Power & Pipes

FERC, CFTC, and State Energy Law Developments

Currently at issue before the US Court of Appeals for the First Circuit is whether the filed rate doctrine prevents a court from assessing the reasonableness of a utility’s rates in the retail market. Under the filed rate doctrine, any rate that is approved by the governing regulatory agency is per se reasonable in judicial proceedings. FERC holds exclusive authority to determine whether wholesale rates filed by utilities are just and reasonable. Therefore, if FERC determines that a rate is just and reasonable, a court does not approve a departure from that wholesale rate.

The applicability of this doctrine on retail rates, however, has come into question in a First Circuit proceeding in which a group of consumers alleged that some utilities serving consumers in the Northeast engaged in anticompetitive and deceptive business practices. Underlying the allegations is a fall 2017 academic paper in which the authors alleged that legitimate actions taken by local gas distribution utilities artificially constrain natural gas pipeline capacity in New England, thereby driving up natural gas and electricity prices. Specifically, the gas utilities use no-notice transportation service offered by interstate pipelines pursuant to FERC-approved tariffs to deliver gas to their customers, some of which are gas-fired power generation facilities. No-notice transportation service allows a gas utility to change—at no cost—the quantity of natural gas it has scheduled to flow on the interstate pipeline to match the quantity of natural gas actually delivered to the utility city gate in order to reflect daily customer demand. The consumers alleged that the utilities routinely reserved more pipeline capacity than needed and adjusted those reservations downward at the end of the day. They alleged that the utilities’ actions led market participants to believe that pipeline capacity was limited when, in reality, it was left unused. As a result, the cost of fuel consumed by gas-fired power plants increased, which in turn allegedly increased the wholesale price of electricity in New England and caused consumers to overpay for electricity as retail customers.

FERC investigated the allegations and in February 2018 determined to take no further action after finding no evidence of anticompetitive withholding of natural gas pipeline capacity as alleged. Nevertheless, a group of consumers sought judicial recourse in the form of a class action lawsuit filed in Massachusetts. Last fall, a Massachusetts federal judge dismissed the consumers’ class action on the grounds that the court cannot determine the reasonableness of the utilities’ rates, as they fall within FERC’s exclusive jurisdiction and are preempted by the filed rate doctrine. The court explained that it cannot determine the utilities’ liability for alleged retail electricity market manipulation without first deciding the reasonableness of wholesale electricity rates approved by FERC. The judge added that the filed rate doctrine prohibits the court from determining the difference between wholesale electricity rates and hypothetical rates that would have been charged but for the alleged anticompetitive conduct.

The utility consumers appealed this decision to the First Circuit, arguing that there are limits to the application of the filed rate doctrine, including in situations where the conduct or harm occurred outside of FERC’s jurisdiction. The consumers argued that the Massachusetts district court unreasonably expanded the scope of the filed rate doctrine to preempt claims of anticompetitive conduct affecting unregulated sales simply because that conduct also affected some other regulated price. They raised the concern that if the district court’s decision is affirmed, it will “stretch a blanket immunity over all conduct by energy sector utilities.”

In response, the utilities stated that the consumers’ allegations invade FERC’s exclusive jurisdiction over wholesale energy rates. Addressing the consumers’ demand for damages would require the court to decide what the wholesale rates would have been had the utilities not engaged in the alleged misconduct, but these wholesale rates are subject to FERC’s exclusive authority. The utilities also noted that courts have repeatedly applied the filed rate doctrine to bar actions by retail customers whose claims hinge on rates in FERC-regulated wholesale markets.

In addition to addressing the scope and applicability of the filed rate doctrine, this case also raises the issue of whether reforms to both the structure and the transparency of the energy markets are warranted. FERC may continue to evaluate whether it can implement reforms to increase price and market transparency and foster robust price formation.