The U.S. Supreme Court ruled that the Federal Energy Regulatory Commission (FERC) has limited authority to overturn a utility contract even when third parties object to unfair rates. The decision is a blow to all utility consumers.
The case concerns New England's capacity market for electricity, which has had a number of problems in recent years. In a "capacity" market, as opposed to a wholesale electricity market, the entity purchasing electricity for consumers compensates the seller for the option of buying a specified quantity of electrical power regardless if they ultimately buy that quantity. Under this system, the purchasers of electrical power generally purchase more electrical capacity than is necessary to meet their customers' demand for electricity.
This case involved four months of negotiations involving 115 parties across New England. All but eight of the parties reached a settlement purporting to set rates for all market participants whether or not they agreed to the settlement. Eight litigants, including Maine Public Utilities Commission and the attorneys general of Connecticut and Massachusetts, objected on the grounds, among other things, that the agreement effectively forced states to acquire a specific level of capacity whether they wanted or needed it. They also challenged the methodology by which the price point was determined.
Nonetheless, FERC approved the settlement even as to the states objecting to the settlement. That decision was rejected by a federal circuit court on appeal. The D.C. Circuit Court of Appeals ruled that the objecting states and other parties were entitled to a review by FERC under the "just and reasonable" guidelines of the Federal Power Act.
NRG Power Marketing LLC v. Maine Pub. Utilities Comm'n was appealed to the U.S. Supreme Court, where AARP filed a "friend of the court" brief with the consumer-interest group Public Citizen.
The settling parties argued that FERC and the courts must scrupulously adhere to the terms of the contract, and they also argue that a freely negotiated contract by definition reflects an agreement between two parties with adverse interests and therefore a contract must presumptively be considered fair.
AARP's brief, filed by AARP Foundation Litigation attorneys, countered that while that contract theory might make sense generally, in this case it does not apply. Because wholesale purchasers who resell power to consumers are entitled to pass on their costs directly to consumers, they cannot be trusted to automatically protect the interests of the public in establishing rates. Thus it is all the more important that third-party challenges to rate-setting contracts be allowed, and that they not be inhibited by artificially created barriers and presumptions.
The brief noted that the Federal Power Act (FPA) provisions regarding rate setting and its purposes in protecting consumers are both clear. Even after a rate or contract goes into effect, the FPA provides that FERC at all times retains authority, upon its own initiative or upon a complaint filed by anyone, to find that the rate or contract is "unjust, unreasonable, unduly discriminatory or preferential."
Moreover, the brief noted that both common sense and long experience demonstrate that in transactions for the purchase and sale of wholesale electricity, companies that purchase power for resale to consumers cannot be expected to negotiate rates that are just and reasonable to consumers, precisely because retail sellers of power have an almost unlimited ability to pass on rates to consumers. The brief detailed cases in which courts found that wholesale purchasers in fact were unlikely to be representing the interests of their customers.
Finally, AARP's brief noted that the reason the FPA was enacted and FERC was established was a response to market failures that left consumers and state regulators helpless against utility companies.
The Supreme Court ruled that in order to set aside the terms of a long term contract, FERC had to first presume that the contract was just and reasonable, and then only disturb it if the public interest is seriously harmed. The Court ruled that the presumption of just and reasonableness of rates applied to not only parties to the contract, but also to everyone else, including state governmental agencies, consumer groups or other third parties who never agreed to the contract.
Justice Stevens, in a stinging dissent, wrote that the Court was the latest chapter in a story "about how a reasonable principle, extended beyond its foundation, becomes bad law." Reading the language and the history of the FPA, he wrote that the Court's ruling would seriously impede FERC's statutorily-mandated ability to set aside a contract as unjust and unreasonable "even though it saddled consumers with a duty to pay prices that would be considered unjust and unreasonable under normal market conditions." In other words, as Justice Stevens wrote, "If a third party wholesale buyer can show a rate harms the public interest … but cannot show it seriously harms the public, FERC may do nothing about it."
Justice Stevens' dissent suggested that the fix to this injustice may lie with congressional action.
What's at Stake
The case is important because of its potential impact on the cost of utilities to consumers, who ultimately are the ones paying for wholesale electric contracts. Many people on fixed incomes cannot afford to pay rapidly increasing utility costs, and nationwide electricity discounts for the poor are being reduced or eliminated because of state budget problems. The double whammy of escalating prices and inadequate funding for energy assistance leaves consumers in a vulnerable situation that demands action by the federal regulators tasked with protecting the public interest.
FERC was created so that utility rates could be examined by the Commission, and following a hearing, the Commission could set aside any rate found "unjust, unreasonable, unduly discriminatory or preferential," and replace it with a just and reasonable rate. In NRG the Court held for the first time in the law's 73-year history that the FPA requires regulators to presume that contracts offered by regulated utility sellers and accepted by wholesale buyers are "just and reasonable" even when noncontracting parties such as consumers, advocacy groups or state regulators affected by the contracts object to the contracts. The Court's decision in NRG now requires that consumer groups or state regulators not just show that they are harmed by excessive electrical rates but rather they must show extraordinary harm, a test extremely difficult to pass.
It is now up to Congress to determine whether the additional burdens placed on consumers and state agencies who challenge unjust utility rates will stand.