U.S. Supreme Court to Decide Electricity Market Rate Refund Case

On September 24, 2007 the Supreme Court granted a writ of certiorari to review a December 2006 decision of the Court of Appeals for the Ninth Circuit in Morgan Stanley Capital Group v. Snohomish County. The Ninth Circuit held that FERC must consider reasonableness of long term electricity contracts made at a time when the market prices were manipulated.

FERC refused to review the Snohomish contracts for reasonableness and possible refunds based on its interpretation of the "Mobile-Sierra" doctrine established in two prior Supreme Court decisions. The effect of the Mobile and Sierra cases was to limit FERC's power to revise contract rates for wholesale electricity. The issue in the Sierra case was whether the contract rate had become too low, and the seller could not be relieved of its obligations unless the impact of holding the seller to its deal would harm the "public interest."

The contract rates in the Snohomish case, in contrast, were excessive, not too low. Further, the sellers had received market-based rate "authorizations" from FERC. FERC relieves sellers with such authorizations from the statutory duty to file their rates, rate schedules and contracts affecting rates in advance, and only requires abbreviated post hoc quarterly summaries of sales.

FERC's "market-based rate tariffs contain no rates or rate schedules or formula from which the price can be calculated, and allow prices to be what the seller and buyer agree, in private, with no public filing of the rates or contracts before they take effect. This agency waiver of advance filing requirements is not authorized by the language of the Federal Power Act, and was simply made up by FERC. See May the FERC Rely on Markets to Set Electric Rates.

In MCI v AT&T, in the context of analogous deregulatory initiatives by the FCC, the Supreme Court heldthat a federal regulatory agency cannot create alternative systems that ignore a filed rate regulation system created by statute. In other pending litigation, consumer groups have raised the issue whether FERC can dispense with the statutory requirement of advance public filing of wholesale electricity rates and contracts simply because FERC believes the sellers lack market power. See FERC Escapes Court Review of Legal Authority for its Electricity Market Rate Regime , and Consumer Groups Question FERC Market Rates.

When buyers sought relief from unreasonable wholesale market rates for electricityduring the California crisis, FERC threw consumers to the lions, allowing sellers protection under the "filed rate doctrine" that allows only prospective modification of previously established rates (thus thwarting any refunds for prior overcharges) and the "public interest" standard that militates against revision of contract rates. Perversely, the Federal Power Act -- statute designed to protect consumers by subjecting all rates and contracts to public scrutiny, agency review and public accountability -- was turned by FERC's interpretations into one that insulates excessive utility charges from any public or agency scrutiny.

In a 2004 decision in Lockyer ex. rel California v. FERC creating refund remedies for consumers injured by excessive market rates, the Ninth Circuit uncritically accepted a doctrine of the D.C. Circuit Court of Appeals which said that FERC can allow market rates to be charged when the agency deems that sellers lack market power (the ability to drive prices up) . The D.C. Circuit, however, had avoided grappling with the inconsistency of unfiled market prices and longstanding core statutory rate filing requirements. The Ninth Circuit nonetheless allowed refunds for the benefit in Lockyer on a theory that if FERC's initial assessment of sellers' market power turned out to be wrong wrong, and if sellers did not make quarterly reports, FERC could require refunds of excessive charges.

In Snohomish, the Ninth Circuit elaborated on its Lockyer doctrine:

Market-based rate authority provides a meaningful opportunity for prior review and approval of rates under the FPA, an essential prerequisite to the Mobile-Sierra mode of rate review, only insofar as FERC implements and uses an effective oversight mechanism after the market-based rate authorization is initially granted. Only then can FERC meet its statutory duty to ensure that all rates are “just and reasonable.”

In effect, the Ninth Circuit said FERC could invent a new system of market rates, and the court invent a remedy when the market rates are discovered to be unreasonable. See More Doubts About FERC's Market Rate Regime From Ninth Circuit.

Sellers sought review of the Lockyer decision in the Supreme Court. California argued in its conditional cross-petition that if the case was accepted for review, the Supreme Court should hold that the market rates were subject to plenary review for reasonableness (as opposed to prospective revision barring relief for prior overcharges) because the rates had never been filed as required by the Federal Power Act Section 205. The Supreme Court denied review in the Lockyer case in June 2007, and so the rate filing issue raised by California was not decided in that case.

Sellers in the Snohomish case that will now be heard by the Supreme Court essentially claim that their contracts should not be revised under the Mobile-Sierra doctrine. Examination of the Mobile and Sierra cases, however, shows that the contracts there had been properly filed before they took effect, had been subject to public scrutiny, protest and intervention by interested parties, and had already been reviewable for reasonableness by the regulatory agency.

The Supreme Court's decision in Mobile emphasizes the importance of the public advance filing requirement, a factor not present in Snohomish:

"This contract was filed with the Federal Power Commission as an amendment to the general supply contracts between Mobile and United, and, with the approval of the Commission, became a part of United's filed schedules of rates and contracts."
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In June 1953 United, without the consent of Mobile, filed new schedules with the Commission which purported to increase the rate on gas for resale to Ideal to 14.5 cents per MCF, a rate more closely approximating that for other gas furnished to Mobile by United. Claiming that United could not thus unilaterally change the contract rate, Mobile petitioned the Commission to reject United's filing.
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The Act 3 requires natural gas companies to file all rates and contracts with the Commission (4)(c)) and authorizes the Commission to modify any rate or contract which it determines to be "unjust, unreasonable, unduly discriminatory, or preferential" (5(a)). Changes in previously filed rates or contracts must be filed with the Commission at least 30 days before they are to go into effect ( 4 (d)***
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In construing the Act, we should bear in mind that it evinces no purpose to abrogate private rate contracts as such. To the contrary, by requiring contracts to be filed with the Commission, the Act expressly recognizes that rates to particular customers may be set by individual contracts.
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Recognizing the need these circumstances create for individualized arrangements between natural gas companies and distributors, the Natural Gas Act permits the relations between the parties to be established initially by contract, the protection of the public interest being afforded by supervision of the individual contracts, which to that end must be filed with the Commission and made public.
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The provision of the Natural Gas Act directly in issue here is 4 (d), which provides that "no change shall be made by any natural-gas company in any such [filed] rate . . . or contract . . . except after thirty days' notice to the Commission," which notice is to be given by filing new schedules showing the changes and the time they are to go into effect.
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These sections are simply parts of a single statutory scheme under which all rates are established initially by the natural gas companies, by contract or otherwise, and all rates are subject to being modified by the Commission upon a finding that they are unlawful.
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The basic duties are the filing requirements: 4 (c) requires schedules showing all rates and contracts in force to be filed with the Commission and 4 (d) requires all changes in such schedules likewise to be filed. In addition, 4 (d) imposes the further requirement that the changes be filed at least thirty days before they are to go into effect. It may readily be seen that these requirements are no more than are necessary to implement 4 (e) and 5 (a): the filing requirements are obviously necessary to permit the Commission to exercise its review functions, and the requirement of 30-days' advance notice of changes is essential to afford the Commission a reasonable period in which to determine whether to exercise its suspension powers under 4 (e).

In the Sierra case, which involved the Federal Power Act, the Supreme Court again emphasized that the contract at issue "was duly filed with the Federal Power Commission."

The Morgan Stanley cert petition and associations of energy sellers urged the Supreme Court to undo the remedy for consumers fashioned by the Ninth Circuit by applying the "public interest" standard of review rather than a "just and reasonable" standard, but did not come to grips with a major distinction: the contracts at issue in their case had never been publicly filed at FERC and thus had never been subject to its review for reasonableness and possible revision before taking effect. In contrast, the more stringent standard for contract review developed in the Mobile-Sierra cases came into play only after advance public filing and after the agency had reviewed them for reasonableness.

The Ninth Circuit was right to require FERC to consider refund remedies for excessive charges. Otherwise, it would be possible for unreasonable and illegal rates to burden customers with no remedy from the agency whose mission includes the duty to see that no unreasonable charges are imposed to the eventual detriment of consumers.

The Ninth Circuit's decision could be affirmed by the Supreme Court on an additional or alternative ground more firmly anchored in the language of the governing statute. The deference normally accorded to a wholesale electricity contract arises only after the contract has been filed publicly in advance, subject to public scrutiny, intervention and protest, and FERC review to determine if rates are just and reasonable. Because the Snohomish contract sellers had market rate authorizations, their actual rates, charges and contracts were not publicly filed in advance. Thus, as in any case where the seller has not filed rates in accordance with the law, FERC has power to review them for reasonableness when the excessive charges became apparent and buyers objected, from the date the contract began.

FERC and the sellers have maintained that a screening for market power and a post hoc reporting requirement is sufficient to justify waiver of the statutory public rate filing requirements. The Supreme Court, however, in MCI v. AT&T, rejected such administrative deregulation by the FCC without congressional action to modify the agency's governing statute:

our estimations, and the Commission's estimations, of desirable policy cannot alter the meaning of the [statute]. For better or worse, the Act establishes a rate regulation, filed tariff system ..., and the Commission's desire "to `increase competition' cannot provide [it] authority to alter the well-established statutory filed rate requirements".... As we observed in the context of a dispute over the filed rate doctrine more than 80 years ago, "such considerations address themselves to Congress, not to the courts ....

We do not mean to suggest that the tariff-filing requirement is so inviolate that the Commission's existing modification authority does not reach it at all. Certainly the Commission can modify the form, contents, and location of required filings, and can defer filing or perhaps even waive it altogether in limited circumstances. But what we have here goes well beyond that. It is effectively the introduction of a whole new regime of regulation (or of free-market competition), which may well be a better regime, but is not the one that Congress established.

Sellers cannot have it both ways, i.e., escaping initial public and agency scrutiny of unfiled rates for reasonableness while demanding the protection of the filed rate and Mobile Sierra doctrines.

Significantly, after the Supreme Court struck down the FCC's attempt at agency deregulation in MCI v. AT&T , Congress enacted a new statute, the Telecommunications Act of 1996 which took into account changes since the 1930's, recast the duties of utilities, revised the powers of the agency, established standards for relaxation of regulation and reintroduction of regulation. Further, Congress added significant new universal service and consumer protection measures the federal agency either lacked any power to create, or which, in its deregulatory zeal, it had overlooked.

This broader, congressional solution is exactly the result contemplated by the Supreme Court in FPC v Texaco, another case that discussed energy agency departure from statutory requirements:

It is not the Court's role, however, to overturn congressional assumptions embedded into the framework of regulation established by the Act. This is a proper task for the Legislature where the public interest may be considered from the multifaceted points of view of the representational process.

The actions taken by Congress in the aftermath of MCI v. AT&T included

• requiring all local telephone companies to offer reduced price Lifeline and Linkup service for low income customers
  
• requiring comparable and affordable telephone rates for customers in urban, rural, and low income areas, and
• requiring low cost internet broadband service for schools and libraries.
  

If the Supreme Court affirms the obligation of FERC to review questioned rates for reasonableness, and follows MCI v. AT&T precedents and trims back FERC's effort to deregulate wholesale electricity utilities without statutory authorization, it is possible that Congress would respond with new statutory alternatives to the longstanding consumer protection provisions of the Federal Power Act. If so, it is to be hoped that Congress would begin to correct the glaring deficiencies in FERC's minimalist approach to review of market rates and abysmal record on consumer protection. In addition, as it did in the Telecom Act of 1996, Congress could address universal service and affordability issues presented when rates are based on market forces.