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Supreme Court Considers Energy Contracts

(CN) - The Supreme Court on Tuesday heard arguments on whether a New England energy contract could be challenged by a third party. But the third party, which had support from the appellate court, appeared to have lost this round. "You're in a very tough position," Chief Justice John Roberts told its lawyer.

Jeffrey Lamken, with Baker Botts, represented NRG Power Marketing and other energy companies that entered into the power agreement. Lamken argued that nonparties should not be able to challenge the agreement. If it were so easy to disrupt a contract, the uncertainty would keep companies from investing hundreds of millions of dollars in infrastructure, he said.

Connecticut Attorney General Richard Blumenthal argued that rates set under FERC supervision are tariffs, not contract rates, in which case third parties should have a say. He suggested that the Federal Energy Regulatory Commission should not have unchecked discretion to adopt energy policies.

Chief Justice Roberts said in response to Lamken's argument: "It's a bit much to say that the importance is to preserve the stability of two parties' contract, and therefore a third party who didn't sign the contract is bound to the two parties' contract."

Lamken replied that the nonparty is not the one paying the rate, so it is not directly affected.

"Is there any other area of the law in which the parties to a contract can, in effect, dictate the substantive standard of the administrative review for challenges raised by nonparties?" Justice Antonin Scalia asked skeptically.

Lamken said he didn't know.

Blumenthal, who represented the companies challenging the agreement, also faced tough questioning from the justices.

"Well, they can self-supply, can't they?" Justice Sonia Sotomayor asked, supposing the third parties could work outside of the energy agreement.

"They're not bound to it," Scalia said.

"Their simple question was, Mobile-Sierra binds the contracting parties and the rate doesn't stick for anybody else," Justice Ginsburg said, in remarking that the contract would not affect third parties. "That's what the Court of Appeals decided."

The FERC determined that New England had low energy capacity and accepted a negotiated plan between 115 parties. Of those, eight opposed the final settlement.

The FERC has exclusive jurisdiction over transmission of energy across state lines and determines if rates for the sale of power are just and reasonable.

Under the Supreme Court's Mobile-Sierra provision, an energy agreement made between two or more parties is assumed to be just and reasonable because it is privately negotiated in the free market. The FDRC may modify or nullify contracts only if they are shown to severely harm the public interest.

"The commission devises a system for trying to get it done, and if they do it reasonably, they win," Justice Stephen Breyer said.

Justice Scalia added: "It was decided on the very simple basis that the Mobile-Sierra doctrine simply does not apply to challenges by third parties."

Scalia asked if Blumenthal supported the decision. Blumenthal said he did and added that Mobile-Sierra is about contracts.

"It isn't about contracts; it's about reasonable rates," Scalia said. "I thought what it was, was a determination by the commission, approved by this court, that when two giants of the industry, very knowledgeable, deal in arm's length and come up with a contract, that is presumptively reasonable, and unless it contravenes the public interest, that rate will be upheld.

"You say it should be upheld only between the two contracting parties," Scalia said. "What good does that do?"

Justice Roberts added: "You're in a very tough position because of the way this has progressed. I think you can make a strong argument that you shouldn't be bound by these contract rates if FERC doesn't have a lot of discretion to let you go. If FERC has a lot of discretion to let you go, your argument that you shouldn't be bound is a lot weaker."

Blumenthal said that application of the provision can be applied sometimes.

Scalia was skeptical. "Has anybody before even suggested that Mobile-Sierra is a sometimes thing?" Scalia asked.

The Maine Public Utilities Commission and the attorneys general of Connecticut and Massachusetts sought review of the agreement and argued that the Mobile-Sierra provision, which restricts changing of a contract, should not apply when a challenge is brought by a noncontracting third party for reasons of public interest.

They said the FERC's approval of the agreement was arbitrary and beyond its jurisdiction.

The court of appeals agreed with the parties who challenged the agreement, saying that when a noncontracting third party challenges a rate, the provision restricting changes to the contract does not apply. NRG Power Marketing and other energy companies that settled with the FERC petitioned the Supreme Court for review.

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