A three-judge panel of the US Court of Appeals for the Ninth Circuit in a pair of December 19 opinions — PUD v. FERC and PUC v. FERC — effectively gutted FERC’s decade-old approach to fostering robust and liquid bulk power markets, which FERC has done by granting qualified sellers blanket authorizations to make wholesales at negotiated market- (rather than cost-) based prices. Annually, tens of thousands of wholesale power transactions occur in the US pursuant to this program, but will likely now stop in western states obligated to observe the Ninth Circuit's opinions and possibly elsewhere. Supreme Court review will inevitably be sought.
The two opinions decide companion appeals from FERC decisions in 2003 that rejected complaints by electric power buyers in California, Nevada and Washington seeking relief from contracts that they entered during the 2000-01 western energy crisis. The panel held that prices set in those bilateral transactions pursuant to FERC’s market-based program enjoyed no presumption of legality. Instead, payment of those prices should be refunded to the buyers to the extent the prices exceed a “zone of reasonableness” beginning on a refund-effective date soon after the buyers filed complaints with FERC. The panel remanded the cases back to FERC for a determination of whether and by how much prices exceeded that permissible zone.
According to the panel, FERC was wrong to accord the challenged bilateral contract prices Mobile Sierra protection — named after two Supreme Court decisions from 1956 — that immunizes a contract against unilateral change by either the buyer or seller unless the price is shown to be contrary to the general public interest. The prices and contracts at issue were entitled to no such protection, the panel ruled, because they were the product of FERC’s market-based pricing program — which another Ninth Circuit panel had found deficient in the 2004 opinion in Lockyer v. FERC. And even if that were not the case, the panel held that FERC misapplied Mobile Sierra. In a novel new interpretation of the 50-year old doctrine, the panel opined that Mobile Sierra is asymmetric in that it protects wholesale buyers from unilateral seller complaints that prices are excessively low, but does not equally protect wholesale sellers from unilateral buyer complaints that prices are excessively high. In other words, Mobile Sierra accommodates buyer’s remorse, but not seller’s.
It is in the panel’s expansion of the earlier Lockyer decision that the market-pricing program is dealt what will surely be a fatal blow unless the decisions are overturned. For over a decade, FERC has authorized market-based rate schedules under the Federal Power Act allowing certain electric wholesalers to charge market-determined prices. Eligibility turned on the seller demonstrating in advance that it lacked or had mitigated market power — the ability to set prices for an appreciable period of time — in power supply, power transmission and the inputs to power supply, such as fuel supply or delivery. Once granted market pricing authority, a seller reports any change affecting its lack of market power, files quarterly reports on its market-based sales for the preceding quarter, and triennially demonstrates anew that it continues to lack market power. The Lockyer panel held that a market-based seller who aggregates sales information in its quarterly report is in violation of its market-based rate schedule, loses the protection of the filed rate doctrine for those sales and can be made to refund — even retroactively — its revenues on those sales.
The PUD/PUC panel relied on and expanded Lockyer to erode further the price certainty of market-based sales and make new and ineluctably fatal demands of FERC’s market-based pricing program. Specifically, the panel held that power wholesales pursuant to that program enjoy no Mobile Sierra price certainty following a unilateral challenge unless the contract is presented in advance to FERC and FERC has “an opportunity for [(1)] initial review of whether [the] rate is just and reasonable,” (2) determining “whether the original negotiations occurred in a functional marketplace,” and (3) “timely reconsideration of [the seller’s] market-based [pricing] authorization if market conditions change.”
From the outset of its market-pricing program, the purpose of determining the lack of market power and monitoring changes in market power going forward was and is to facilitate the tens of thousands of market-based wholesales that now occur each year in the US without requiring advance regulatory analysis and approval of specific prices and contract formation. If advance regulatory approval is to be required in order to achieve price certainty, then no purpose is served by the market power determination and monitoring. The entire exercise becomes a nullity. And, in its stead, the new panel-prescribed process becomes unworkable since the FERC does not now have ― nor ever will have ― the resources to determine individually and in advance whether the prices in tens of thousands of market-based wholesales are within a zone of reasonableness and were arrived at pursuant to negotiations in a functional marketplace. Notwithstanding disclaimers to the contrary, the panel, if not reversed, has killed market pricing and competitive wholesale power markets.