The Federal Power Act's Double Standard: Unwinding the Mobile-Sierra Doctrine after Morgan Stanley Capital Group, Inc. v. Public Utility District No. 1

Emerging from two Supreme Court opinions decided in the 1950s, the Mobile- Sierra doctrine has evolved to stand for a principle of contract sanctity in public utility rate setting. The courts have largely come to the conclusion that the Federal Energy Regulatory Commission (the Commission) has less authority to modify rates set by contract, as compared to unilaterally-filed tariff rates, when the contract is the result of arm's-length negotiations between sophisticated parties of equal bargaining power, unless the contract indicates otherwise. Only in "extraordinary circumstances," the Court has found, may the Commission step in to modify any such "Mobile-Sierra contract."This Comment argues that the Mobile-Sierra doctrine, as interpreted recently in Morgan Stanley Capital Group, Inc. v. Public Utility District No. 1, departs from both the statutory intent of the Federal Power Act and the original cases from which the doctrine derived its name. The Federal Power Act does not contemplate imposing any extraordinary barriers to Commission modification of contract rates. Similarly, the two cases from which the doctrine derived its name, United Gas Pipe Line Co. v. Mobile Gas Service Corp. and Federal Power Commission v. Sierra Pacific Power Co., sought to protect the public interest by restraining a utility's ability to unilaterally raise prices set in a contract, but they did not seek to limit the Commission's authority to modify contracts generally. By further limiting the Commission's authority to modify contracts, Morgan Stanley has encroached on the Commission's ability to fulfill its statutory obligation to protect the public interest.INTRODUCTION"[I]t doesn't matter what you crazy people in California do, because I got smart guys out there who can always figure out how to make money."1-Kenneth Lay, former CEO of Enron Corporation, speaking to David Freeman, then-Chairman of the California Power AuthorityOn several occasions during 2000 and 2001, the lights went out in California, affecting businesses and everyday life and raising public ire.2 In Irvine, for example, computer-operated traffic lights went out in May 2001, turning freeways into parking lots and bringing much of life there to a halt.3 A confluence of factors had caused rolling blackouts4 in the region,5 as prices for power rose to extraordinarily high levels at both wholesale and retail levels.6 Enron Corporation- a major player in the newly-deregulated wholesale power markets and a behemoth once respected for its wealth and competence- subsequently went into bankruptcy amid reports of scandal.7In the midst of this environment, and at the urging of the Federal Energy Regulatory Commission (Commission),8 several utilities attempted to hedge the escalating prices in the wholesale electric power spot market by entering into contractual agreements with power sellers.9 Seeking relief from the rising prices, these utilities eventually agreed to buy power through long-term contracts at rates that dwarfed traditional levels, but were still considerably lower than the spot market prices during the crisis.10After the crisis passed and prices approached historical levels, three western utilities asked the Commission to modify the long-term power contracts they had entered into during the crisis.11 The utilities argued that the prices and terms in their contracts were unlawful as a result of the crisis conditions in western power markets at the time they executed their contracts.12 Relying on two cases from the 1950s, which together have formed what courts and other commentators refer to as the "Mobile-Sierra doctrine," the Supreme Court held in Morgan Stanley Capital Group Inc. v. Public Utility District No. 113 that the Commission could relieve utilities of their contractual purchase obligations only after a finding of "unequivocal public necessity" or "extraordinary circumstances," regardless of the type of contract at issue14 or the underlying market conditions. …