contract where there is unfair dealing at the contract formation stage,” noted the Supreme Court. “But the mere fact that the market is imperfect, or even chaotic, is no reason to undermine the stabilizing force of contracts” as an alternative to tariff-based regulation, it added. Thus, the decision may hamper attempts at reducing the costs of bilateral contracts. “Buyer’s remorse set in” after the 2000-01 energy crisis contracts were negotiated at high prices, noted the court. Buyers asked federal regulators to modify those contracts to reflect “just and reasonable” rates. At the time, California estimated it could end up in $1.4 billion in refunds. The case turned on what’s called the Mobile-Sierra precedent. That case presumes that a legal contract for rates is “just and reasonable.” However, that presumption became rebuttable under the Ninth Circuit’s January 2007 decision when rates are high. The decision notes that if “a challenged contract imposes any significant cost on ultimate customers because of a wholesale rate too high to be within a zone of reasonableness, that contract affects the public interest.” The High Court decision, written by Justice Antonin Scalia, was split 5 to 2. The two dissenters were Justices John Paul Stevens and David Souter. Chief Justice John Roberts and Justice Stephen Breyer did not vote. A concurrence in part was made by Justice Ruth Bader Ginsberg. The case is Morgan Stanley Capital v. Public Utility District, Snohomish County.

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