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Morgan Stanley Capital Grp. Inc. v. Pub. Util. Dist. No. 1 - 554 U.S. 527, 128 S. Ct. 2733 (2008)

Rule:

The statutory requirement that wholesale-electricity rates be just and reasonable is obviously incapable of precise judicial definition, and courts afford great deference to the Federal Energy Regulatory Commission in its rate decisions. The Commission is not bound to any one ratemaking formula, but the Commission must choose a method that entails an appropriate balancing of the investor and the consumer interests. In exercising its broad discretion, the Commission traditionally reviews and sets tariff rates under the cost-of-service method, which ensures that a seller of electricity recovers its costs plus a rate of return sufficient to attract necessary capital.

Facts:

Under the Mobile-Sierra doctrine, the Federal Energy Regulatory Commission (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 (FPA), see 16 U.S.C. § 824d(a), and the presumption may be overcome only if FERC concludes that the contract seriously harms the public interest. Under FERC's current regulatory regime, a wholesale-electricity seller may file a "market-based" tariff, which simply states that the utility will enter into freely negotiated contracts with purchasers. Those contracts are not filed with FERC before they go into effect. In 2000 and 2001, there was a dramatic increase in the price of electricity in the western United States. As a result, respondents entered into long-term contracts with Morgan Stanley that locked in rates that were very high by historical standards. Respondents subsequently asked FERC to modify the contracts, contending that the rates should not be presumed just and reasonable under Mobile-Sierra. The Administrative Law Judge concluded that the presumption applied and that the contracts did not seriously harm the public interest. FERC affirmed, but the Ninth Circuit remanded. The court held that contract rates are presumptively reasonable only where FERC has had an initial opportunity to review the contracts without applying the Mobile-Sierra presumption and therefore that the presumption should not apply to contracts entered into under "market-based" tariffs. The court alternatively held that there is a different standard for overcoming the Mobile-Sierra presumption when a purchaser challenges a contract: whether the contract exceeds a "zone of reasonableness."

Issue:

Did FERC erroneously apply the judicial presumption that the rates were just and reasonable?

Answer:

No

Conclusion:

The U.S. Supreme Court disagreed with the appellate court and held that the just-and-reasonable presumption applied to the subject contracts, as it did to all purchase contracts, and the lack of initial review of the contracts by FERC did not preclude application of the presumption upon a subsequent challenge. Further, the standard justifying modification of the contract rates required serious harm to the public interest, and the standard was not lessened simply because the challenge was brought by the purchasers rather than sellers. However, the remand to FERC was appropriate since there was inadequate consideration of future burden to consumers and possible unlawful market manipulation by the sellers.

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