Supreme Court Denies Review of Consumer Groups’ Challenge to FERC’s "Market-Based Rates" Scheme, Leaving Issue Unresolved

Over the past decade or so, in a series of orders, the Federal Energy Regulatory Commission (FERC) began to allow producers and traders of wholesale electric service to sell at “market-based rates.”  In doing so, FERC effectively eliminated requirements in Section 205 of  the Federal Power Act that all rates, charges and contracts — and changes to them — be transparently filed with FERC in advance, allowing for public and FERC scrutiny before they take effect.  The flip side of the filed rate regulation coin is that once filed and if not modified by the agency, the filed rates cannot be changed, except prospectively.

FERC adopted the fiction that by filing a so-called “market-based rate” tariff, which simply says charges will be determined by seller and buyer, the rate and rate change filing requirements are satisfied.  Further, to satisfy the statutory command that all rates be just and reasonable, and the corollary that any that are not are illegal, FERC assumed that prices would be reasonable if the seller singlehandedly lacked power to change the market price.  This system allows sellers and traders to change prices hourly, without disclosing their price demands and without filing in advance the prices that will be charged.  This system is vulnerable to market malfunction, price rigging and manipulation, and has resulted in huge overcharges without meaningful remedies for consumers.  See  Mohler, Has the “Complete and Permanent Bond of Protection” Provided by FERC Refunds Eroded in the Transition to Market-Based Rates?, 33 Energy L.J. 41, 44 (2012).

In 2004, FERC began a rulemaking proceeding to consolidate its market rate policies.  Consumer groups pointed out the apparent inconsistency of the market rate system and the filing requirements of the Federal Power Act, and the absence of any meaningful measure of whether a market rate is just and reasonable.  FERC adopted its proposed rules, rejecting the legal challenges, in its Order 697 and adhered to its market rate doctrines on rehearing  in 2008in Order 697-A.

Public Citizen, PULP, and the attorneys general of Connecticut, Rhode Island and Illinois petitioned for  judicial review of the FERC order adopting regulations to implement the market rates system.  The case was heard by the Court of Appeals for the Ninth Circuit.

In its decision, the Ninth Circuit acknowledged that the Supreme Court had said in a recent opinion that the legality of the “market-based rate” scheme was not decided, but considered itself bound by its prior decision in another case, Lockyer v FERC.  (In Lockyer, the Ninth Circuit rejected a broad challenge to the market rate system but found that FERC had not followed its own guidelines regarding quarterly reporting of charges, and remanded the case, which resulted in some refunds because the sellers had violated the subsequent reporting requirements of their market rate tariffs).

The consumer groups filed a petition for a writ of certiorari with the Supreme Court, asking it to review the Ninth Circuit order dismissing the case.  FERC filed a brief in opposition, which was supported by an amicus brief from a group of sellers and traders.  They argued, among other points, that there was no “split” in the circuits and that Congress, in some language mentioning energy markets, had ratified FERC’s scheme.  The petitioners filed a reply brief arguing that a divergence among circuit courts is not determinative when a case is of national importance, and that Congress has not repealed or amended the critical requirements of the Federal Power Act, i.e., the procedural requirement that all rates and changes in rates be filed publicly in advance, and the substantive requirement that all rates and rate changes demanded and charged must be reasonable.

The Supreme Court issued an order denying the petition for a writ of certiorari on June 25, 2012.

The denial of certiorari is not a ruling on the merits of a case.  Consequently, the legality of FERC’s scheme remains undecided by the Supreme Court and by circuit courts of appeal other than the Ninth Circuit.  Other litigants, for example, a utility buying wholesale electricity for its retail customers who objects to excessive unfiled market rate charges, are free to pursue relief.

If FERC asks Congress to regularize its system through amendments to the Federal Power Act, Congress would have the opportunity to reject or modify FERC’s market system, add market reforms and consumer protections.  Also, modest non-bypassable surcharges on transactions in the wholesale markets could fund  environmental, universal service, affordability and utility consumer advocacy functions.  There is precedent for this.  In the aftermath of the Supreme Court’s nullification in MCI v AT&T of the FCC attempt to abolish rate filing and deregulate the telecom industry, Congress adopted the Telecommunications Act of 1996, establishing a new regulatory platform designed for multiple utility providers to replace the old system geared toward monopolies, adopting consumer protections, adding affordability requirements for Lifeline and Linkup, and establishing a universal service funding mechanism.

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