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9th Circuit Denies Petitions for Review of Order No. 697 and 697-A on Market-Based Rate Authority

On October 13, 2011, the United States Court of Appeals for the Ninth Circuit (“9th Circuit” or “Court”) issued a decision (Montana Consumer Counsel v. FERC) denying petitions for review of the FERC Order No. 697 and Order No. 697-A, codifying market-based rate policy.  The 9th Circuit noted that it was tasked with reviewing whether the market-based rate policy embodied in Order No. 697 exceeds FERC’s authority as conferred by the Federal Power Act (“FPA”).  The Court concluded that  Order No. 697 did not per se violate the FPA, however, it did leave open the possibility that the petitioners in this case or other parties would succeed in an as-applied challenge to FERC’s implementation of the order.

Montana Consumer Counsel, the States of Connecticut, Illinois and Rhode Island, and Public Citizen, Inc., Colorado Office of Consumer Counsel, and Public Utility Law Project of New York, Inc. (together, “Petitioners”) filed petitions for review of Order No. 697 and Order No. 697-A, contending: (1) that FERC, by relying solely on the market to regulate rates, has violated its statutory obligation to ensure that rates are just and reasonable; and (2) that the market-based rates policy, which allows sellers to file a market-based rate and does not require sellers to give sixty days advance notice of changes in market prices, violates the express terms of the FPA.  The petitioners made arguments concerning (1) competitiveness of the market; (2) empirical evidence; (3) reporting requirements; (4) reviewing reports for market power and manipulation; and (5) filed rates and sixty-days-notice-requirement.

In its decision, the Court rejected the Petitioners’ argument that FERC has to assess the overall competitiveness of the market, and relied on earlier court decisions where no such finding is required.  The Court also rejected Petitioners’ argument that the Commission must conduct an empirical analysis or offer substantial evidence that competition among sellers will drive rates to reasonable levels.  The Court stated that FERC’s order requires the collection of empirical data through its screening process and that if a seller passes such market power screening, then the seller’s prices will be just and reasonable. In terms of reporting requirements, the Court deferred to the Commission’s decision to require market-power analysis reports every three years as well as the Commission’s decision to exempt Category 1 sellers from market power analyses as such decisions are within the Commission’s discretion and do not give the Court sufficient cause to invalidate FERC’s market-based rate policy.  The Court further found that the law enables the Commission’s approach as stated in Order No. 697 and that FERC can ensure rates are just and reasonable by indirectly regulating the wholesale market. 

Petitioners also contended that market-based rate sellers will violate the prior notice requirement that rates be filed with FERC before they go into effect.  The Court found that FERC has broad discretion to construe the FPA’s notice and filing requirements.  It is reasonable for FERC to construe the statute to find that a rate “change” (triggering the prior notice requirement) occurs only once during the filing for authorization to sell at market-based rates. 

A copy of the Court’s decision is available here.