On October 13, 2011, the U.S. Court of Appeals for the Ninth Circuit held that the market-based rate policy embodied in FERC Order No. 697 and FERC Order No. 697-A does not exceed FERC's authority as conferred by the FPA. Under Order 697, which became effective in September 2007, sellers who apply for market-based rates must be pre-screened by FERC and show that they lack (or have adequately mitigated) both horizontal and vertical market power.
FERC bases its market power determination primarily on the seller's share of capacity in the relevant markets, and also considers whether the seller can limit competition through its control of transmission, erect barriers to entry, or engage in abuse of affiliate relationships. A seller who obtains market-based rate authority must file an updated market-power analysis every three years to confirm that it continues to lack market power. In April 2008, FERC issued Order 697-A, rejecting assertions that it did not have authority to implement the market-based rates program and that the program violated the FPA.
The petitioners in Montana Consumer Counsel v. FERC contended that FERC violated its statutory obligation to ensure that rates are just and reasonable by relying solely on the market to regulate prices. They also argued that FERC's market-based rates policy, which allows sellers to file a market-based rate tariff and does not require sellers to give 60-days advance notice of changes in actual market prices (as distinct from changes in the tariff), violates the express terms of the FPA.
The Ninth Circuit held that FERC has adopted a permissible approach to fulfilling its statutory mandate to ensure that rates are just and reasonable by screening for market power before authorizing sales at market-based rates and monitoring sellers' transactions for evidence of market power. In doing so, the court rejected the notion that FERC must first determine that a market is competitive before authorizing market based rates.
The court also found that FERC's interpretation of the FPA's notice and filing requirements is permissible. The court relied in part on its holding in a previous case, California ex rel. Lockyer v. FERC, that "there is nothing inherent in the general concept of a market-based tariff that violates the FPA." The court followed that ruling in this case, but it also noted that the Supreme Court reserved on the lawfulness of FERC's market-based rate program in Morgan Stanley Capital Group v. Public Utility District No. 1 of Snohomish County, Washington, 554 U.S. 527 (2008).
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