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Nos. 06-1454, 06-1457, 06-1462 and 06-1468

In the Supreme Court of the United States




SEMPRA GENERATION, ET AL., PETITIONERS
v.
PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA, ET AL.




MORGAN STANLEY CAPITAL GROUP INC., PETITIONER
v.
PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH COUNTY, WASHINGTON, ET AL.




CALPINE ENERGY SERVICES, L.P., ET AL., PETITIONERS
v.
PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH COUNTY, WASHINGTON, ET AL.




DYNEGY POWER MARKETING, INC., ET AL., PETITIONERS
v.
PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA, ET AL.




ON PETITIONS FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT




BRIEF FOR THE FEDERAL ENERGY REGULATORY COMMISSION IN OPPOSITION




PAUL D. CLEMENT
Solicitor General
Counsel of Record
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217
JOHN S. MOOT
General Counsel
ROBERT H. SOLOMON
Solicitor
LONA T. PERRY
Senior Attorney
Federal Energy Regulatory
Commission
Washington, D.C. 20426





QUESTION PRESENTED
Whether, under United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332 (1956), and FPC v. Si erra Pacific Power Co., 350 U.S. 348 (1956), the Federal Energy Regulatory Commission may take into account the severe market dysfunction of the 2000-2001 western energy crisis in determining the standard to be applied in its review of contracts for the sale of electric power.

In the Supreme Court of the United States


No. 06-1454
SEMPRA GENERATION, ET AL., PETITIONERS
v.
PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA, ET AL.




No. 06-1457
MORGAN STANLEY CAPITAL GROUP INC., PETITIONER
v.
PUBLIC UTILITY NO. 1 OF SNOHOMISH COUNT, WASHINGTON, ET AL.




No. 06-1462
CALPINE ENERGY SERVICES, L.P., ET AL.,
PETITIONERS
v.
PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH COUNTY, WASHINGTON, ET AL.




No. 06-1468
DYNEGY POWER MARKETING, INC., ET AL., PETITIONERS
v.
PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA, ET AL.




ON PETITIONS FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT




BRIEF FOR THE FEDERAL ENERGY REGULATORY COMMISSION IN OPPOSITION




OPINIONS BELOW

The opinions of the court of appeals (Pet. App. 1a- 15a, 268a-329a) are reported at 474 F.3d 587 and 471 F.3d 1053.1 The orders of the Federal Energy Regula tory Commission (Pet. App. 91a-214a, 215a-267a; 06- 1462 Pet. App. 246a-313a, 314a-363a) are reported at 103 F.E.R.C. ¶ 61,354, 105 F.E.R.C. ¶ 61,182, 103 F.E.R.C. ¶ 61,353, and 105 F.E.R.C. ¶ 61,185.

JURISDICTION

The judgments of the court of appeals were entered on December 19, 2006. On March 6 and March 8, 2007, Justice Kennedy extended the time within which to file petitions for a writ of certiorari to and including May 3, 2007, and the petitions were filed on that date. The ju risdiction of this Court is invoked under 28 U.S.C. 1254(1).

STATEMENT

1. The Federal Power Act (FPA), 16 U.S.C. 791a et seq., grants the Federal Energy Regulatory Commis sion (Commission or FERC) exclusive jurisdiction over the "transmission of electric energy in interstate com merce" and the "sale of electric energy at wholesale in interstate commerce." 16 U.S.C. 824(b)(1). Proposed rates for the sale or transmission of power within FERC's jurisdiction are subject to FERC review to en sure that they are "just and reasonable" and not unduly discriminatory or preferential. 16 U.S.C. 824d(a) and (b). To that end, the FPA provides that, "[u]nder such rules and regulations as the Commission may prescribe, every public utility shall file with the Commission, within such time and in such form as the Commission may designate, * * * schedules showing all rates and charges for any transmission or sale subject to the juris diction of the Commission." 16 U.S.C. 824d(c).

2. Until the 1980s, the Commission established rates primarily on a cost-of-service basis. As barriers to entry in the generation sector declined, however, a competi tive market for wholesale sales of electric energy began to emerge. In response to that development, the Com mission began considering and approving market-based rates for wholesale electric energy sales in the late 1980s.

Under the Commission's market-based rate pro gram, the Commission approves a seller's request to sell electric energy at market-based rates only if it first finds that the seller and its affiliates either do not have market power or have adequately mitigated their market power. See California ex rel. Lockyer v. FERC, 383 F.3d 1006, 1009 (9th Cir. 2004), cert. denied, 127 S. Ct. 2972 (2007) (Lockyer). Specifically, the Commission undertakes an intensive factual review of the relevant product and geographic markets to determine whether, based on an analysis of market concentration during various seasons and load levels, the seller has market power. See Market-Based Rates for Wholesale Sales of Elec. Energy, Capacity & Ancillary Servs. by Pub. Utils., 115 F.E.R.C. ¶ 61,210 (2006); AEP Power Mktg., Inc., 107 F.E.R.C. ¶ 61,018, on reh'g, 108 F.E.R.C. ¶ 61,026 (2004). Market power is defined as a seller's ability to "'significantly influence price in the market by withholding service and excluding competitors for a significant period of time.'" Lockyer, 383 F.3d at 1012 n.4 (quoting Citizens Power & Light Corp., 48 F.E.R.C. ¶ 61,210, at 61,777 (1989)).

The Commission's review is designed to assure a competitive market, because "when there is a competi tive market the FERC may rely upon market-based prices in lieu of cost-of-service regulation to assure a 'just and reasonable' result." Elizabethtown Gas Co. v. FERC, 10 F.3d 866, 870 (D.C. Cir. 1993); see Lockyer, 383 F.3d at 1013 (noting that "[i]n a competitive market, where neither buyer nor seller has significant market power, it is rational to assume that the terms of their voluntary exchange are reasonable") (quoting Tejas Power Corp. v. FERC, 908 F.2d 998, 1004 (D.C. Cir. 1990)).

To assure that the Commission can monitor, on a continuing basis, the justness and reasonableness of market-based rates and the potential exercise of market power, the Commission also imposes an ongoing quar terly reporting requirement for market transactions. See Lockyer, 383 F.3d at 1013. The quarterly reporting requirement provides a means for the Commission and the public to identify pricing trends or discriminatory patterns that might suggest the exercise of market power. See California ex rel. Lockyer, 99 F.E.R.C. ¶ 61,247, at 62,063, reh'g denied, 100 F.E.R.C. ¶ 61,295 (2002). For each contract, sellers are required to report the buyer's and seller's name, a description of the ser vice, the delivery point for the service, the price, "the quantities to be served or purchased; the contract's du ration . . . and any other attributes of the product being purchased or sold which contribute to its market value." Lockyer, 99 F.E.R.C. at 62,066 (quoting Citizens Power & Light Corp., 48 F.E.R.C. ¶ 61,210, at 61,778 (1989)).

"After-the-fact reporting allows the market to oper ate initially without regulatory intrusion," avoiding the costs and practical difficulties that would be associ ated with prior review of a large number of transac tions, many of which are of short duration. Lockyer, 99 F.E.R.C. at 62,065. At the same time, the reporting re quirement provides the Commission with information with which it can monitor and oversee the rates being charged, and it places sellers on notice that their autho rization to sell at market-based rates will be subject to continuing review and, if necessary, to remedial action, including the possible revocation of that authorization. Ibid. Further, upon finding a tariff violation, the Com mission may take retroactive action, including ordering the disgorgement of unjust profits. California ex rel. Lockyer v. British Columbia Power Exch., 100 F.E.R.C. ¶ 61,295, at 62,334 (2002).

3. In 1995, in response to retail electric rates that were well above the national average, California com prehensively restructured the electric energy indus- try in that State. At that time, the major traditional investor-owned utilities were vertically integrated; that is, they owned generating resources, transmission lines, and distribution facilities. Lockyer, 383 F.3d at 1008- 1009 & n.2. Under the restructuring, those utilities were required to divest most of their generating assets and to purchase power at market-based rates through an independent power exchange, which operated an or ganized wholesale market, and an independent system operator, which managed the transmission network.

As part of California's restructuring plan, Califor nia's three major investor-owned utilities filed applica tions with FERC seeking authority to sell electric en ergy at wholesale at market-based rates. In accordance with its established policy, FERC approved their re quests for market-based rate authority after finding that the companies and their affiliates either did not have, or had adequately mitigated, market power. See, e.g., Pacific Gas & Elec. Co., 81 F.E.R.C. ¶ 61,122, at 61,437, 61,537, 61,572 (1997), aff'd, 82 F.E.R.C. ¶ 61,223 (1998). FERC also reviewed and approved applications by other wholesale generators and suppliers that lacked, or had adequately mitigated, market power to sell elec tric energy at market-based rates in the California mar kets. See, e.g., Lockyer, 99 F.E.R.C. at 62,055.

For two years, the restructured California electricity markets operated largely as intended. Starting in the summer of 2000, however, wholesale electricity prices in California increased significantly, with the day-ahead market peaking at a 15-fold increase over the pre-re structuring average cost. See In re Cal. Power Exch. Corp., 245 F.3d 1110, 1115 n.2 (9th Cir. 2001). As a re sult, load-serving utilities incurred billions of dollars of debt, and the independent system operator declared dozens of system emergencies and occasional rolling blackouts. Id. at 1115-1116.

Acting in response to a complaint filed on August 2, 2000, FERC took steps to remedy the situation. Specifi cally, it implemented structural and pricing reforms to make California and western electricity markets more stable and less susceptible to price spikes. See, e.g., Cal ifornia Power Exch., 245 F.3d at 1114-1116; San Diego Gas & Elec. Co. v. Sellers of Energy & Ancillary Servs., 93 F.E.R.C. ¶ 61,294, at 61,982 (2000). The Commission also urged the California utilities to enter into long-term contracts, finding that a key structural flaw of the Cali fornia market was the State's decision to place primary reliance on spot-market purchases. As a result of these steps and other factors, by early June 2001, prices in California spot and forward markets fell back to preex isting competitive levels. See San Diego Gas & Elec. Co. v. Sellers of Energy & Ancillary Servs., 95 F.E.R.C. ¶ 61,418, at 62,546 (2001).

4. The western energy crisis generated considerable litigation. In an earlier proceeding, the Court of Ap peals for the Ninth Circuit reviewed a broad challenge to the Commission's market-based rate program, in which some parties argued that any market-based rate contract must actually be filed with the Commission for it to be effective. See Lockyer, 383 F.3d at 1011-1013. The court of appeals rejected that challenge, holding that "the dual requirement of an ex ante finding of the absence of market power and sufficient post-approval reporting requirements" are sufficient to satisfy the notice and filing requirements of the FPA. Id. at 1013. But the court found that "non-compliance with FERC's reporting requirements was rampant" during the west ern energy crisis, and it therefore remanded the case to the Commission to consider whether such noncompli ance was sufficient to merit refunds to the purchasers under those contracts. See id. at 1014. This Court de nied certiorari. See Coral Power, L.L.C. v. California ex rel. Brown, 127 S. Ct. 2972 (2007) (No. 06-888).

5. The proceedings below concerned challenges to specific long-term contracts entered into during the 2000-2001 western energy crisis. The purchasers filed complaints with FERC, arguing that the contracts should be reformed because they were tainted by mar ket power or dysfunction. The Commission denied the complaints. Pet. App. 91a-214a; 06-1462 Pet. App. 246a- 313a.

The Commission's orders cited this Court's decisions in United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332 (1956) (Mobile), and FPC v. Sierra Pacific Power Co., 350 U.S. 348 (1956) (Sierra). Pet. App. 93a; 06-1462 Pet. App. 90a-91a. In Mobile, the Court interpreted provisions of the Natural Gas Act that parallel the FPA, and it held that the statute "pre serv[es] the integrity of contracts" and does not permit companies unilaterally to change those contracts. 350 U.S. at 344. The same day, the Court held in Sierra that the Federal Power Commission could not declare a rate set by contract to be "unreasonable solely because it yields less than a fair return on the net invested capital." Id. at 355. Rather, "the sole concern of the Commission would seem to be whether the rate is so low as to ad versely affect the public interest." Ibid. The Mo bile-Sierra doctrine, grounded in those two decisions, rests on the assumption that "[i]n wholesale markets, the party charging the rate and the party charged were often sophisticated businesses enjoying presumptively equal bargaining power, who could be expected to nego tiate a 'just and reasonable' rate as between the two of them." Verizon Commc'ns Inc. v. FCC, 535 U.S. 467, 479 (2002).

Applying Mobile-Sierra, the Commission concluded that the appropriate standard of review for the contracts at issue in this case was the "public interest" standard rather than the ordinary "just and reasonable" stan dard. Pet. App. 93a; 06-1462 Pet. App. 248a-249a. Since the purchasers had not shown that the contracts were contrary to the public interest, the Commission denied the complaints. Pet. App. 95a-96a; 06-1462 Pet. App. 248a.

6. The purchasers petitioned for review. In a pair of decisions issued the same day, the court of appeals granted the petitions and remanded the cases to FERC for further proceedings. Pet. App. 1a-15a, 268a-329a.

The court of appeals stated that "there is but one statutory standard addressing the lawfulness of whole sale electricity rates," and "[t]hat standard requires that all rates be 'just and reasonable.'" Pet. App. 300a. The Mobile-Sierra doctrine, the court reasoned, is sim ply "one means of review under the just and reason- able standard, applicable in certain limited circum stances." Ibid. Specifically, the court concluded that Mobile-Sierra applies when three conditions are met: (1) the terms of the contract must not preclude its appli cation, id. at 301a; (2) "the regulatory scheme in which the contracts are formed must provide FERC with an opportunity for initial review of the contracted rate," id. at 303a; and (3) "the scope of that review must permit consideration of the factors relevant to the propriety of the contract's formation," id. at 305a. See id. at 9a.

The court of appeals concluded that FERC erred in its application of the Mobile-Sierra doctrine to the con tracts at issue in these cases. The court agreed with the Commission that the contracts did not preclude the ap plication of Mobile-Sierra. Pet. App. 306a-309a. But it held that FERC did not have an opportunity for timely and effective review of rates. While acknowledging that "market-based rate authority can qualify as sufficient prior review to justify limited Mobile-Sierra review," the court stated that market-based rates must be "ac companied by effective oversight permitting timely re consideration of market-based authorization if market conditions change." Id. at 309a-310a. As in Lockyer, the court believed that the Commission failed appropriately to oversee market-based rates during the western en ergy crisis. Id. at 319a. In the court's view, quarterly reporting was "unlikely to expose in a timely manner the impact of market changes," and it allowed "review of the grounds for market-based rate authority only with re gard to contracts entered into after the impact of the market dysfunction or market power on long-term bilat eral contracts has already occurred." Id. at 315a.

Added to that "procedural error" was the Commis sion's "substantive adherence to Mobile-Sierra without regard to the market conditions in which the contracts at issue were formed." Pet. App. 320a. "Mobile-Sierra cannot apply," the court of appeals reasoned, "without a determination that the challenged contract was ini tially formed free from the influence of improper fac tors, such as market manipulation, the leverage of mar ket power, or an otherwise dysfunctional market." Ibid. The court found that FERC had failed to consider evi dence that "the dysfunction and manipulation of the spot market[] artificially influenced the rates in the forward market," id. at 321a, notwithstanding the conclusion of a FERC staff report that "forward power prices negoti ated during 2000-2001 in the western United States were significantly influenced by the then-current spot power prices," id. at 320a (quoting FERC Staff, Final Report on Price Manipulation in Western Markets: Fact-Finding Investigation of Potential Manipulation of Electric and Natural Gas Prices ES-12 (2003) (Staff Report)) <www.ferc.gov/legal/maj-ord-reg/land-docs/ PART-I-3-26-03.pdf>.

The court went on to state that, even if the Mo bile-Sierra doctrine applied, the Commission had used "an erroneous standard for determining whether the challenged contracts affect the public interest." Pet. App. 322a-323a. Specifically, the court concluded that FERC had erroneously applied "factors taken from the context of a low-rate challenge rather than those rele vant to the high-rate challenge present in this case." Id. at 323a. FERC should instead have considered whether the contracts were "outside the 'zone of reasonableness' and result[ed] in retail rates higher than would be the case if that zone were not exceeded." Id. at 327a.

The court remanded to the Commission "to deter mine, first, whether Mobile-Sierra review of the chal lenged contracts is appropriate; second, if so, to apply the modified form of Mobile-Sierra review outlined in this opinion; and finally, if not, to apply full just and rea sonable review to the challenged contracts." Pet. App. 328a; see id. at 15a.

ARGUMENT

Petitioners argue (06-1457 Pet. 15) that the decisions of the court of appeals are contrary to settled precedent, placing United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332 (1956), and FPC v. Sierra Pacific Power Co., 350 U.S. 348 (1956), "in the historical dust bin." Petitioners greatly overstate the breadth of the opinions below. The opinions do not overturn long-term power contracts. Instead, they remand to the Commis sion for further factual inquiry. The opinions do not hold that Mobile-Sierra protections are unavailable to market-based rate contracts unless they are first re viewed by the Commission. Instead, they hold that market-based rate authority qualifies as sufficient prior rate review to justify Mobile-Sierra contract review, so long as it is accompanied by continuing and effective oversight of the market. And the opinions do not over turn the Mobile-Sierra doctrine. Instead, they apply the principles of Mobile and Sierra to the highly unusual context of the 2000-2001 western energy crisis, the worst electricity-market crisis in American history. The decisions below stand for the narrow proposition that, if there is a credible claim that severe market dysfunction has affected the formation of a market-based contract, the Commission must take that fact into account in de termining whether the public-interest standard of Mobile-Sierra applies to its review of that contract.

Taken as a whole, the decisions of the court of ap peals allow the Commission sufficient discretion on re mand to consider all relevant factors in determining whether the contracts at issue should be upheld or re formed. Allowing the Commission to address these is sues on remand will not "cause severe damage to the wholesale energy markets." 06-1457 Pet. 25. The deci sions have not, as petitioners suggest, caused a flood of complaints by disgruntled purchasers seeking to reform contracts. In fact, there have been relatively few com plaints, and, more important, the Commission has promptly rejected those that lack merit. See, e.g., CAli fornians for Renewable Energy, Inc. v. California Pub. Utils. Comm'n, 119 F.E.R.C. ¶ 61,058 (2007) (CARE).

Petitioners allege various conflicts between the deci sions below and the decisions of this Court and other courts of appeals, but their arguments ignore the unique nature of the western energy crisis of 2000-2001. None of the cases on which they rely addressed a remotely similar event. As FERC applies the decisions below to future contracts-not affected by the unprecedented market dysfunction of the 2000-2001 crisis-there is no reason to suppose that it will reach conclusions different from those that it would reach if it were to apply the decisions of other courts of appeals. Further review is not warranted.

1. Petitioners contend (Pet. 15-17, 20; 06-1457 Pet. 17; 06-1462 Pet. 11-13; 06-1468 Pet. 14-17) that the court of appeals limited the application of the Mobile-Sierra doctrine to instances in which FERC reviews the terms of a contract before it takes effect. In their view, the decision below has effectively eliminated Mobile-Sierra protections in the context of market-based rates, making market-based rate approval a useless exercise. Petition ers misinterpret the court's opinions.

As petitioners point out, the court of appeals stated that "the regulatory scheme in which the contracts are formed must provide FERC with an opportunity for initial review of the contracted rate." Pet. App. 303a. But the court also took pains to emphasize, as it had two years earlier in Lockyer, that in "the contemporary reg ulatory regime," the requisite initial review "can be lim ited to review of a utility's market-based rate authority in the first instance." Id. at 302a; see id. at 309a-310a (noting that "market-based rate authority can qualify as sufficient prior review to justify limited Mobile-Sierra review," so long as it is "accompanied by effective over sight permitting timely reconsideration of market-based authorization if market conditions change"); id. at 311a- 312a; see also Lockyer, 383 F.3d at 1013. Thus, the court did not hold that the filing of a contract with the Commission is a necessary prerequisite to the applica tion of Mobile-Sierra.2 Instead, the court of appeals remanded for two narrower reasons, neither of which merits further review.

a. First, the court held that the Commission did not adequately oversee the market after granting petition ers' market-based rate authority during the western energy crisis. Pet. App. 314a-320a. That finding is pri marily of historical interest, given that the oversight regime that exists today is far different from that which existed in 2000-2001.

Since the western energy crisis, and in no small part because of it, the Commission has created a new Office of Enforcement to oversee markets and enforce compli ance with its orders and regulations; it has increased the transparency of market information to enhance its over sight function; it has reformed California electricity markets to correct the design flaws that contributed to the crisis; and it has adopted a more rigorous market power analysis in reviewing market-based rate requests and has imposed additional requirements, including change-in-status filing requirements, as a condition of retaining market-based rate authority.3 In addition, Congress has enacted legislation giving the Commission authority to punish market manipulation and impose civil penalties for market rule violations. See Energy Policy Act of 2005, Pub. L. No. 109-58, § 1283, 119 Stat. 979 (to be codified at 16 U.S.C. 824v (Supp. V 2005)) (au thorizing FERC to prohibit "any manipulative or decep tive device or contrivance" by "any entity" in connection with a FERC-jurisdictional transaction); § 1284, 119 Stat. 980 (to be codified at 16 U.S.C. 825o-1 (Supp. V 2005)) (providing for enhanced civil penalties for willful violations of Part II of the FPA).

The Commission has already recognized the rele vance of these new measures to the evaluation of con tracts under Mobile-Sierra. In an opinion issued subse quent to the Ninth Circuit's decision in this case, FERC explained that the decision below "addressed a unique set of facts and a market-based rate program that has undergone substantial improvements since 2001." CARE, 119 F.E.R.C. ¶ 61,058 para. 29. In light of those improvements in FERC's market oversight, when sell ers "have been granted market-based rate authority, the wholesale contracts that they have entered into are pre sumed to be just and reasonable." Id. para. 42.

b. As an independent basis for its remand, the court of appeals held that the Commission erred in determin ing, as a matter of law, that market dysfunction is irrele vant to whether the public-interest standard applies. Pet. App. 320a. As the court noted, the Commission's staff had found that "forward power prices negotiated during 2000-2001 in the western United States were sig nificantly influenced by then-current spot power prices," and "that the trauma of the dysfunctional spot power prices at that time so influenced buyers that they placed great weight on these prices in forming future expecta tions." Staff Report ES-9; Pet. App. 320a. But the Com mission declined to consider that evidence in determin ing whether or not the public-interest standard gov erned its review of the contracts, choosing instead to consider it as one factor in deciding whether, applying the public-interest standard, the contracts should be modified. 06-1462 Pet. App. 292a-293a; Pet. App. 108a- 109a. As the Commission saw it, to justify contract mod ification under the public-interest standard, it is not enough to show that forward prices became unjust and unreasonable due to the impact of spot-market dysfunc tion; rather, it must be shown that the contract rates, terms, and conditions were contrary to the public inter est. Ibid. The court of appeals found the Commission's approach erroneous, however, because the Commission failed "ever to consider whether the influence of the spot markets on the forward markets reached a level suffi cient to question whether FERC could assume that two private parties had negotiated a 'just and reasonable' contract in the first instance and therefore apply the Mobile-Sierra presumption." Pet. App. 321a.

The court's conclusion does not warrant review at this time because it is unclear how its position differs, in practical effect, from that of the Commission. Although the court criticized the Commission's approach, it did not explain its alternative approach in any detail. It appears that the court contemplates a two-step analysis in which the Commission first considers whether market dysfunction was so severe as to undermine Mobile-Si erra's presumption that contract prices reflect a fair bargain between a willing buyer and a willing seller. See Pet. App. 320a (application of Mobile-Sierra re quires "a determination that the challenged contract was initially formed free from the influence of improper factors, such as market manipulation"). Once that test is applied, the court seems to contemplate an analysis of whether to uphold or reform the contract based on all relevant factors under either the public-interest stan dard, if applicable, or the just-and-reasonable standard. Id. at 322a-327a.

Because the court of appeals has not specified the required inquiry in any detail, it has not restricted the Commission's ability, on remand, to consider all relevant facts in its analysis. Petitioners argue (06-1457 Pet. 23) that spot-market dysfunction is irrelevant as a matter of law because it is just another "fact about the world" that purchasers consider when entering into forward con tracts. While spot-market dysfunction may be a "fact about the world," it is a very important fact. Recogniz ing this, the Commission's orders below did not disre gard the spot-market dysfunction; rather, the Commis sion considered it as part of the "totality of circum stances" in considering whether the contracts offended the public interest. 06-1462 Pet. App. 339a; Pet. App. 111a. Even though the Commission upheld the con tracts, it never suggested that the spot-market dysfunc tion was irrelevant as a matter of law in determining whether the public-interest standard could be overcome. The court has simply directed the Commission to con sider spot-market dysfunction at a different stage in its analysis, and it is far from clear that the difference will be outcome-determinative in this or any other case. Nor is it likely that market dysfunction of the kind that oc curred in the 2000-2001 western energy crisis will occur in the future. See pp. 6, 12-13, supra.

Petitioners also suggest (06-1468 Pet. 19-20) that the decision below conflicts with Northeast Utils. Serv. Co. v. FERC, 993 F.2d 937, 961 (1993), in which the First Circuit held that market power is not relevant to the application of Mobile-Sierra. Although the First Circuit did express that view initially, on a subsequent appeal following its remand, the First Circuit noted that, while it previously "questioned the significance of the seller's market power and the lack of arms-length bargaining, it left open the possibility that these factors may so affect third parties as to warrant intervention even under the public interest standard." Northeast Util. Serv. Co. v. FERC, 55 F.3d 686, 691-692 (1st Cir. 1995) (Northeast Utils.) (citation omitted). On its second review of the case, the First Circuit affirmed the Commission's appli cation of a "more flexible" public-interest review of the contract at issue because the Commission had explained why the disputed contractual terms might harm third parties. Id. at 692. That holding is consistent with the approach taken by the court of appeals in this case.

2. Petitioners also contend that the court of appeals improperly "collapses" the public-interest and the just- and-reasonable standards in a "high rate" case, that is, a case in which a purchaser challenges a rate as exces sively high. Pet. 24-25; 06-1468 Pet. 25-26. Here, too, petitioners misread the court's opinions.

Petitioners focus on the court of appeals' statement that "the proper standard * * * is not whether the contracted rates pose an 'excessive burden' on consum ers, but whether the wholesale energy contract is out side the 'zone of reasonableness' and results in retail rates higher than would be the case if that zone were not exceeded." Pet. App. 326a-327a. But the court of ap peals expressly rejected the proposition "that any direct impact on consumer rates is enough to demonstrate a public interest effect sufficient to displace the counter vailing Mobile Sierra concern with protecting the stabil ity of contract." Id. at 326a. Instead, while noting that "a functioning marketplace will drive prices towards marginal cost, and therefore towards * * * a reasonable range," the court made clear that, "[e]ven if a particular rate exceeds marginal cost * * * it may still be within this reasonable range-or 'zone of reasonableness'-if that higher-than-cost-based price results from normal market forces and is part of a general trend toward rates that do reflect costs." Ibid. Thus, contracts en tered into in a "functioning marketplace" do not offend the public interest simply because the rates are above traditional measures of cost. Ibid.

Petitioners argue (Pet. 26) that the court of appeals created a "heads I win, tails you lose" rule in which pur chasers can "challenge any contracts that are no longer favorable to them," but sellers cannot. As explained above, the court's application of the public-interest test does not permit a party to challenge a contract simply because it is "no longer favorable." Indeed, even under the just-and-reasonable standard, a purchaser may not claim "buyer's remorse" and be excused from a long- term contract simply because market prices have fallen during the term of the contract. Rather, it must demon strate that the relative benefits and burdens have been upset over the life of the contract. See, e.g., Pontook Operating Ltd. P'ship v. Public Serv. Comm'n, 94 F.E.R.C. ¶ 61,144, at 61,552 (2001); French Broad Elec. Membership Corp. v. Carolina Power & Light Co., 92 F.E.R.C. ¶ 61,283 (2000); San Diego Gas & Elec. Co. v. Public Serv. Comm'n, 95 F.E.R.C. ¶ 61,073 (2001).

Nor did the court create a rule that is biased against sellers. In many of the portions of its opinion cited by petitioners, the court was simply observing that the fac tual considerations in low-rate and high-rate cases dif fer, a point that is neither surprising nor new. For ex ample, the potential insolvency of a seller is always a concern in a low-rate case. See, e.g., Sierra, 350 U.S. at 355 (noting that a low rate "might impair the financial ability of the public utility to continue its service"). In contrast, in a high-rate case, a purchaser may be able to pass rates on to its customers without going bankrupt. As the First Circuit has held, the Sierra "definition of what is necessary in the public interest was formulated in the context of a low-rate case. It was not and could not be an across-the-board definition of what constitutes the public interest in other types of cases." Northeast Utils., 55 F.3d at 690.

Contrary to petitioners' suggestion, the court of ap peals also recognized the importance of contractual sta bility, even in high-rate cases. For example, in addition to acknowledging that a functioning marketplace can often produce high rates-and that such rates can be consistent with the public interest-the court made clear that "the stability of contract considerations that underlie the Mobile-Sierra doctrine do carry over to challenges by buyers rather than sellers." Pet. App. 325a.

In any event, this case is a poor vehicle for consider ing the application of the public-interest standard to a high-rate case. The court's interpretation of the public- interest standard was unnecessary to its decision, since it had already remanded the case because of the Commis sion's failure to consider adequately whether the public- interest standard applies at all. And on remand, the Commission will be able to consider the issue in a man ner consistent with traditional Mobile-Sierra principles, obviating many of the concerns raised by petitioners. In fact, FERC has already demonstrated that, in applying the principles of the court's decisions, it will protect con tractual stability. The Commission has explained that it "protects customers * * * by providing rate stability through the protection of sales contracts," and that its "improved market-based rate program provides the foundation to ensure that sellers and buyers can con tinue to rely on market-based rate contracts to provide price certainty." CARE, 119 F.E.R.C. ¶ 61,058 para. 40. At this point, then, any consideration by this Court would be premature because the Court's review would benefit from the better-developed record that would be produced by FERC's application in the first instance on remand of the principles set out by the court of appeals.

3. Petitioners allege numerous conflicts between the decisions below and various decisions of other courts of appeals (Pet. 26; 06-1457 Pet. 24; 06-1462 Pet. 13-14; 06- 1468 Pet. 15-16), but they ignore the obvious point that no other case addressed facts even remotely similar to those at issue here. The western energy crisis was the worst in the Nation's history. It arose from an unprece dented confluence of "flawed market rules; inadequate addition of generating facilities in the preceding years; a drop in available hydropower due to drought condi tions; a rupture of a major pipeline supplying natural gas into California; strong growth in the economy and in electricity demand; unusually high temperatures; an increase in unplanned outages of extremely old generat ing facilities; and market manipulation." CARE, 119 F.E.R.C. ¶ 61,058 para. 30. Those factors combined "to place California and the entire West in an electricity crisis that had never before been experienced." Ibid. The resulting crisis was hardly comparable, as peti- tioners suggest (06-1457 Pet. 22), to "the change in prices * * * caused by the sudden availability of power from the Shasta dam" in Sierra.

In two of the decisions on which petitioners rely, the courts of appeals actually affirmed Commission deci sions to reform a contract under Mobile-Sierra. In Northeast Utilities, the First Circuit considered a power contract that was potentially harmful to third parties. Despite the presence of a Mobile-Sierra clause, the Commission reformed the contract to remedy the potential harm, and the court upheld the Commission's decision. See 55 F.3d at 692. Likewise, in Maine Public Utilities Commission v. FERC, 454 F.3d 278 (2006), the D.C. Circuit addressed a proposal by New England's transmission owners to pull out of a regional market without adequate prior review by the Commission. De spite the presence of a Mobile-Sierra clause, the Com mission reformed the contract to require a meaningful prior review by the Commission before the transmission owners could withdraw from the market, and the D.C. Circuit upheld the Commission's action. See id. at 284.

Other cases rejected challenges to contracts, but none of them involved facts similar to those here. In Potomac Electric Power Co. v. FERC, 210 F.3d 403 (2000), the D.C. Circuit addressed a claim by a pur chaser that its transmission rate in its 1987 contracts had become unreasonable over time. The Commission rejected the complaint, and the court upheld the deci sion because the purchaser "presented no evidence" that the rates were "unduly discriminatory or excessively burdensome on [the purchaser's] ratepayers." Id. at 409. In Boston Edison Co. v. FERC, 233 F.3d 60 (2000), the First Circuit vacated and remanded Commission orders applying a just-and-reasonable standard to re duce a seller's return on equity. In remanding the case for application of the public-interest standard, the court noted that "[v]ery little useful precedent exists" ad dressing the question whether rates are "so high as to be contrary to the public interest." Id. at 68. And in San Diego Gas & Electric Co. v. FERC, 904 F.2d 727, 730 (1990), the D.C. Circuit affirmed Commission orders rejecting a buyer's argument that a contract should be modified based on after-the-fact market changes.

None of the cited cases concerned a market-based rate contract, much less one entered into during the Na tion's worst power crisis. At most, they illustrate the Commission's longstanding commitment to contractual stability, a commitment that has not lessened in the wake of the decisions at issue here. See CARE, 119 F.E.R.C. ¶ 61,058 para. 40.

4. Petitioners present a number of arguments based upon the particular factual circumstances of their indi vidual cases. For example, some of the contracts in cluded recitations to the effect that the terms were "'just' and 'reasonable' within the meaning of the FPA" (Pet. 22-23); some involved purchasers who were power marketers, not merely retail providers (06-1462 Pet. 17- 19); and some were agreed to by parties who were al ready aware of market dysfunction (06-1468 Pet. 22-23). In one case, the seller alleged that the contract would result in a relatively modest increase in retail rates. 06-1457 Pet. 23-24. In another, the purchasers pre sented evidence to the court of appeals that they had failed to present to FERC. Pet. 29-30.

Petitioners may present those (and other) case-spe cific arguments on remand, and the Commission may take them into account in addressing whether each con tract should be reformed. If petitioners are dissatisfied with the result on remand, they will be able to seek agency rehearing and judicial review. See 16 U.S.C. 825l(a)-(b). At present, the interlocutory nature of those issues makes this Court's review premature. See Ham ilton-Brown Shoe Co. v. Wolf Bros. & Co., 240 U.S. 251, 258 (1916).

CONCLUSION

The petitions for a writ of certiorari should be de nied.

Respectfully submitted.

PAUL D. CLEMENT
Solicitor General

 


JOHN S. MOOT
General Counsel
ROBERT H. SOLOMON
Solicitor
LONA T. PERRY
Senior Attorney
Federal Energy Regulatory
Commission





AUGUST 2007
1 Unless otherwise noted, all references to "Pet." and "Pet. App." are to the petition and appendix in No. 06-1454.

2 Petitioners cite numerous cases in which other circuits have held that Mobile-Sierra applies to contracts not filed with the Commission. See 06-1462 Pet. 11-13; 06-1468 Pet. 16-17; Pet. 16-17. Because the court of appeals in this case did not hold that such filing is required for to the application of Mobile-Sierra, there is no conflict.

Petitioner Dynegy notes (06-1468 Pet. 17-18) that it did file its contract with the Commission. The court of appeals did not consider that fact to be dispositive, because, "[a]t the time Dynegy filed its con tract, the full scale of market manipulation and forward market dys function was not nearly as fully known as it is today." Pet. App. 11a. In other words, the result in Dynegy's case rested on the court's holding that market dysfunction is relevant to determining whether to apply the Mobile-Sierra public-interest test. For the reasons discussed at pp. 16-18, infra, that holding does not warrant review.

3 See generally CARE, 119 F.E.R.C. ¶ 61,058 paras. 31-41 (describ ing steps taken by the Commission "to ensure that there are appropri ate market safeguards in place to prevent a repeat of the California 2000-2001 energy crisis"); see also, e.g., Revised Pub. Util. Filing Requirements, 99 F.E.R.C. ¶ 61,107 (2002) (Order No. 2001) (requiring electronic filing of quarterly reports providing transaction-specific data on wholesale power sales) (67 Fed. Reg. 31,044 (2002)), order on reh'g, 100 F.E.R.C. ¶ 61,074 (2002), order on reh'g, 100 F.E.R.C. ¶ 61,342 (2002); Order Amending Market-Based Rate Tariffs & Authorizations, 105 F.E.R.C. ¶ 61,218 (2003) (imposing market behavioral rules in all market-based rate tariffs), order on reh'g, 107 F.E.R.C. ¶ 61,175 (2004), petition for review denied, No. 04-1238, 2007 WL 1791011 (D.C. Cir. June 22, 2007); Electric Quarterly Reports, 105 F.E.R.C. ¶ 61,219 (2003) (revoking market-based rate authority for utilities that failed to meet reporting requirements); Order Revoking Market-Based Rate Auth., Establishing Hearing & Settlement Judge Procedures, & Terminating Sec. 206 Proceeding, 113 F.E.R.C. ¶ 61,124 (2005) (same); AEP Power Mktg., Inc., 107 F.E.R.C. ¶ 61,018 (2004) (adopting new interim gen eration market-power analysis and mitigation policy), on reh'g, 108 F.E.R.C. ¶ 61,026 (2004); Reporting Requirement for Changes in Status for Pub. Utils. with Market-Based Rate Auth., 110 F.E.R.C. ¶ 61,097 (Order No. 652) (amending regulations to establish a reporting obligation for changes in status that apply to public utilities authorized to make sales at market-based rates) (70 Fed. Reg. 8253 (2005)), reh'g granted in part, 111 F.E.R.C. ¶ 61,413 (2005); Prohibition of Energy Mkt. Manipulation, 114 F.E.R.C. ¶ 61,047 (2006) (Order No. 670) (amending Commission regulations to implement new Section 222 of the Federal Power Act, prohibiting the employment of manipulative or deceptive devices or contrivances) (71 Fed. Reg. 4244 (2006)). See also Market-Based Rates for Wholesale Sales of Elec. Energy, Capacity, & Ancillary Servs. by Pub. Utils., 119 F.E.R.C. ¶ 61,295 (2007) (revising current standards for market-based rate sales); Notice of Proposed Rulemaking, 118 F.E.R.C. ¶ 61,031 (2007) (proposing revised standards of conduct for electric transmission providers) (72 Fed. Reg. 3958 (2007)).