Client Alert
Energy
Pillsbury Winthrop Shaw Pittman LLP www.pillsburylaw.com
Vol.7200, No. 2708 | 1
July 8, 2008
Supreme Court Reaffirms Mobile-Sierra
Doctrine on Energy Contracts
by Michael S. Hindus and Jennifer L. Hong
On June 26, the U.S. Supreme Court issued its decision in the related cases of
Morgan Stanley Capital Group Inc. v. Public Utility District No. 1 of Snoho-
mish County, Washington (No. 06-1457) and American Electric Power Service
Corp. v. Public Utility District No. 1 of Snohomish County (No. 06-1462). Both
cases appealed a decision by the U.S. Court of Appeals for the Ninth Circuit,
which found that the Federal Energy Regulatory Commission (“FERC”) mis-
applied the Mobile-Sierra doctrine to certain power sales contracts entered into
during the Western Energy Crisis of 2000-2001. The Supreme Court affirmed
the Ninth Circuit and remanded the case to FERC, but largely rejected the
Ninth Circuit’s view of the Mobile-Sierra doctrine.
These cases stem from various buyers and sellers entering into long-term energy contracts during and
shortly after the Western Energy Crisis, when prices in the electricity spot market spiked to record levels.
As a result, many buyers entered into long-term contracts in which the prices were high by historical stan-
dards but lower than the spot market. After the prices in the spot market came down, the buyers com-
plained that the contract prices were much higher and that the market where the contracts had been
entered into was “dysfunctional” and had been manipulated by some sellers, including the named sellers in
this action. As a result, the buyers asked FERC to reform their contracts, as they were not “just and rea-
sonable.”
In its proceedings, FERC applied the Mobile-Sierra doctrine to these contracts. Under the Mobile-Sierra
doctrine, freely negotiated contracts would be considered “just and reasonable” and enforced unless the
“public interest” required that they be modified or abrogated. The “public interest” standard of review
requi