During an energy crisis in the Western U.S. in late 2000 and early 2001, several utility companies who had decided they could no longer afford to buy electricity from their normal suppliers and had an immediate need to secure power for their customers negotiated long-term contracts to buy electricity from alternate suppliers. After the energy crisis passed and energy prices dropped, the utility companies asked FERC to allow them to modify their contracts to enable them to pay lower prices for wholesale energy and subsequently lower their customer rates. In refusing their request, FERC explained that the Supreme Court’s Mobile-Sierra doctrine establishes a presumption that contracts negotiated by sophisticated parties like public utilities are “just and reasonable” in accord with the Federal Power Act and thus cannot be revised. The Court carved out an exception for cases where the contracts are against the “public interest” (for example, when not permitting modification would jeopardize the supply of power to retail users).
The Ninth Circuit reversed FERC’s decision, holding that the Mobile-Sierra doctrine only applies in “limited circumstances” and that, by failing to consider the market conditions in which the contracts at issue were formed, FERC had failed to determine whether such “limited circumstances” were present here. The Ninth Circuit also held that even if the Mobile-Sierra doctrine applied, its public interest exception would permit contract modification because the high electricity rates excessively burdened consumers.
The Supreme Court ruled 6/26/08 that FERC was required to follow the Mobile-Sierra presumption of reasonableness, and the validity of a contract is not affected by an environment of electric power market "dysfunction." The Court rejected the Ninth Circuit's "zone of reasonableness" test, and underscored the need to honor contracts unless they seriously harm the public interest. There must be "unequivocal public necessity" to set aside a contract rate. However, the Court affirmed the Ninth Circuit's ruling on other grounds: FERC's defective analysis of the market effects needs to consider longer-term burdens, and FERC needs to more carefully consider whether there was unlawful market manipulation that disrupted fair, arms-length contract negotiations.