9th Circuit Upholds FERC’s Market-Based Rate System Issue of Remedies for Reporting Violations Remanded to FERC

In a much anticipated decision issued September 9, 2004, the U.S. Court of Appeals for the Ninth Circuit upheld the Federal Energy Regulatory Commission’s (FERC) authority under the Federal Power Act (FPA) to authorize general tariffs providing for the wholesale sale of electricity at market-based rates (MBR). St. of Calif. ex rel. Lockyer v. FERC, No. 02-73093. The Court rejected California’s contention that market-based tariffs violate the filed rate requirements in §205(c) of the FPA because they do not permit FERC to review rates for specific transactions in advance of the sale. The Court also ruled, however, that FERC’s requirement for transactionspecific quarterly reports by each MBR seller is an “integral part” of the tariff, and that FERC had erred in concluding “that retroactive refunds were not legally available” for violation of the reporting requirements. The Court remanded the case to allow FERC to “reconsider its remedial options in the first instance.”

FERC Action on California’s Complaint

The FERC orders under review originated from a complaint filed in March 2002 by California against public utilities that sold power in the markets operated by the California Independent System Operator Corporation (CAISO) and the now defunct California Power Exchange Corporation (PX), as well as those that made short term sales of energy to the California Energy Resources Scheduling Division of the California Department of Water Resources (CERS). The complaint was filed after FERC determined in its FPA §206 refund proceeding that refunds under §206 are not available for sales prior to October 2, 2000. FERC, however, had also noted that it retains authority to order retroactive monetary remedies whenever a seller “did not charge the filed rate or violated statutory or regulatory requirements or rules in applicable rate tariffs.”

In its complaint, California argued that market-based tariffs – which set forth general terms and conditions, but no specific rates – violate section 205 of the FPA. Section 205(a) requires that rates be just and reasonable. In addition, §205(c) requires that all rates and charges, as well as the terms and conditions of service, be shown in rate schedules filed with the Commission and available for public inspection. California contended that MBR sales made at rates not shown in a filed rate schedule violate the plain language of §205(c). California also complained that numerous sellers had violated their market-based rate authorization by filing quarterly reports showing aggregated rather than transaction-specific data.

FERC ruled that market-based tariffs are consistent with FPA §205. With respect to the reporting violations, FERC required the refiling of transaction-specific quarterly reports back to October 2, 2000, but denied the California’s request for retroactive monetary remedies. FERC explained its exercise of remedial discretion on the grounds, inter alia, that many sellers had filed aggregated reports for years without challenge, and that California had not shown any causal connection between the alleged reporting violations and specific unjust or unreasonable pricing.

The Ninth Circuit Decision

The Ninth Circuit rejected California’s challenge to the validity of market-based rates. Finding that FERC has broad rate-making authority under the FPA, the Court held that FERC’s regulatory scheme for marketbased rate authorizations enables FERC to determine whether rates are just and reasonable.

Although FERC had expressly ruled that the market-based tariffs, not the quarterly reports, constitute the authorization to sell at market-based rates, the Court held that FERC’s reporting requirements were “an integral part of a market-based tariff that could pass legal muster.” The Court characterized FERC’s orders as holding that the Commission was without legal authority to order retroactive remedies for the reporting violations the agency had found. The Court then ruled that FERC “had misapprehended its legal authority in this context.” FERC’s orders, however, in fact had confirmed that the Commission has a full array of remedies, including disgorgement of profits resulting from violations of the FPA and Commission orders and regulations. Because it viewed FERC‘s decision as a misapprehension of the agency’s remedial authority, the Court did not address any of the specific grounds FERC’s orders relied on in exercising its remedial discretion to deny disgorgement of profits. Rather, the Court ruled only that “retroactive refunds” are “legally available.” In remanding, the Court expressly declined to order refunds. It explained that “[i]t is more appropriate for FERC to reconsider its remedial options in the first instance.”

Significance of the Decision

After two years of litigation, the Ninth Circuit’s ruling removes the legal cloud around market-based rates that California’s complaint had created. The decision upholds a rate-making system now more than a decade old, which is the foundation for most wholesale sales of electricity and all existing organized markets. However, the Court’s remand to FERC for reconsideration of its remedial options for violation of quarterly reporting requirements, including monetary remedies, appears to create additional litigation uncertainty relating to the California crisis.

For all public utilities, the ruling emphasizes the importance of strict adherence to all requirements associated with FERC authorizations to sell at market-based rates.