MBO Participates in Landmark Supreme Court Decision

On June 26, 2008, the Supreme Court of the United States Court issued a landmark decision requiring the Federal Energy Regulatory Commission (FERC) to reconsider its denial of relief to utilities seeking rate relief from excessively priced long-term electricity contracts entered into during the 2000-2001 California energy crisis.

Miller, Balis & O'Neil, P.C., represented Golden State Water Company before the Court, defending a 2006 opinion by the United States Court of Appeals for the Ninth Circuit that had sent several cases back to FERC for reconsideration.

In December 2000, FERC strongly urged California utilities to sign long-term wholesale purchase contracts as a solution to the State's energy crisis and pledged to monitor the pricing of such contracts over the coming year. In March 2001, the Company (then named Southern California Water Company) entered into a long-term energy purchase to meet the base load energy requirements of the 22,000 retail electric consumers served by its Bear Valley Electric Service division. When it became apparent that market dysfunction and market manipulation had inflated the price under the contract, the Company filed a complaint at FERC seeking rate relief. Other wholesale purchasers filed similar complaints. But FERC denied the complaints, claiming that the Mobile-Sierra doctrine, named for a pair of 1956 Supreme Court cases, erected a nearly insurmountable barrier against modifying the contracts.

The Ninth Circuit reversed and remanded, holding that the Mobile-Sierra doctrine did not foreclose FERC review of a market-based rate in a power contract where FERC had not previously established the rate's lawfulness and had not examined whether the rate was the product of a dysfunctional market. The court also held that FERC used an erroneous legal standard for determining the contracts' effect on the public interest.

Sellers that had contracts with other wholesale purchasers sought Supreme Court review. The Court concluded that under the Mobile-Sierra doctrine, FERC is ordinarily entitled to presume that wholesale electricity contracts are just and reasonable to the consuming public, and it can modify such contracts only when they impose serious injury to the public interest.

But the Court found two reasons why FERC still had to reconsider its denial of the complaints in this instance. First, to assess the effect of these challenged contracts on the public interest, FERC looked simply at whether consumers' rates increased immediately after the challenged contracts took effect, rather than considering the rates consumers would have paid down the line without the challenged contracts, after eliminating the market dysfunction. Second, the Mobile-Sierra doctrine does not allow FERC to presume that a wholesale electricity contract is just and reasonable where one party to the contract unlawfully manipulated energy markets so as to affect the negotiations of the contract rate; yet it appeared that FERC had improperly dismissed the relevance of such evidence.

The Court's decision is entitled Morgan Stanley Capital Group Inc. v. Public Utility District No. 1 of Snohomish County, Washington, No. 06-1457. MBO principal Randolph Elliott, counsel Milton Grossman, and associate Jeff Janicke filed the brief for Golden State Water Company.