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Court of Appeals Rejects Petitions for Review of FERC’s Decision on Mobile-Sierra Applicability to Forward Capacity Auction Rates

April 8, 2013 By Monica M. Berry

Monica M. Berry

The US Court of Appeals for the District of Columbia Circuit issued its opinion in New England Power Generators Association, Inc. v. Federal Energy Regulatory Commission, Case No. 11-1422 (D.C. Cir. Feb. 15, 2013) (NEPGA). In that case, the Court reviewed the Federal Energy Regulatory Commission’s determinations regarding the applicability of the Mobile-Sierra doctrine to a capacity market auction price.  Under the Mobile-Sierra doctrine, FERC must presume that the electricity rate set in a freely negotiated wholesale-energy contract meets the “just and reasonable” requirement of the Federal Power Act, and the presumption may be overcome only if FERC concludes that the contract seriously harms the public interest.  Many have viewed this standard as “practically insurmountable.

In the order under review, FERC reviewed rates in ISO New England Inc.’s (ISO) Forward Capacity Market.  In capacity markets, transmission providers pay generators for the option to buy a quantity of power rather than directly purchasing wholesale electricity.  In the ISO’s Forward Capacity Auction (FCA) process, generators in the auction commit themselves to selling a certain amount of capacity at a particular price three years in advance.  The FCA is a “descending clock auction,” in which the ISO, after announcing a starting price, gradually reduces its offered price until the capacity bids equal the amount the ISO determined is necessary to guarantee grid reliability.  The resulting clearing price applies to all capacity purchasers in a zone.

The Commission, in a decision on remand following orders issued by the D.C. Circuit and the Supreme Court, concluded that FCA rates were not technically contract rates for the purpose of Mobile-Sierra.  However, because FCA auction results “possess certain characteristics of contracts,” FERC found, as an exercise of its discretion, that application of the public interest standard is appropriate when reviewing the rates.  The New England Power Generators Association filed a petition seeking judicial review, arguing that although the Commission reached the correct result, the FCA results are contract rates that must receive the Mobile-Sierra presumption.  A group of state regulator petitioners likewise appealed, arguing that although the Commission was correct in concluding that the auction results are not contract rates, it cannot apply the Mobile-Sierra presumption to find them just and reasonable.  The Court dismissed Generator’s petition for lack of standing and denied the state petitioners’ petition on the merits.

According to the Court, while the Generators may have preferred FERC’s full endorsement of the FCA rates as contract rates, its desired outcome (application of Mobile-Sierra’s public interest standard) has already been achieved.  Thus, the Generators have not been harmed by FERC’s decision, and the fact that FERC may one day alter its position is insufficient injury to justify judicial review at this time.  The Court pointed out that neither a FERC decision’s legal reasoning nor the precedential effect of such reasoning confers standing unless the substance of the decision itself gives rise to an injury in fact.  Accordingly, because the Generators lacked standing, the Court dismissed its petition for review.

With respect to the state petitioners’ claims, the Court asserted that the petitioners’ argument “boils down to a single misconception” that because the existence of a contract rate mandates application of the Mobile-Sierra presumption, the absence of a contract rate precludes it. According to the Court, application of public interest review is only one method by which FERC may assure itself a rate is just and reasonable.  Further, because the statutory requirement that rates be “just and reasonable” is “incapable of precise judicial definition” the Court affords great deference to the Commission in its rate decisions.  And, the Commission is not bound to any one ratemaking formula.  The remaining question was whether FERC exceeded its discretion by adopting the public interest standard for deciding whether a given FCA rate is just and reasonable.  Because FERC offered ample reasoning in support of its position, the Court concluded that the Commission did not abuse its discretion and rejected the state petitioners’ argument to the contrary. Having rejected the merits of the state petitioners’ arguments, the Court denied their petition for review.

This DC Circuit order follows two recent Supreme Court decisions concerning the Mobile-Sierra doctrine.  In Morgan Stanley Capital Group, Inc. v. Public Utility District No. 1, 128 S. Ct. 2733 (2008), the Court held that the just and reasonable standard is the only statutory standard for assessing wholesale electricity rates, whether set by contract or tariff.  According to the Court, instead of representing a wholly different standard, the Mobile-Sierra “public interest standard” refers to the differing application of the just and reasonable standard to contract rates.  In NRG Power Marketing v. Maine Public Utilities Commission, 130 S. Ct. 693 (2010), the Supreme Court held that the Mobile-Sierra presumption is not limited to challenges to contract rates brought by contracting parties, but also applies to challenges initiated by noncontracting parties.

Monica M. Berry is a counsel with Schiff Hardin.


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