Miller, Balis & O'Neil, P.C., Wins Landmark Electricity Case

The United States Court of Appeals for the Ninth Circuit has issued a landmark decision in favor of Golden State Water Company, represented by Miller, Balis & O'Neil, P.C., in a case seeking rate relief from an excessively priced long-term electricity contract the Company entered into during the 2000-2001 California energy crisis.

The decision, issued on December 19, 2006, is the first to make clear that the Federal Energy Regulatory Commission (FERC) must protect the consuming public from excessively priced wholesale energy contracts when the Commission moves from traditional cost-based rate regulation to a market-based scheme.

In early 2001, the Company, then called Southern California Water Company, entered into a five-year contract with a large power marketer to meet the baseload energy requirements of the 22,000 consumers served by its Bear Valley Electric Service division. The Company's previous supplier of baseload energy had refused to renew its contract, opting instead to sell all of its power to the State of California, which had started buying energy and negotiating long-term power contracts on behalf of the state's larger utilities.

FERC had strongly encouraged California utilities to sign long-term contracts as a solution to the state's energy crisis and had pledged to monitor the pricing of such contracts.

When it became apparent that unchecked market dysfunction and market abuses had inflated the price under its new long-term contract, the Company filed a complaint at FERC seeking rate relief. But a FERC administrative law judge denied relief, and FERC, in a 2-1 vote, upheld that decision.

FERC claimed that the Mobile-Sierra doctrine, named for a pair of 1956 Supreme Court cases, erected a nearly insurmountable barrier against modifying a power contract.

In a unanimous decision, the Ninth Circuit reversed FERC's ruling. The court held that FERC erred in relying on the Mobile-Sierra doctrine to foreclose its review of a marketbased rate in a power contract, where FERC's regulatory scheme for market-based rates had never determined whether the contract rate was just and reasonable as an initial matter, and FERC had not examined whether the contact rate was the product of a dysfunctional wholesale electricity market. The court also ruled that FERC used an erroneous legal standard for determining how the contract affected the public interest.

The decision is important because it holds that FERC cannot presume that the marketbased rates in power contracts are lawful unless it first ensures that the wholesale electricity markets are functioning properly. The decision also clarifies that FERC must measure the lawfulness of wholesale contract rates predominantly by their effect on the consuming public.

The court's decision, which also dealt with appeals involving utilities in Washington and Nevada, is captioned Public Utility District No. 1 of Snohomish County, Washington v. FERC, No. 03-72511 (9th Cir. Dec. 19, 2006). Miller, Balis & O'Neil, P.C., principal Randolph Elliott argued the case for the Company.