Jessica Reiss

January 29, 2010

On January 13, the Supreme Court handed down NRG Power Marketing, L.L.C. v. Maine Public Utilities Commission. The case arose out of New England's struggle to supply enough energy to meet the region's demand. New England's energy-supply problem originated from the structure of the region's energy market. The energy market failed to encourage investment in new energy-producing facilities. Without new energy-producing facilities, no new supply was created to meet growing demand.

Back in 2003, energy-producers, the Independent System Operator of New England (ISO-NE), and the Federal Energy Regulatory Commission (FERC) began working toward "a new market mechanism" to encourage investment in new energy-producing facilities. Eventually, the parties agreed to create a "forward capacity market." In the forward capacity market, ISO-NE holds auctions in which energy-providers bid to purchase energy from energy-producers. However, the energy-providers bid three years in advance of when that energy will be used. Essentially, energy-providers bid today on energy they will receive three years from today.

The forward capacity market allows energy-producers to auction energy they cannot actually produce today. This provides energy-producers with certainty of future revenue. In reliance on the auction purchase, the energy-producers can invest in new energy-producing facilities to meet the demand in three years. The forward capacity market also provides energy-providers with certainty of supply and locks in a price.

The agreement to create the forward capacity market was at issue in NRG Power Marketing. Opponents challenged several aspects of the agreement in the D.C. Circuit. The D.C. Circuit rejected all but one of the opponents' challenges. The one provision the D.C. Circuit overturned stated: "the prices will be subject to the Mobile-Sierra public interest standard" of review. The Supreme Court reversed the D.C. Circuit's decision as to that provision only. In sum, the entire agreement has now been upheld in court.

What does it mean for "prices [to] be subject to the Mobile-Sierra public interest standard" of review? The Federal Power Act (FPA) allows energy-producers and energy-providers to enter into contractual agreements as to rates. FPA also requires that all rates be "just and reasonable." Mobile-Sierra is a judicially-created presumption "that contract rates freely negotiated between sophisticated parties meet the just and reasonable standard imposed by 16 U.S.C. § 824d(a)." "The presumption may be overcome only if FERC concludes that the contract seriously harms the public interest."

The forward capacity market implicates this FPA provision because the auction creates contractual agreements between energy-producers and energy-providers concerning the purchase of energy in three years. Because "the prices will be subject to the Mobile-Sierra public interest standard" of review, the rates agreed upon at the auctions are presumed to be just and reasonable. Thus, those rates can only be challenged if FERC first "concludes that the contract seriously harms the public interest." The result is limited judicial review of the contracts created at the forward capacity market auctions.

Limited judicial review is desirable because it furthers the certainty provided by the forward capacity market. Rates subject to judicial review cannot be relied upon for investment purposes. Energy-producers must be able to rely upon the rates set forth in the auction contracts without fear that FERC will modify them. For this reason, the provision was included in the agreement, and, for this reason, the court upheld it.

Sources:

NRG Power Marketing, L.L.C. v. Maine Public Utilities Commission. 558 U.S. ____ (2010).

16 U.S.C. § 824d(d).

16 U.S.C. § 824d(a).

Devon Power L.L.C., 115 F.E.R.C. 61,340 (2006).

Clinton A. Vince, What Is Happening and Where in the World of RTOs and ISOs?, 27 Energy L. J. 65 (2006).