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FERC provides guidance on refunds for sequential “pancaked” complaints

For years, FERC has permitted challengers to submit a second “pancaked” rate complaint while a complaint under Section 206 of the Federal Power Act (“FPA”) is already pending. The pancaked complaints created overlapping refund periods and uncertainty about what refunds were available under each complaint. In its November meeting, FERC issued Opinion No. 569-B, denying rehearings in relevant part of Opinion Nos. 569 and 569-A, and clarifying the refund effect of such sequential complaints. The issue is whether the filing of such sequential complaints provides a mechanism to circumvent and extend the statutory fifteen-month refund period permitted under FPA Section 206(b). FERC held that it would limit refunds to the statutory fifteen-month period established after filing of the first complaint, except and to the extent that the later complaint justified even lower rate reduction than the rate level found appropriate in the first complaint.

The 1988 Regulatory Fairness Act

The fifteen-month refund limitation arises from the 1988 Regulatory Fairness Act, Pub. L. No. 100-473, 102 Stat. 2299 (1988) (“RFA”), which added the concept of a refund period to Section 206 of the Federal Power Act. Prior to passage of the RFA in 1988, Section 206 did not provide for refunds; relief under complaints was purely prospective, in that a new lower rate could be established and would be in force only after the date that FERC ordered a new rate. Further, the courts held that when FERC found a rate too high, the new rate would be in place only from the date that FERC accepted a compliance filing amending the tariff at issue to include the new corrected rate. Electrical Dist. No. 1 v. FERC, 774 F.2d 490 (D.C. Cir. 1985).

Advocates for lower electric rates argued that the pre-1988 regime provided utilities an incentive to slow down the complaint and post-complaint compliance process. In response, Congress enacted the RFA which amended FPA Section 206(b), providing that in addition to prospective relief at the close of the complaint proceeding, consumers could obtain refunds for a “refund period” of up to fifteen months from a “refund effective date” that would be established upon filing of the complaint. Specifically, the revised Section 206(b) provided:

Legislation Subsequent to 1988

In the 32 years since passage of the RFA, the only relevant legislative changes to the refund provisions of FPA Section 206 were in the Energy Policy Act of 2005 (“EPAct 2005”). The amendments in EPAct 2005 change the timing of the “refund effective date” that would be established on filing of a Section 206 complaint. The 1988 version of the statute provided that the refund effective date could be no sooner than 60 days after the filing of the complaint. But the California energy crisis demonstrated that millions of dollars in excessively priced charges could be incurred in that 60-day period. To capture those missing refunds, Congress amended the statute to provide that the refund effective date could be as early as the date of filing of the complaint. But the EPAct 2005 amendments did not revise the fifteen-month duration of the refund period – instead advancing both the beginning and end dates of the refund period by 60 days.

Exceptions to Fifteen-month Refund Period

To counteract the incentive of utilities to slow down complaint proceedings to limit relief, the RFA included in FPA Section 206(b) an express exception to the fifteen-month refund period, providing that the refund period would be doubled to thirty months where the utility has engaged in “dilatory behavior” that slows down the complaint proceeding.

There are other exceptions, most notably the “legal error doctrine” which provides that FERC has equitable authority to correct its legal errors. See generally ISO New England v. Bangor-Hydro Electric Co., 161 FERC ¶ 61,031 (2017). For example, if FERC were to grant a complaint a year after it was filed, it would provide refunds for the year prior to ruling, and prospective relief afterward. But if FERC erroneously denies the complaint after a year, and then is reversed on appeal three years later, the fifteen-month limitation could be read as preventing FERC from correcting rates for the three years the error was in place. Under the “legal error doctrine”, FERC has authority to restore the parties to where they would have been if FERC had ruled properly in its initial ruling, providing relief for the entire time period, even though that could mean more than fifteen months of refunds.

Broader relief might also be available in other narrow cases. For example, the Supreme Court has held that FERC has authority “to set aside a contract where there is unfair dealing at the contract formation stage—for instance, if it finds traditional grounds for the abrogation of the contract such as fraud or duress.” Morgan Stanley Capital Group Inc. v. PUD No. 1 of Snohomish County, 128 S.Ct. 2733, 2747 (2008). Such allegations are rare at FERC, but if FERC were to set aside a contract with findings relating to “the contract formation stage,” broader relief would be available than in the more typical FPA Section 206 complaint where a contract’s rate is reasonable when entered into and only later is determined to be unreasonable.

Sequential or Pancaked Complaints

For nearly as long as the RFA fifteen-month refund provision has been in place, there have been concerns that FERC would take longer than fifteen months to act – leading to a “gap period” between the end of the fifteen months and the date of a FERC order, in which relief would be unavailable, even if FERC ultimately found the rate excessive. To circumvent the gap period, advocates sought to erase the statutory limitation by filing pancaked complaints. That is, if the fifteen-month refund period were nearing expiration with no FERC order in sight, the original plaintiffs (or a carefully selected set of alternative plaintiffs) would file a second complaint in order to trigger a new fifteen-month refund period. With both pancaked complaints pending at the same time, the theory was that one refund period would extend into the next, effectively resulting in a refund period longer than fifteen months, erasing the gap period.

FERC’s practice, over the years, has been to permit such sequential complaint filings to proceed, finding that they were not redundant to the extent that they relied on “new, more current data” and to allow the establishment of new refund periods as the result of such complaint filings. See, e.g., Belmont Mun. Light Dep’t v. Cent. Me. Power Co., 156 FERC ¶ 61,198, at PP 39-40 (2016), reh’g denied, 162 FERC ¶ 61,035, at PP 8-12 (2018).

While FERC has permitted pancaked rate complaints to proceed, those cases have typically been resolved by settlement, or have not resulted in FERC excessive rate determinations, thus obviating the need to confront the issue of whether the pancaked complaints actually lead to more than fifteen months of refunds. Until Order 569 -- in which FERC was forced to directly confront a situation where rates were found to be excessive, where the fifteen-month statutory limit would have created a gap period with no relief, and where pancaked complaints could potentially have erased the gap period.

Opinion Nos. 569, 569-A, and 569-B

In Opinion No. 569 and affirmed in Opinion Nos. 569-A and 569-B, FERC held that it would not permit the filing of sequential pancaked complaints to circumvent the fifteen-month refund limitation in Section 206(b) – refunds would be limited to fifteen months, unless the correct rate for the second (or subsequent) complaint was determined to be lower than the rate allowed in the first complaint.

An example might make this easier to understand. Consider the following simplified example:

Original rate: $100/month

Complaint 1 – January 1 Year 1 (Refund Period 1 until April 1, Year 2)

Complaint 2 – April 1 of Year 2 (Refund Period 2 until June 1, Year 3)

Order fixing new rate issued – April 1 of Year 3

If FERC in the above example were to find in the Order that the correct rate for Refund Period 1 were $80/month and that the correct rate for Refund Period 2 was also $80/month, then relief (of $20/month) would be provided for the fifteen-month Refund Period 1. The new correct rate of $80 would also be put in place prospectively from the date of the Order. But there would be a Gap Period from the end of Refund Period 1 until the date of the Order were no relief is available. The Gap Period arises because of the fifteen-month limitation.

On the other hand, if the Order found that the Correct Rate for Refund Period 1 were $80/month, and that the correct rate for Refund Period 2 was $70/month: Relief would be available for Refund Period 1 of $20/month. Relief would be available for Refund Period 2 (until the date of the Order) of $10/month – the difference between the rate determined in Complaint 1 and the rate determined in Complaint 2. And the rate would be $70/month prospectively after the Order. In this example, relief was available in the Gap Period – but only to the extent that the relief improved on the rate found appropriate in the first complaint.

FERC justified its result on the language of Section 206(b), which provides that refunds are available for amounts collected “in excess of those which would have been paid under the just and reasonable rate, charge, classification, rule, regulation, practice, or contract which the Commission orders to be thereafter observed and in force” (emphasis added). FERC explained that this language ties refunds to prospective rate changes. They reasoned that to the extent the second complaint proceeding did not lead to rate reductions beyond those determined necessary in the first complaint, that it would not order any prospective rate change as a result of the second complaint, and thus no refunds were owed for the second complaint. The prospective change resulting from Complaint 2 is the difference, if any, between the rate fixed in Complaint 1 and the rate fixed in Complaint 2.

While this reasoning is somewhat complex – the result is simple. A second complaint will not be permitted to circumvent the fifteen-month refund limit. Instead, the second complaint can only provide extra relief if and to the extent it justifies an even lower rate than established in the first complaint.

A spirited dissent argues that the result is unfair and relies on a “convoluted” reading of Section 206 – but nothing in the dissent explains how a different result that simply erases the fifteen-month limitation could be consistent with the statutory refund limit.

Conclusion and Next Steps

Knowledgeable observers had wondered for years how FERC could possibly square its practice of permitting sequential pancaked complaints with the statutory fifteen-month refund limitation. In Opinion Nos. 569, 569-A, and 569-B, FERC managed to do just that. Parties are permitted to pursue sequential pancaked complaints in which new evidence is presented – but relief for those sequential complaints is permitted only if, and to the extent, that FERC determines that the later complaints justify a lower rate than determined in the first complaint. This provides a defensible reason for the sequential complaints – because the passage of time may well mean that new conditions justify an even lower rate than could be justified at the time of the first complaint. But the statutory refund limitation is preserved.

The issue is now pending on appeal in the DC Circuit (Docket No. 20-1227 et al) – so there will be further review of whether FERC has properly followed the statute.

Stan Berman

Eric Todderud

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