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Morgan Stanley Capital Group, Inc. v. Public Utility District No. 1 of Snohomish County

554 U.S. 527 (2008)

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Morgan Stanley Capital Group, Inc. v. Public Utility District No. 1 of Snohomish County

United States Supreme Court

554 U.S. 527 (2008)

Facts

In mid-2000, the California Power Exchange’s spot market, or short-term market, for electricity faced extreme volatility and caused an electricity crisis. The price of electricity in the spot market increased more than 15 times. This increase led to rolling blackouts. Utilities entered long-term contracts for purchasing electricity during this time. For example, Snohomish (plaintiff) executed a nine-year contract to purchase electricity from Morgan Stanley (defendant) for $105 per megawatt hour (MWh) compared to the historic average of $24 per MWh. Accordingly, the Federal Energy Regulatory Commission (FERC) sought to eliminate the reliance of utilities on the spot market and instead encouraged utilities to make their wholesale electricity purchases in the forward market (i.e., the marketplace for future deliveries of electricity). Electricity prices began to return to previous levels by June 2001. At this time, utilities (plaintiffs) that had executed long-term contracts to purchase electricity during the crisis requested that FERC modify their contracts. They argued that the contracts should not enjoy the Mobile-Sierra presumption that the contract rates were just and reasonable because the contracts had never been approved initially by FERC without the presumption. Alternatively, the utilities argued that the contract rates violated the public interest because the rates were so high. FERC found that the presumption applied to the contracts that the utilities sought to modify if FERC had reviewed the contracts initially. FERC determined that such initial review had occurred across the board when the commission first authorized market-based rates. FERC also determined that the contracts had not been shown to harm the public interest, but it did not make specific findings. The court of appeals held that the Mobile-Sierra presumption of just and reasonable rates applied only if FERC had initially reviewed the contract after its formation and that market dysfunction was a sufficient ground for finding a contract not just and reasonable. Certiorari was granted.

Rule of Law

Issue

Holding and Reasoning (Scalia, J.)

Dissent (Stevens, J.)

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