Craft & Sheppard's Supreme Court Review

Energy Regulation

By state statute, California restructured the regulation of its electrical generation market.  In 1999, a series of events – changes in law, market manipulation, and increased demand – produced a serious in-state energy crisis; prices for electricity leaped fifteen-fold before returning to normal levels the next year.  During the high price period, some utilities entered into long term contracts to buy power at rates lower that the fifteen-fold increase, but far higher than historical levels. Federal law, 16 U.S.C. § 824, permits wholesale rates for electricity to be set by tariff or by contract between sophisticated buyers, subject to regulatory review.  After prices dropped, the utilities asked the Federal Energy Regulatory Commission (FERC) to abrogate the contracts, arguing they were not in the public interest.  FERC refused.  In Morgan Stanley Capital Group, Inc. v. Public Util. Dist. No. 1, the Court affirmed FERC’s action.  The case implicated the Mobile-Sierra doctrine’s scope, stressed the benefits of freedom of contract, explained away FERC’s change in position during the proceedings, and found that freely-negotiated rates for wholesale electricity met federal law’s “just and reasonable” standard.