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The federal “filed-rate doctrine” is not a particularly difficult or complex doctrine, at least on the surface. On other levels, though, it is still little understood, sometimes even by those federal agencies charged with its enforcement. And where filed rates are encountering market-based regulatory schemes, new and unresolved tensions have developed — tensions that are evident today in the Federal Energy Regulatory Commission’s oversight of electricity markets. In its simple formulation, the filed-rate doctrine requires a regulated entity to file the rate it will charge for a particular service. Theoretically, this permits purchasers of a diverse range of regulated services to know exactly what they will be required to pay at any given time and gives them confidence that similarly situated competitors are not being given a better deal. The doctrine is common to a number of federal regulatory statutes, including the Federal Power Act and the Natural Gas Act. It originated in the regulation of railroads in the Interstate Commerce Act of 1887. The doctrine has other noteworthy features: Under the supremacy clause of the Constitution, states are required to permit federally approved filed rates to “flow through” into retail rates. When Aunt Dorothy opens her electric bill, for example, the rate she is charged is based, at least in part, on federal filed rates. Challenges on antitrust and other grounds are largely barred if there is a valid federal filed rate in existence. This is because the federal agency setting the rate is presumed to have acted in a quasi-legislative role, setting just and reasonable rates that then have the force of law. There is also a growing body of law suggesting that, in certain circumstances, the use of filed rates will be given precedence over otherwise applicable bankruptcy law. Under the Federal Power Act and the Natural Gas Act, the filed-rate doctrine has a corollary known as the “retroactive ratemaking doctrine,” which essentially holds that an agency cannot retroactively change a filed rate that is not subject to refund. This protects utility and natural gas consumers from having to pay surcharges on service for which they already paid a filed rate. However, with increased interest in using competitive markets to set rates in once heavily regulated industries, there is a growing tension between advocates of traditional filed rates and advocates of market-based pricing. This tension is palpable in proceedings where FERC has found that market-based rates can be the equivalent of filed rates under the Federal Power Act and the Natural Gas Act. DEFINING A FILED RATE The key question now being posed is this: Can there be a valid “filed rate” where the rate itself has never been published in a tariff and is not known until after the market determines what the rate will be? Is it enough that rules governing the behavior of markets be stated in a tariff, even if a rate is not directly discernible from those rules? In the past, courts have opined that a pricing formula could meet the definition of a “filed rate,” because even though the rate itself wasn’t stated, all the inputs into the formula were readily available. A range of cost-based rates with a provision for nondiscriminatory discounting has also been approved as a “filed rate.” Markets though are different than clearly stated mathematical formulas. And market-based rates are not predicated on traditional cost-based calculations. Markets are messy. Even with the best market rules, it is not always clear why a particular price results. Moreover, prices in markets can change dramatically. Thus, if Aunt Dorothy lived in San Diego in August 2001, she got an unpleasant surprise when she opened her power bill to find the results of California’s market-based pricing scheme. For the first time, the state permitted market-based electricity prices to flow through directly to consumers in the San Diego Gas & Electric Co. service territory. Prices rose sharply. This is generally not how filed rates behave. When addressing filed-rate questions in the past, the Supreme Court has tended to construe the doctrine literally. As recently as 1990, when considering a trucking industry rampant with prices set by contract that varied from the filed rates, the Court in Maislin Industries v. Primary Steel found that “strict adherence to the filed rate has never been justified on the grounds that the carrier is equitably entitled to that rate, but rather that such adherence, despite the harsh consequences in some circumstances, is necessary to the enforcement of the [Interstate Commerce] Act.” And speaking of consequences: After the Maislin Industries decision, a cottage industry sprung up to help trucking companies (or their bankruptcy trustees) search out and obtain surcharges from customers to whom they had earlier agreed to give discounts below the filed rates. MARKET JUDGMENT It is well-established law that where there is sufficient competition, the market, with appropriate oversight or mitigation, can yield just and reasonable rates. This is a result readily defended with elementary principles of economics. Some legal analysts argue that there has not yet been an unequivocal legal holding that market-based rates that have not actually been filed, or were only filed some period after they were implemented, can qualify for filed-rate status. And, indeed, one of the seminal cases finding that market-based rates could be just and reasonable — City of Elizabeth Gas Co. v. FERC, decided by the U.S. Court of Appeals for the D.C. Circuit in 1993 — avoided the question of whether market-based rates are inconsistent with the filed-rate provisions of the Natural Gas Act (similar to the Federal Power Act provisions) simply because the issue had not been properly raised at FERC or in the petitioner’s initial brief. Now this conflict between the acolytes of market-based rates on the one hand, and traditional filed-rate doctrine advocates on the other, is directly and unavoidably teed up in both the D.C. Circuit and the 9th Circuit. Regardless of outcome, these two cases will almost certainly result in writs of certiorari to the Supreme Court before the battle is over. BEFORE THE COURTS The pending 9th Circuit case arose from the California energy crisis of 2000-01, when the state’s experiment in electricity market deregulation began to unravel. It is now well-documented that the market failures and rolling blackouts experienced during that period were, in large part, the result of market manipulation by energy sellers, including Enron. However, rather than sending the state back to cost-based regulation, FERC chose instead to patch up the market rules and to “mitigate” the unjustly high prices resulting from the market manipulation. FERC’s active intervention in correcting otherwise deficient market-based prices reinforced the view that these rates constituted federally approved filed rates. In 2002, the California attorney general and the California Public Utilities Commission challenged FERC’s use of market-based rates in State of California v. FERC. The state officials argued that the filed-rate doctrine generally does not apply to market-based rates (a) because the market-based tariffs contain no discernible “rate,” and (b) because filed-rate protection assumes the existence of a rate that was, in fact, filed. None of the market-based rates in question were ever actually filed, either in advance or in after-the-fact reports. The case has been argued and now awaits the 9th Circuit’s decision. More recently, on July 16, 2004, the Colorado Office of Consumer Counsel, the Rhode Island and New Mexico attorneys general, the Utah Committee of Consumer Service, the Public Utility Law Project of New York, the National Consumer Law Center, and Public Citizen filed a petition for review of FERC’s new market behavior rules in the D.C. Circuit. The petitioners argue, among other things, that the rules “fail to comply with the statutory requirements that all rates for, and practices affecting, wholesale electric sales be filed and subject to public notice and FERC review, before taking effect.” A COMPETITIVE CONFLICT So what will the outcome be? This is in many ways a religious debate, with true believers on both sides. On the one hand, a FERC spokesman reportedly stated that the D.C. Circuit appeal is “a collateral attack on competitive markets for electricity” and a “misguided attempt to stuff the genie back into the bottle to bring back cost-of-service regulation.” Other supporters would point to the many cases since City of Elizabeth that have addressed the filed-rate doctrine in the context of market-based rates and found that it applied. Indeed, the most recent of these cases — Public Utility District No. 1 of Grays Harbor County v. IDACORP Inc. — was issued by the 9th Circuit on Aug. 10. The court observed that “while market-based rates may not have historically been the type of rate envisioned by the filed rate doctrine, we conclude that they do not fall outside of the purview of the doctrine.” On the other hand, given the Supreme Court’s past literal construction of the filed-rate doctrine — even at the expense of otherwise legitimate deals between willing parties and rational efforts by agencies to deal with the economic realities of the industries they regulate — it is still possible that, in a well-pleaded case, a market-based rate would be found not to meet the requirement for a filed rate. This result is supported by Gerald Norlander, executive director of the Public Utility Law Project, in a scholarly exegesis in a 2003 issue of the Energy Law Journal. Norlander concluded that “FERC’s assertion of legal authority to introduce market-based rates is founded on several rulings of the [U.S.] Court of Appeals for the District of Columbia, which upon close review did not actually decide whether market-based rates are permissible under the [Federal Power Act].” He added that “FERC policy is contrary to rulings of the Supreme Court which have not allowed regulatory agencies to lighten statutory requirements upon an agency’s finding . . . that market prices will yield just and reasonable rates.” Given FERC’s widespread approval of market-based rates in recent years, and the winning record thus far in the courts of appeals, a Supreme Court decision finding that market-based rates do not qualify as filed rates appears increasingly remote. However, if the Court were to reverse course, it could spawn a new cottage industry of FERC practitioners sorting the matter out for years to come. Congress would likely be urged to consider legislation to modernize the regulatory framework consistent with the market-based initiatives that FERC and the industry have invested in, and that many economists believe to be economically superior to the cost-based, command-and-control systems of the past. And Aunt Dorothy? In her view, while markets are fine for shopping for dinner, she wants her electricity rates to be clear, upfront, and in writing, just as Congress intended when it first conceived the filed-rate doctrine back in 1887. But if market-based rates would lower her bill, she’d be fine with them too. Paul B. Mohler is a partner in the D.C. office of Heller Ehrman White & McAuliffe, where he practices complex administrative and energy law. The views expressed here are his own and should not be attributed to the firm or any client.

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