Washington (Platts)--4Dec2008

A federal appeals court on Thursday paved the way for the US Federal
Energy Regulatory Commission to reconsider its refusal to alter or do away
with hundreds of millions of dollars worth of long-term power contracts during
the 2000-2001 western energy crisis.

Following up on a recent Supreme Court decision, the 9th US Circuit Court
of Appeals vacated its prior opinion and remanded the case to FERC "for
further proceedings consistent with the Supreme Court's rulings."

The Supreme Court in June ruled that FERC should "amplify or clarify" its
decision to leave the contracts intact. The court wants FERC to weigh in on
whether the contracts cause an excessive burden on consumers or otherwise
seriously harm the public interest and whether the commission can find a
connection between unlawful activity of participants in the spot market and
the contract rate.

The Mobile-Sierra doctrine, the Supreme Court said, presumes a rate set
out in a freely negotiated wholesale energy contract meets just-and-reasonable
standards outlined in the Federal Power Act unless FERC finds that the
contract seriously harms the public interest.

At the heart of the case is whether FERC properly applied Mobile-Sierra
when it refused to modify or cancel long-term power contracts between a number
of major power sellers.

Although the Supreme Court affirmed the lower court's finding that "there
is only one statutory standard" -- the just-and-reasonable standard -- for
reviewing rates set by contracts or tariffs, it found that the 9th Circuit
incorrectly interpreted Mobile-Sierra as treating an initial commission
opportunity for review as a curtailment on later challenges to the rates.

Neither did the Supreme Court agree with the lower court that FERC must
look for market dysfunction at the time the contracts were signed before it
applies the doctrine.

The Supreme Court rejected another aspect of the lower court's decision--
the "zone of reasonableness" test. "The standard for a buyer's challenge must
be the same, generally speaking, as the standard for a seller's challenge,"
the justices said.

Although the 9th Circuit has passed down the Supreme Court's remand, it
did not "decide the question reserved by our prior opinion as to whether the
Mobile-Sierra doctrine applies to the California Public Utilities Commission,
which was not a signatory to the long-term contracts at issue in this case."

Instead, the remand is without prejudice to petitioners' ability to bring
up the question before FERC or the 9th Circuit "at a later time."

--Esther Whieldon, esther_whieldon@platts.com