UTILITIES:

Supreme Court reverses lower court in energy-contract case

The Supreme Court today reversed a lower court's decision that allowed third parties to meet a less stringent standard than contracting parties when challenging certain energy agreements.

Those third parties -- which could include state utility commissions or consumer groups -- were ruled to be subject to the 55-year-old Mobile-Sierra doctrine, which allows contracting parties such as energy providers and utilities to create agreements that cannot be challenged merely in response to market conditions. A Mobile-Sierra agreement can only be challenged in circumstances of significant public interest -- for instance, if the contract would force a crucial utility to shut down.

"A presumption applicable to contracting parties only, and inoperative as to everyone else -- consumers, advocacy groups, state utility commissions, elected officials acting parens patriae -- could scarcely provide the stability Mobile-Sierra aimed to secure," Justice Ruth Bader Ginsburg wrote for the court in an 8-1 decision that reversed in part and remanded the case to the U.S. Circuit Court of Appeals for the District of Columbia.

The case, NRG Power Marketing v. Maine Public Utilities Commission, challenged the appeals court's March 2008 ruling regarding a long-term energy deal that created ISO New England Inc.'s forward capacity market. The panel of three judges held that while the parties to the contract were subject to Mobile-Sierra's "public interest" standard, downstream purchasers who objected to the deal were not.

NRG Power Marketing Inc. had argued in its petition for certiorari that the appeals court ruling "overturns decades of settled understanding and eliminates the stability and certainty that are critical to the maintenance and development of energy infrastructure." During oral arguments before the Supreme Court on Nov. 3, 2009, Connecticut Attorney General Richard Blumenthal (D) said third parties should not be required to meet the stricter standard because they never had a say in the agreement.

The lone dissenter to Tuesday's majority opinion was Justice John Paul Stevens, who said the ruling will necessarily "set a higher bar" for third-party challenges and thereby hinder Mobile-Sierra's primary goal of protecting the public interest.

"In this third chapter of the Mobile-Sierra story, the Court applies a rule -- one designed initially to protect the enforceability of freely negotiated contracts against parties who seek a release from their obligations -- to impose a special burden on third parties exercising their statutory right to object to unjust and unreasonable rates," he wrote.

Charles Zielinski, co-leader of the energy industry group at Washington, D.C.'s Bryan Cave LLP, said the agreements are crucial to the industry because they allow energy providers and utilities to infuse more certainty into their agreements.

"People who are having to build have to invest a lot of capital to produce energy," Zielinski said. "You want to be able to go to investors and say, 'Look, we have negotiated this rate, and you can invest with pretty solid insurance that you are going to get this rate for the life of the contract.' It's that level of certainty that you get out of Mobile-Sierra doctrine" (Greenwire, Nov. 4).

The Supreme Court's opinion means third parties will need to go through "a huge exercise" to challenge Mobile-Sierra agreements, said Mark Williams, a partner at Bingham McCutchen LLP in Washington.

Due to the huge number of agreements it processes, the Federal Energy Regulatory Commission will likely need to implement new rules, Williams said.

"FERC will not be able to generally restrict the use of the clause without issuing further orders or even a rulemaking," Williams said. "They're going to have to come up with advanced regulations."