“The Supreme Court and Long-Term Energy Contracts: Seller Beware”

On June 26, 2008, the United States Supreme Court issued its opinion in Morgan Stanley Capital Group Inc. v. Pub. Util. Dist. No. 1 of Snohomish County, holding that, under the Mobile-Sierra doctrine, the Federal Energy Regulatory Commission’s (“FERC”) evaluation of the rates contained in certain long-term power contracts was flawed or incomplete. The case arose out of the 2000-2001 Western energy crisis, during which certain public utilities – including the appellees in Morgan Stanley – entered into long-term contracts with suppliers for the delivery of electricity. The rates contained in these contracts were historically high, although they were lower than prices being paid in the spot market. Once the energy crisis subsided, and prevailing market rates declined, the public utilities filed actions with FERC challenging the rates in the long-term contracts as unjust and unreasonable. The Court affirmed the Ninth Circuit Court of Appeals (“Ninth Circuit”) in a 5-2 majority opinion authored by Justice Antonin Scalia, but rejected most of the Ninth Circuit’s reasoning, and remanded the case to FERC for further proceedings. This Stroock Special Bulletin looks at the history of this case, examines the Supreme Court’s decision, and discusses the potential implications for market participants that enter into contracts during a period of high volatility and high prices.