Friday, September 10, 2004
Ninth Circuit Rules Federal Regulators Erred in Rejecting Energy Refunds for State Consumers
From Staff and Wire Service Reports
Federal energy regulators improperly calculated how much money energy companies should refund to California consumers, and the state should get another chance to argue for $2.8 billion in overcharges on electricity sales in 2000, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
Handing Attorney General Bill Lockyer a long-fought victory, the court said that the Federal Energy Regulatory Commission “abused its administrative discretion” when it declined to bill the power sellers for “rampant” failure to comply with reporting requirements imposed when FERC permitted them to charge variable, market-based wholesale rates during the height of the state’s 2000-01 energy crisis.
Lockyer said the court agreed with California’s argument that “the watchdog was sleeping during the robbery, it failed to enforce its own rules, and it unduly restricted remedies for consumers with artificial chains.”
The quarterly reporting requirements at issue are the government’s main mechanism for regulating the power industry, but the safeguard “was, for all practical purposes, nonexistent while energy prices skyrocketed and rolling brownouts threatened California’s businesses and citizens,” Judge Sidney R. Thomas explained in an opinion joined by Judges M. Margaret McKeown and Richard R. Clifton.
The panel declined, however, to order further refunds on its own, but instead remanded the case to FERC for further proceedings.
California has asked FERC to order $9 billion in refunds; FERC has said that’s more likely to be around $3 billion—the estimated amount overcharged on sales between Oct. 2, 2000, and June 20, 2001.
The commission had rejected California’s bid to expand the refunds to include sales made between May and October 2000, a period in which energy companies failed to file the quarterly rate reports. FERC said the failure to file those reports amounted to “essentially a compliance issue.” To remedy that, FERC said it could only order the refiling of those reports.
The appeals court disagreed, saying FERC had “broad remedial authority to address anticompetitive behavior” and had ordered refunds in other cases where wholesale energy companies failed to file the quarterly price reports.
Thomas rejected the state’s argument that FERC lacked authority to approve the market-based tariffs. He noted that while schemes allowing energy companies to charge market rates, rather than to set a fixed rate subject to regulatory approval, were disallowed by the Supreme Court in MCI Telecommunications Corp. v. AT&T, 512 U.S. 218 (1994) and Maislin Industries U.S., Inc. v. Primary Steel, Inc., 497 U.S. 116 (1990), those cases did not involve the kind of safeguards FERC imposed in the California market.
“[T]he crucial difference between MCI/Maislin and the present circumstances is the dual requirement of an ex ante finding of the absence of market power and sufficient post-approval reporting requirements,” Thomas wrote. “Given this, FERC argues that its market-based tariff does not run afoul of MCI or Maislin, and we agree.”
He also rejected the state’s claim that FERC should have mandated more or different reporting. The agency, he said, “has broad discretion to establish effective reporting requirements for administration of the tariff.”
But the judge said the safeguard the reporting was supposed to provide proved illusory since “non-compliance with FERC’s reporting requirements was rampant throughout California’s energy crisis.”
“If the ability to monitor the market, or gauge the ‘just and reasonable’ nature of the rates is eliminated, then effective federal regulation is removed altogether. Without the required filings, neither FERC nor any affected party may challenge the rate. Pragmatically, under such circumstances, there is no filed tariff in place at all. The power to order retroactive refunds when a company’s non-compliance has been so egregious that it eviscerates the tariff is inherent in FERC’s authority to approve a market-based tariff in the first instance. FERC may elect not to exercise its remedial discretion by requiring refunds, but it unquestionably has the power to do so. In fact, if no retroactive refunds were legally available, then the refund mechanism under a market-based tariff would be illusory. Parties aggrieved by the illegal rate would have no FERC remedy, and the filed rate doctrine would preclude a direct action against the offending seller. That result does not comport with the underlying theory or the regulatory structure established by the FPA.”
Thomas went on to declare:
“[A]s MCI and Maislin affirm, a market-based tariff cannot be structured so as to virtually deregulate an industry and remove it from statutorily required oversight.”
FERC spokesman Bryan Lee said the commission welcomed “the court’s clarification of the scope of the commission’s remedial authority” for violations of the rate rules.
State Sen. Debra Bowen, chairwoman of the Senate Energy Committee, said the idea that FERC believed it “lacked the ability to order a remedy has always seemed ridiculous to me.”
“That’s just an invitation to rip off customers and hope you don’t get caught,” Bowen, D-Marina del Rey, said. “Cheaters figure out new ways to cheat the system and FERC has to have a way to go back and provide redress for illegal behavior.”
The court decision was hailed as a victory by Gov. Arnold Schwarzenegger, who called the court’s ruling “fantastic,” and U.S. Sen. Dianne Feinstein, D-Calif. Both urged the commissioners to act quickly on California’s refund request.
California has alleged that it was the victim of widespread manipulation of both the price and supply of energy in a newly deregulated electricity market. As prices soared, the state faced energy shortages and rolling blackouts. The crisis cost the state billions of dollars and disrupted energy markets across the West.
FERC capped wholesale power prices and instituted other changes in June 2001 that brought a quick end to the crisis. But by then, the state’s largest utility had filed bankruptcy and two others had billions in debts. The state of California also rang up billions in debts after it stepped in to help the utilities buy power for their customers.
The agency ordered energy companies to refund $3.3 billion, but California wants the federal regulators to order more refunds from the companies, which include several subsidiaries of Enron Corp. and Mirant Corp. The companies have denied wrongdoing.
Mirant and Enron have declared bankruptcy, which complicates the collection of any refunds.
“How much of the that total we would be able to recover, we don’t know. But I would expect that most of the companies are in good financial condition,” said Ken Alex, the attorney leading the attorney general’s energy task force.
The case is California v. FERC, 02-73093.
Copyright 2004, Metropolitan News Company