Public Citizen v. Federal Energy Regulatory Commission

The Federal Power Act required the Federal Energy Regulatory Commission (FERC) (defendant) to ensure just and reasonable electricity rates. FERC allowed wholesale electricity sellers to file market-based tariffs, which did not indicate specific electricity prices and instead indicated that electricity rates would be determined based on freely negotiated contracts between sellers and purchasers. Midcontinent Independent System Operator (MISO) was a regional transmission organization that conducted annual electrical-capacity auctions. MISO determined how much capacity was required for a given operational zone and then accepted electricity generators’ offers to sell capacity until the zone’s capacity requirements were met. The price at which the last required increment of capacity was sold was set as the auction clearing price for that zone, and all capacity for the zone would then be purchased at that clearing price. MISO implemented rules to ensure that sellers could not exercise anticompetitive market power, including (1) requiring that offers to sell capacity in a zone could not exceed the cost of new entry, defined as the estimated cost of building a new power plant to provide capacity in the zone, and (2) establishing an initial reference level based on an estimate of how much generators could earn by exporting capacity to a different transmission organization instead of selling to MISO. If a seller’s offer exceeded a so-called conduct threshold, defined as the sum of the initial reference level plus 10 percent of the new-entry cost, MISO automatically lowered the seller’s offer to the initial reference level. In April 2015, MISO conducted a capacity auction for nine regional zones. For Zone 4, which included most of Illinois, MISO calculated the initial reference level at $155.79 per megawatt-day. After the auction, the auction clearing prices in every zone except Zone 4 were below $3.50 per megawatt-day. However, the auction clearing price for Zone 4 was $150 per megawatt-day—a price that significantly exceeded both the prices in the other zones and the historical prices in Zone 4. Entities including the State of Illinois and Public Citizen (plaintiffs) filed complaints with FERC, asserting that the auction had led to unjust and unreasonable electricity rates in Zone 4. The state alleged that Illinois power company Dynegy was a necessary electrical-capacity supplier for Zone 4 and thus could exercise its market power to receive any price it wanted for its capacity as long as that price was under MISO’s conduct threshold. Public Citizen argued that FERC was required to review the auction results to ensure that each resulting electricity price was just and reasonable before the price could be implemented. FERC investigated the auction for three years and then issued a conclusory order stating that Dynegy had not engaged in market manipulation. FERC declined to pursue either further investigation of Dynegy or an enforcement action against Dynegy. Public Citizen appealed.