Overview
On March 12, 2024, the US Court of Appeals for the Third Circuit vacated, in part, a FERC order that allowed PJM Interconnection, L.L.C. (PJM) to implement new rules in the middle of a capacity auction—and to apply those rules to capacity bids that had already been submitted.1 The case explains what it means for a regulatory rule to be retroactive and emphasizes the importance of the filed rate doctrine in FERC cases.2
PJM’s existing tariff required it to calculate an amount of capacity that must be procured, considering peak demand and a reserve margin. This is the LDA Reliability Requirement, an important input to determine the results of the capacity auction. After capacity suppliers submitted offers, PJM realized that certain assumptions it had used to derive the LDA Reliability Requirement were faulty, leading to a capacity price four times higher than it would have been otherwise. After it received bids, but before it determined auction results, PJM proposed an amendment to the tariff under section 205 of the Federal Power Act to modify how the LDA Reliability Requirement was calculated. PJM requested that FERC apply this new rule to the pending auction as well as future auctions.
FERC agreed to PJM’s request. It determined that because PJM’s filing was made before PJM settled the capacity auction, and thus before capacity suppliers incurred any obligation to provide capacity, FERC was authorized to apply the revised rules to the pending auction.
The Third Circuit rejected FERC's decision as contrary to the filed rate doctrine, which forbids retroactive rates. To define retroactivity, the court relied on precedent holding that "retroactive rules alter the past legal consequences of past actions."3 The court evaluated FERC's actions in light of the definition, concluding that "[t]he Tariff Amendment is retroactive because it altered the legal consequence attached to a past action when it allowed PJM to use a different LDA Reliability Requirement than the one it had calculated and posted.” In other words, because PJM had already calculated and posted the LDA Reliability Requirement under the original tariff, and suppliers had already submitted their binding offers, FERC could not apply a different set of rules to evaluate those offers.
The court recognized that application of the filed rate doctrine may produce a harsh result, but emphasized that "equities play no role in [] application of the filed rate doctrine." In doing so, the court underscored the "central purpose of the filed rate doctrine: predictability." Without it, parties may lose confidence in the markets, and "[b]y eroding confidence in the markets, FERC may ultimately harm consumers who buy electricity in those markets." The court thus held that the filed rate doctrine prohibited application of FERC’s order to the pending auction, but allowed the revised rules to stay in place for future auctions since future application poses no retroactivity concerns.
The case emphasizes the importance of the filed rate doctrine in curbing the ability of FERC to agree to retroactive modifications of tariffs, and further clarifies what it means for agency action to be retroactive. While its genesis was a challenge to FERC action, the principles discussed are equally important to challenges from third parties that implicate regulator-approved rates, an issue that frequently arises in energy litigation (as we have discussed before).4
Endnotes
1 PJM Power Providers Gp. v. FERC, No. 23-1788 et al. (3rd Cir. 2024) (https://www2.ca3.uscourts.gov/opinarch/231778p.pdf)
2As the court explains, the filed rate doctrine “binds regulated entities to charge only the rates filed with FERC and to change their rates only prospectively.”
3The court directly quoted from Bd. of Cnty. Comm'rs of Weld Cnty. v. EPA, 72 F.4th 284 (D.C. Cir. 2023), and noted that case drew its definition from Landgraf v. USI Film Prods., 511 U.S. 244 (1994), the "Supreme Court's seminal opinion on retroactivity." In Landgraf, the Supreme Court evaluated whether a plaintiff whose Title VII case was on appeal could avail herself of rights and remedies included in a new congressional statute for alleged Title VII violations. The Supreme Court ultimately concluded the plaintiff could not, but emphasized that determining retroactivity "is not always a simple or mechanical task" and encouraged courts to rely on "familiar considerations of fair notice, reasonable reliance, and settled expectations [for] sound guidance." Id. at 268, 270.
4 See, e.g., Third Circuit Bars Claims Against Colonial Based on Filed Rate Doctrine (https://www.steptoe.com/en/news-publications/third-circuit-bars-claims-against-colonial-based-on-filed-rate-doctrine.html); 1st Circuit Dismisses $3.66 Billion Class Action Against Eversource, Avangrid (https://www.steptoe.com/en/news-publications/1st-circuit-dismisses-dollar366-billion-class-action-against-eversource-avangrid.html).
