The International Swaps and Derivatives Association, Inc. (ISDA) and the Financial Institutions Energy Group (FIEG) today submitted a joint amicus brief to the U.S. Supreme Court to reverse a pair of decisions by the United States Court of Appeals for the Ninth Circuit issued in December 2006. The decisions were handed down in Public Utility District No. 1 of Snohomish County, WA v. the Federal Energy Regulatory Commission (FERC) and California Public Utilities Commission v. FERC.
The filing is in response to a decision by the Ninth Circuit that buyers could avoid their contractual obligations and obtain rate reductions if their contract was viewed as being negotiated in a "dysfunctional" market. The Ninth Circuit also held that the Mobile-Sierra doctrine cannot be invoked unless the FERC had an initial opportunity to review the contract rates agreed between the parties and the market conditions under which the contract was negotiated.
ISDA and FIEG argue in their joint amicus brief that the Ninth Circuit’s decision undermined the Mobile-Sierra doctrine, in which the Supreme Court held in 1956 that long-term contracts for wholesale electric power would be enforceable, even if changes in the marketplace rendered the contract unprofitable to one of the parties.
"As ISDA and FIEG play extremely important roles in the wholesale power markets, both Associations want to ensure that the markets operate efficiently," said Robert Pickel, executive director and ceo, ISDA. "Consumers will be harmed if a market dysfunction standard can be used to reduce the predictability that the Mobile-Sierra doctrine has afforded for 51 years."
The brief, which was filed by Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, further contends that the Ninth Circuit’s decision creates the risk that buyers will be able to escape their contractual commitments. It would discourage the use of long-term contracts that provide important benefits, such as facilitating investment, mitigating financial risks and reducing market volatility, and also would discourage sellers from increasing the supply of power when prices increase.
In essence, ISDA and FIEG believe that the Ninth Circuit’s standards would undermine sellers’ ability to control or predict whether a contract will be enforceable because that contract could be set aside for reasons entirely unrelated to the behavior of the contracting parties. The Ninth Circuit’s decision appears to require hindsight to determine whether a contract was negotiated in a "dysfunctional" market, rather than relying on the information that was available when the contract was negotiated. In addition, the Ninth Circuit’s decision is asymmetric in the sense that it allows buyers to "renegotiate" contracts, but not sellers.