Today, the U.S. Court of Appeals for the District of Columbia Circuit overturned a decision by the Federal Energy Regulatory Commission (“FERC” or “Commission”) regarding a rate increase mandated by the Commission that resulted from the California energy crisis.

The case stems from the Commission’s “must-offer obligation” which required most wholesale electricity generators serving California markets to supply available power at specific rates to electricity purchasers. After being subject to the must-offer obligation for several years, several electricity generators filed a complaint with FERC arguing that the must-offer obligation did not justly and reasonably compensate them and proposed a new rate under a Reliability Capacity Services Tariff (“RCST”).

On July 20, 2006, the Commission issued an order agreeing with the generators and found that the must-offer obligation was no longer just and reasonable. It also indicated that it would adjust the rates for the power accordingly. However, it did not adjust the rates or rule on the proposed RCST in the July 20, 2006 order. Instead, on February 13, 2007, FERC issued orders determining that the proposed RCST rates were just and reasonable and made the proposed rates retroactively effective to June 1, 2006.

Six California cities appealed the Commission’s decision to the D.C. Circuit. In its order, the Court looked at the “plain language” of Section 206 of the Federal Power Act which prohibits FERC from setting rates retroactively. The Court found that while it affords deference to an agency’s authority and reasonable interpretation of an ambiguous statutory provision, it gives “no deference to an agency interpretation that fails to comport with the plain statutory language.” As a result, the Court vacated FERC’s orders to the extent FERC made the rates retroactively applicable and remanded the issue of when the rates should become effective back to FERC.