Argument recap:Morgan Stanley Capital Group, et al. v. Public Utility 1
This case was argued on February 19, 2008. Walter Dellinger appeared on behalf of the petitioners, and shared a divided argument with Deputy Solicitor General Edwin Kneedler, who appeared for FERC as a respondent in support of the petitioners. Christopher Wright argued on behalf of the respondents.
 Oral Argument Recap
The oral argument opened with the justices pressing FERC's counsel about why the agency had opposed cert. but was now supporting the petitioners. Justice Ginsburg pointed out that the Ninth Circuit's decision "empowers" FERC by recognizing authority which the agency had previously disclaimed, while Justice Scalia countered that a decision which said FERC "must" act was more of a directive than an empowerment.
After counsel provided a brief overview of FERC's market-based rate authority program, Justice Alito inquired as to what the remedy would be if a seller were pre-approved as not having unmitigated market power, but "contrary to what FERC thought when it granted the approval, the seller has exercised market power or has otherwise manipulated the market." Counsel responded that FERC could revoke the rate authority, but this would have no retroactive effect on contracts already formed. In addition, FERC could abrogate contracts if there was fraud or market manipulation in their formation. However, FERC had determined that there were no such problems with the specific contracts in this case.
Finally, Justice Ginsburg asked whether FERC had monitored the rates of long-term contracts vigorously, as it had announced that it would in December 2000. She was informed that FERC had indeed conducted extensive staff studies in support of its efforts to stabilize the dysfunctional spot market.
Petitioners' counsel opened his argument by repeating the policy arguments in the briefing"”that enforceable long-term contracts are essential to taming the volatility of spot markets and promoting investment in energy infrastructure. Justice Ginsburg questioned the applicability of Mobile and Sierra to the contracts in this case, since those decisions were intended to protect consumers from overcharging, but counsel repeated that enforcing contracts was in the interest of consumers, because long-term contracts are an alternative to the expensive spot market.
Justice Stevens asked whether a contract could be set aside because the market was in such "turmoil" that negotiation could not produce reasonable rates. Counsel for the petitioners answered that such a contract would be binding unless the public interest required a rate revision, such as when the rates would drive a utility out of business. He asserted that "[t]he Commission has been on the job here," working diligently to administer the market-based rate program.
Justice Ginsburg then observed that the FERC staff had concluded that the dysfunction in the spot market carried over into the forward, or long-term, market. Counsel responded that the parties themselves had been aware of this and yet had signed contracts without any provision allowing the buyers to seek a rate modification from FERC. Moreover, the conclusion that the forward markets were dysfunctional was irrelevant to FERC because the agency was not attempting to determine an appropriate price"”rather, it was allowing the parties to set their own rates through contract negotiations.
Counsel for the respondents began by highlighting that the "just and reasonable" standard applies to all rates. In response to a query from Justice Alito, he indicated that market-based rates could be acceptable if the market were competitive when the contracts were formed. Justice Alito then questioned whether ex post modification of contracts could be compatible with a market-based program, and Justice Souter remarked that in a volatile market no contract would be enforceable. Counsel said that there were four reasons that most contracts would be enforceable.
First, he stated that this had been "the worst electricity market crisis in history," but Justice Souter countered that dissatisfied parties in the future would claim that "these times are almost as bad." Second, counsel referred to the "rampant noncompliance" with FERC's reporting requirements by market-based sellers (including the petitioners), but Justice Souter noted that non-compliance was not actually the basis for the respondents' claims. Third, counsel stated that the rates were not just and reasonable because they were much higher than traditional prices. Justice Souter responded that this would often be true in volatile markets, thus making all contracts in those markets vulnerable to modification. Finally, counsel offered FERC's own announcement that it would vigorously monitor the contracts and deem rates above the benchmark price suspect.
Justice Kennedy asked about what would happen if FERC modified the challenged contracts"”would FERC also reevaluate the contracts in which petitioners, being middle-men, had bought that electricity? Counsel agreed that the "unwinding process" would continue back to the original power generator.
Justice Scalia attacked the idea that the respondents should be allowed to escape a long-term contract that they entered with full knowledge that the market was "chaotic." Counsel countered that the respondents entered the contracts because they had no other alternatives"”"we had a choice of a variety of rates as long as they were unjust and unreasonable."
Justice Souter then returned to his concern that the respondents' approach would make all long-term contracts in a chaotic market vulnerable. Counsel responded that contracts should be modified only if manipulation was affecting the market, not if weather conditions had created the volatility. Justice Souter raised the possibility that a market could be manipulated by other sellers, so that the parties to a contract would be innocent themselves. Justice Scalia observed that if extrinsic factors were to determine whether a contract should be modified, there would be no distinction from the consumer's point of view between the weather, world market conditions, and market manipulation by other sellers. Counsel responded by arguing that it was inequitable for consumers to pay inflated prices when sellers were making huge profits, because this would not be just and reasonable. Here, the consumers were seeking relief and "any innocent middlemen should be made whole, too," regardless of whether the market manipulation had been caused by the petitioners or by other sellers.
Justice Alito noted that the Ninth Circuit's opinion had justified reforming the contracts based on "dysfunction in the market," which was broad enough to include effects from weather and other factors. He also observed that the administrative law judge in the case had found that there was no manipulation in the forward market. Counsel said that "no one agrees today" with that finding, including FERC and Morgan Stanley.
In rebuttal, counsel for FERC was asked by Justice Souter to discuss possible market manipulation by the petitioners. Counsel stated that FERC had found no evidence that market manipulation had "specifically affected" the contracts in this case. Justice Scalia pointed out that a finding of no manipulation with respect to these particular contracts did not rule out other manipulations in the market by these sellers. Counsel suggested that manipulation in the spot market was sufficiently distinct from the operations of the forward market. Justice Souter pressed him for an admission that "the government's position is that manipulation by these [p]etitioners would be irrelevant to a review under the public interest standard." Counsel conceded this, but argued that FERC could restrict its inquiry to the specific contracts at issue, rather than looking to the market as a whole, because of the "the importance of integrity of contracts."