Mobile-Sierra Update: FERC'S Devon Power Order

In response to a remand order issued by the United States Court of Appeals for the D.C. Circuit on November 5, 2010, FERC issued its “Order on Remand” in Devon Power LLC on March 17, 2011.  The D.C. Circuit ordered FERC to address two questions:  (1)  Are the auction results and transition payments arising from FERC-approved settlement “contract rates” to which the more rigorous “public interest” component of the just and reasonable standard applies?  (2)  If the auction results and transition payments are not “contract rates,” does FERC have discretion to apply the more rigorous “public interest” component of the just and reasonable standard to future rate challenges to the auction results and transition payments?

The settlement at issue involved a proposed redesign in the New England market for installed electric generation capacity.  FERC approved the settlement in 2006.  The settlement established a forward capacity market, which would use annual auctions to set the price of capacity.  The first auction would procure capacity for the one-year period beginning June 1, 2010.  To address the period between the effective date of the settlement and June 1, 2010, the settlement included a transition mechanism providing fixed payments to capacity assignments.

On review the Supreme Court determined that FERC’s approval of the settlement bound both parties agreeing to the settlement and third-parties that contested the settlement or were never parties to the settlement negotiations.  NRG Power Marketing v. Maine Public Utilities Commission, 130 S. Ct. 693 (2010).  The Supreme Court remanded the case to the D.C. Circuit to address the two questions that ultimately FERC considered in the Devon Power order.  In its November 5, 2010 opinion, the D.C. Circuit remanded the case to FERC because the record did not permit the court to rule on the two questions without further decisions and explanation from FERC.

On remand FERC concluded that the auction rates and transition payments are not themselves “contract rates” requiring FERC to presume that they are just and reasonable.   FERC acknowledges that the “public interest” presumption does not apply when the parties have not agreed to set the rates by contract.  FERC concluded that the rates flowing from the settlement were more properly characterized as “tariff” rates than “contract” rates.

Nevertheless, FERC concluded that it has discretion to apply a more rigorous application of the just and reasonable standard of review to future challenges to certain rates and that it was appropriate to exercise that discretion in this specific case regarding the installed capacity market in New England.  The Commission noted that the statutory just and reasonable standard does not bind it to any one particular formula or methodology of ratemaking and that the Commission has the discretion to decide how to apply the just and reasonable standard in each specific case before it.  FERC also observed that nothing in the Federal Power Act or court opinions precludes FERC from applying the more rigorous “public interest” version of the just and reasonable standard as an exercise of its discretion.

The Commission further noted that its decision here in the Devon Power case was not intended to be a template for other cases.  Instead, the Commission emphasized that it would always remain free to apply its discretion in deciding whether to apply the “public interest” component of the just and reasonable standard to rates that are not contract rates.

Commissioner Norris dissented in part from the March 17, 2011 order.  First, he stated that he is not convinced that FERC, under applicable judicial opinions, actually has the discretion to apply the more stringent public interest component of the just and reasonable standard to non-contract rates.  Second, Commissioner Norris expressed a concern that the order would open the door for parties to propose, in non-contract rate filings, that the more stringent public interest component of the just and reasonable standard applies to future rate challenges.  Commissioner Norris believes it is not appropriate to bind future Commissions to such a standard of review and that the Devon Power order could produce an administrative nightmare with continuous argument and litigation about whether the Commission should or should not exercise its discretion to apply the more stringent standard.

At oral argument prior to the D.C. Circuit’s November 5, 2010 opinion, the judges expressed strong skepticism about whether the Commission had the discretion to apply the more rigorous public interest component of the just and reasonable standard to non-contract rates.  It is very likely that the March 17, 2011 Devon Power order will go back on appeal to the D.C. Circuit.  It would also not be surprising if the Supreme Court agrees to review the D.C. Circuit opinion since the issue arises from the Supreme Court’s NRG Power Marketing opinion in 2010.  For this reason, it would be premature to say that the issue of whether FERC has discretion to apply the public interest component of the just and reasonable standard to non-contract rates has been resolved.

To access FERC's decision, please click here.

If you have any questions concerning this decision or its implications, please contact Jim McGrew at  This e-mail address is being protected from spambots. You need JavaScript enabled to view it or 202-296-1500.