FERC’s Market-Based Rate Policy Survives Challenge at the Supreme Court

On June 25, 2012, the Supreme Court of the United States (“Supreme Court”) denied a petition for certiorari challenging a decision by the Court of Appeals for the Ninth Circuit (“9^th Circuit”) that FERC’s Order No. 697, “Market-Based Rates For Wholesale Sales Of Electric Energy, Capacity And Ancillary Services By Public Utilities” does not violate the Federal Power Act (“FPA”). The Supreme Court did not discuss its reasons for denying the petition.

In their unsuccessful petition, Public Citizen Inc., Colorado Office of Consumer Counsel, Public Utility Law Project of New York, Inc. and state attorneys general for Connecticut, Illinois and Rhode Island argued that the 9^th Circuit resolved the question of whether market-based rates for wholesale electric power conflict with the procedural and substantive requirements of the FPA in a way that is “contrary to the dictates of the governing statute and principles” established by the Supreme Court. The petition argued that FERC’s market-based rates rule allows sellers to constantly change rates without any advance filing. It further argued that the market-based rate system is “at odds” with the requirement that rates be just and reasonable as it relies on market forces instead of a statutory standard.

FERC’s Order No. 697 and its related orders on rehearing revised and codified FERC’s regulations on the standards for market-based rates for wholesale sales of electric energy, capacity and ancillary services. Order No. 697 also adopted screens that FERC uses to ensure that market- based rate sellers do not have horizontal or vertical market power and protect against affiliate abuse. FERC further described a category of sellers who are exempt from submitting market power analyses, and described the triennial market power analysis and quarterly data that market-based rate sellers must submit for review.

On a petition for review of Order No. 697 and Order No. 697-A at the 9^th Circuit, Montana Consumer Counsel, Public Citizen Inc., Colorado Office of Consumer Counsel, Public Utility Law Project of New York, Inc. and state attorneys general for Connecticut, Illinois and Rhode Island (together “Petitioners”) argued: (1) FERC violated its statutory obligation to ensure that rates are just and reasonable by relying “solely” on the market to regulate rates; and (2) market-based rate policy violates the express terms of the FPA by not requiring sellers to give sixty-days advance notice of changes in market prices. The 9^th Circuit rejected the Petitioners’ arguments and held that FERC adopted a “permissible approach” to ensuring just and reasonable rates. The 9^th Circuit rejected arguments by the Petitioners that FERC is obligated to make findings that a market is competitive, conduct “empirical analys[es],” or provide evidence which demonstrates that competition among sellers drives rates to reasonable levels. The 9^th Circuit also concluded that FERC’s interpretation that a rate “change” occurs only when the seller files the market-based rate was reasonable, and not an “impermissible” construction of the FPA. Ultimately, the 9^th Circuit concluded that Order No. 697 did not per se violate the FPA (see October 17, 2011 edition of the WER).