On April 29, 2015, the United States Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) held that FERC failed to comply with the court’s remand order in a 2004 case involving the California Energy Crisis—California ex rel. Lockyer v. FERC (“Lockyer”)—by improperly structuring its administrative fact-finding proceeding to focus solely on the accumulation by wholesale power sellers of excessive market share, and not including an analysis of possible deficiencies in transaction reporting by those sellers. The court remanded the case back to FERC for further proceedings.
Under the Federal Power Act (“FPA”), entities are generally required to file their agreements providing FERC-jurisdictional services with the Commission for review before they can become effective. FERC’s market-based rates program permits certain entities, once granted market-based rate authority, to privately negotiate the terms of agreements with third parties, and removes the obligation of those entities to file those agreements with FERC for approval. FERC will only grant market-based rate authority to entities that can adequately demonstrate that they lack “market power,” and also requires entities with market-based rates to file quarterly reports detailing the transactions that they have engaged in over a three-month period.
In Lockyer, the State of California and other parties (the “California Parties”) argued that: (i) the granting of market-based rate authority was impermissible under the FPA; and (ii) even if such authorizations were permissible, the mandatory quarterly reports filed by certain entities with market-based rates during the California Energy Crisis did not contain the transaction-specific information that the FPA requires. The Ninth Circuit rejected the California Parties’ first contention. However, the Ninth Circuit granted the California Parties’ second challenge, finding that FERC had abdicated its regulatory responsibilities by not adequately enforcing the quarterly reporting requirements during the crisis. The Ninth Circuit remanded the proceedings to FERC to reconsider the petitioners’ claim for a refund of the amount that sellers charged in excess of “just and reasonable” rates during the crisis.
On remand from Lockyer, FERC defined the threshold issue as whether each “seller’s improper or untimely filing of its quarterly transaction reports masked an accumulation of market power such that the market rates were unjust and unreasonable, during the relevant period.” FERC expressly limited the market power assessment to whether a seller “did or did not gain an increased generation market share sufficient to give it the ability to exercise market power and cause market-based rates to be unjust and unreasonable as a result.”
The California Parties requested rehearing of FERC’s decision, contending, among other things, that the proceeding established by FERC was too narrow, and did not include an examination of the sellers’ failure to file adequate post-approval transaction reports during the crisis—a component the California Parties stated was identified as critical by the Ninth Circuit in Lockyer. When FERC denied rehearing, the California Parties petitioned the Ninth Circuit for review.
In its April 29, 2015 opinion, the Ninth Circuit found that FERC “insulated sellers from liability for reporting violations and thereby ran afoul of the FPA.” The Ninth Circuit noted its previous holding in Lockyer that FERC’s market-based rates program was only compliant with the FPA if it was accompanied by an initial market power analysis and adequate post-approval transaction reporting. The Ninth Circuit stated that “[t]o remedy reporting violations, FERC must review the transaction reports to determine whether a just and reasonable price was charged by each seller, with specific attention to whether reporting deficiencies masked manipulation or accumulation of market power.”
A copy of the Ninth Circuit’s opinion may be found here.