FERC Escapes Court Review of Legal Authority for its Electricity Market Rate Regime

A number of state and not for profit utility consumer advocates, including Public Citizen and PULP, are raising in several cases the issue of FERC's legal authority to adopt a market rate regime for electricity that has no objective standard for determining whether a market rate is reasonable and which allows sellers to avoid longstanding rate filing requirements of the Federal Power Act. In a recent decision in one of these cases, Colorado Consumer Counsel, et al v. FERC, the Court of Appeals for the D.C. Circuit affirmed a FERC order that had ignored the legal issues raised by consumer advocates.

After the Enron debacle exposed widespread price manipulation of rates ostensibly regulated by FERC, FERC found all market rates to be unreasonable and illegal, and then adopted a set of limited behavior rules (since repealed) to discourage market manipulation. The Court accepted FERC's defense, that having found only one aspect of market rates to be unjust and unreasonable, and having addressed that aspect with the (since repealed) behavior rules, FERC was not obliged to consider other aspects of alleged illegality raised by the consumer advocates.

A FERC press release immediately hailed the court decision as an endorsement of FERC's market rate policies, claiming "[t]he short decision effectively dismissed arguments that the Commission could not authorize market-based rates. " The decision, however, only upheld FERC's efforts to avoid review in that case, and did not address the merits of the legal issues raised by petitioners, and so these legal issues remain for another day, perhaps to be taken up in the future in the D.C. Circuit or in the Supreme Court. These issues include:

• Whether FERC’s market rate system is out of compliance with the Federal Power Act, which requires advance public filing of all rates and charges, and changes in rates and charges, in order to protect consumers from unreasonable rates and effectuate statutory refund remedies

• Whether FERC, in effect, is relying on market results alone to establish reasonable rates, contrary to Supreme Court guidance in FPC v Texaco
  

• Whether FERC lacks any objective standard or test for determining whether a market rate is reasonable, as required by court decisions that have permitted limited reliance on competition in the rate setting and review process, and fails to oversee whether market results are reasonable, contrary to Appeals Court guidance in the Tejas and Farmers Union cases.
  

Also, the FERC Press Release claims that “[t]he U.S. Supreme Court’s decision earlier this week to leave the Lockyer decision in California undisturbed removed all remaining doubt about our legal authority to authorize market-based rates,” quoting Commission Chairman Joseph T. Kelliher. FERC had claimed in the Lockyer case that the "filed rate" doctrine prevented it from granting refunds -- even though the manipulated rates had never been filed in advance as section 205 of the Federal Power Act stipulates, and even though the sellers had ignored FERC's orders regarding subsequent reporting of rates after they had been charged. The Lockyer decision made it possible to review manipulated and unreasonable market rates (which FERC had refused) based on sellers' failure to follow certain reporting requirements in the tariffs. The Lockyer decision said that FERC could allow market rates, but did not analyze closely whether the market rate system can be squared with statutory filing requirements.

When the refund decision of the Ninth Circuit in Lockyer was being challenged by sellers who sought Supreme Court review, the State of California asked the Supreme Court, if it decided to hear the case, to review rate filing issues similar to those being raised by the consumer advocate petitioners.

The issues raised by California, challenging FERC's market rate regime as an alternative basis to support the refund claims, were not argued or decided because the Supreme Court denied review, leaving stand the Ninth Circuit decision that had directed FERC to consider refunds of illegal, unreasonable rates and charges. This does not preclude future litigation of the issues, as suggested by FERC in its Press Release.

It is basic that a denial of certiorari by the Supreme Court is not a ruling on the merits of any issues decided by the lower courts. A denial "imports no expression of opinion upon the merits of the case, as the bar has been told many times." Missouri v. Jenkins. No Supreme Court precedent is created, and the lower court decision is authoritative only within its area of jurisdiction. Thus, the issue whether FERC's market rate regime can pass legal muster under the Federal Power Act and controlling court opinions remains very much alive.

FERC has begun to address its legal authority to adopt its market rate regime in a pending rulemaking proceeding, in which an effort is being made to codify FERC's market rate rules in regulations. Not surprisingly, in its 600-plus page Order 697 adopting regulations, FERC found that it can dispense with the statutory requirements for advance public filing of rates and rate changes. FERC rests its justification, however, not upon any statutory language of the Federal Power Act, but upon a D.C. Circuit Court opinion that by its terms never reached the issue whether a market rate settlement agreement in a natural gas case could pass muster under filing requirements of the Natural Gas Act. This is a weak basis indeed for the FERC market rate program, because subsequently, the Supreme Court held in MCI v AT&T, in the context of deregulatory initiatives by the FCC, that a federal regulatory agency cannot create alternative systems that ignore a filed rate regulation system created by statute.