Consolidated Cases; Calpine v. Snohomish Public Utility District No. 1; Morgan Stanley v. PUD 1

These consolidated energy cases raise issue of enormous difficulty and complexity but which may, however, be framed in very simple terms. They come out of that terribly difficult time in American life in 2000-2001 when there were spot energy shortages, brown-outs and manipulation of the Western energy markets. As a result of market unpredictability, several public utility districts (the district here at issue is the Snohomish (WA) PUD) drew up multi-year contracts with power suppliers that obliged them to pay more per kilowatt hour for energy than ever previously. Of course, these PUD's had to pass on the energy costs to consumers, making Western consumers' energy bills leap like a hart in the years following the crisis. But then, like a great fever in the night that breaks with the morning sunlight, the energy crisis was "over" and the price of energy declined to just above its pre-crisis rate. The PUDs, therefore, were left "holding the bag," i.e., with long-term energy contracts where they were buying energy for considerably more than it was "worth." The big beneficiaries of this regime were companies like Calpine or Morgan Stanley, who had either been long-time players in the energy market or had recently entered in (Morgan Stanley did in 1994). Thus, the economic reality presented by this case is that we have a transfer of funds flowing from consumers into the coffers of the big energy or financial services companies.

Seeing the dramatic result of the long-term contracts, Snohomish PUD and others decided to approach the Federal Energy Regulatory Commission ("FERC") to rewrite their contracts, which they claim were made under duress, so that the public would be protected and the money not flow to Morgan Stanley, Calpine and others. Of course, Morgan Stanley and Calpine have wrapped themselves in the doctrine of the sacredness of contract, and have pointed to 50 year-old Supreme Court precedents to support their case. When the administrative law process decided to uphold the contracts, Snohomish and others kicked the cases into the federal system, landing at the Ninth Circuit. In a unanimous panel decision, the 9th Circuit (which the US Supreme Court loves to reverse) decided that the 50 year-old precedents interpreting the federal law under which FERC operates had to be subordinate to that law. Under that law (The Federal Power Act, esp. sec. 206(a)), the appeals court held that FERC could intervene to undo or rewrite the contracts if they were considered to be operating against the public interest. Since the statute is going to bulk large in the US Supreme Court's decision, it might be useful to give sec. 206(a) here:

"Whenever the Commission, after a hearing had upon its own motion or upon complaint, shall find that any rate, charge, or classification, demanded, observed, charged, or collected by any public utility for any transmission or sale subject to the jurisdiction of the Commission, or that any rule, regulation, practice, or contract affecting such rate, charge, or classification is unjust, unreasonable, unduly discriminatory or preferential, the Commission shall determine the just and reasonable rate, charge, classification, rule, regulation, practice, or contract to be thereafter observed and in force, and shall fix the same by order." 16 U.S.C. § 824e(a) (2000) .

So, at its most basic, the Court will be asked to determine if the 9th Circuit correctly decided that FERC could rewrite the contract (the 9th Circuit actually remanded the case to FERC with authority to do so). In the technical language of the petition for cert. brought by Morgan Stanley, the issue was phrased as follows:

"Whether the Ninth Circuit erred by failing to abide by this Court's decisions in United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332 (1956), and Federal Power Commission v. Sierra Pacific Power Co., 350 U.S. 348 (1956), which preclude the Federal Energy Regulatory Commission from retroactively undoing valid, bilaterally negotiated, arms-length wholesale energy contracts that have, at most, minimal impact on retail rates."

Further Complications

One of the questions before the Supreme Court is how to read these 1956 precedents. Morgan Stanley and other petitioners claim that they stand for the proposition that energy contracts are sacred, and that there is no reason either to change the contracts or to revisit the cases. The 9th Circuit, on the other hand, held that Mobile-Sierra, stood for the proposition that only in certain circumstances (italics in original opinion) a presumption applies that private parties to a wholesale electric power contract have negotiated a "just and reasonable" (the statutory language) contract over a designated period of time. This was not one of those circumstances, according to the court. So, the Supreme Court will have to sort out that one.

One other thing they will have to sort out is the different regulatory context in 1956 and 2001. The 9th Circuit held that the Mobile and Sierra cases arose in a regulatory context in which there was opportunity for traditional cost-based just and reasonable review before the energy contracts became effective. However, the 9th Circuit contended, the regulatory regime has evolved and FERC shifted its inquiry from the permissible "cost-basis" of rates to the determination of a seller's market power. Thus, the 9th Circuit interpreted the case as the "intersection of two doctrines," the Mobile-Sierra court-shaped doctrine and the regulatory agency policy of the 1980s and later.

I don't presume to understand all the permutations of these different doctrines, but it seems to me that the issue here relates to who pays for a contract that turns out to go very bad for the public utility district. I wouldn't be surprised if the Court sides with the big money players--Morgan Stanley and Calpine--in all of this.

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Morgan Stanley v. Publ. Utility Dist 1 Calpine Energy v. Publ. Utility Dist 1

Morgan Stanley v. Publ. Utility Dist 1
Calpine Energy v. Publ. Utility Dist 1