Perspective
Debilitating Doctrine
How the filed-rate policy wreaks havoc-
and what courts can do about it.
November 2004
By Jim Rossi
Like many venerable legal rules, the filed-rate doctrine is rarely questioned. Over the last century, it has served many important purposes. However, with deregulated wholesale electric power markets at the federal level and various degrees of deregulation across the states, both the doctrine's continued applicability and usefulness are suspect.
As recent examples in the industry suggest, presumptive application of the filed-rate doctrine by both firms and courts can cause affirmative harm for energy-market development and policy. For example, a recent U.S. District Court decision in Texas applied the filed-rate doctrine in an astonishingly broad manner (see "A Texas Sized Gap in Regulatory Enforcement," p. 20), precluding anti-trust claims against energy suppliers in the deregulated Texas wholesale power market and leaving those harmed by market abuses without any legal or administrative remedy.
Examples such as this one illustrate a serious need for reassessment of the doctrine by federal courts in the energy context. Both courts and litigators have at their disposal ways of lowering the filed-tariff shield to allow more efficient energy markets to develop, better furthering the goals of energy policy.
In the deregulated electric power industry, the filed-rate doctrine continues to play an important role in precluding judicial enforcement of antitrust, contract, and tort laws.
For instance, the filed-rate doctrine has been used to bar antitrust claims in the deregulated electric power industry. In Town of Norwood v. New England Power Co.1, the First Circuit invoked the Keogh strand of the filed-rate doctrine (see "A Little History and Context," p. 19) to bar a price squeeze claim against a utility-even where the tariff filed with FERC was a market-based tariff relying on competitively set prices.2 The Norwood court reasoned, "It is the filing of the tariffs, and not any affirmative approval or scrutiny by the agency, that triggers the filed-rate doctrine."3
A recent article analyzing the filed-rate doctrine, however, argues that automatic application of the filed-rate doctrine to the partially deregulated electric power industry leads to harmful results.4 The conventionally understood concern with the filed-rate doctrine in deregulated markets is that, by valuing regulatory over market-price determinations, it stands in the way of competitive markets.
Another concern with the filed-rate doctrine arises due to the strategic actions of firms in the regulatory process. To the extent cases such as Town of Norwoodallow the mere filing of tariffs to presumptively determine whether a court will exercise jurisdiction, the filed-rate doctrine invites even more radical deregulation than either Congress or the regulatory agencies accepting tariffs would prefer-that is, markets absent antitrust and common law remedies. Surely, Congress did not intend this in the Federal Power Act or in subsequent energy legislation.
Unlike other types of immunity from litigation, which often apply to firms across the board, the filed-rate doctrine is a firm-specific defense. To the extent the doctrine is used by courts as a basis to decline jurisdiction, private firms might look to ex ante tariffing as a clever strategy to foreclose antitrust or common law litigation, thus reducing the possibility of ex post judicial enforcement. Allowing private conduct to determine the institutional forum for market enforcement leads to a serious bias against judicial enforcement. This bias in favor of regulatory agencies privileges private choice over public assessment of the effectiveness of dual enforcement.
Reliance on private forum selection for a regulatory enforcement mechanism poses a particularly costly problem as we move from cost-of-service-based regulation to a different approach to regulating markets, focusing on inputs or the structure of access to important facilities for competition. For instance, a utility lacking market power can file an umbrella tariff with FERC; this, coupled with quarterly reports (including numerical details on actual sales prices), will satisfy the Federal Power Act's requirements that FERC find wholesale rates to be "just and reasonable." FERC has a much-debated market power test, but market-based tariffs do not include a filed rate-only an offer to negotiate, which can have the odd effect of preventing enforcement of antitrust, tort, and contract laws. Similarly, transmission tariffs can raise filed-rate issues, as firms may use these to maintain that the conduct of individual transmission-owning utilities, regional transmission organizations, or independent service operators are immune from antitrust enforcement and other legal protections against market misconduct.5
Courts have a comparative institutional competence in implementing enforcement regimes that could benefit competitive markets. Unlike regulatory agencies, courts do not depend on budget allocations or legislative delegations of specific regulatory jurisdiction. Courts have wider remedial authority and discovery powers than do regulatory agencies, and they also have greater political independence.
Thus, as we implement competition policy for electric power markets, judicial enforcement of remedies for market abuses based on violations of antitrust, tort, and contract law can play an important role in protecting public welfare. To the extent the filed-rate doctrine privileges private choice over assessment of the public interest in choosing the mechanism for enforcement, courts should refuse to apply it automatically to preclude judicial enforcement.
A More Direct Solution
A plea for more careful application of the filed-rate doctrine by federal courts is not intended to suggest that the doctrine is without purpose in every case. It is, however, a request that courts not consider the doctrine automatic or presumptive, even in cases involving complex regulatory filings.
The filed-rate doctrine continues to serve an important purpose where three conditions are present: nondiscrimination remains an important regulatory goal; regulators possess the authority and in fact do evaluate costs and prices; and regulators possess an adequate remedy for nondiscrimination. While cost-of-service regulation may have justified a presumption against the exercise of judicial authority in most cases, in a deregulated environment it must be presumed that the agency has not engaged in an extensive firm-specific evaluation of nondiscrimination.
Before resorting to the filed-rate doctrine to decline considerations of the merits of a dispute involving allegations of market wrongs, a court first needs to evaluate whether the agency accepting a tariff possesses the authority to protect against nondiscrimination and uses it in ways that would present a conflict with courts or make judicial enforcement unnecessary. In many contexts, it is not at all clear that agency regulators possess the authority to evaluate tariffs for nondiscrimination, or to remedy discrimination and other market abuses. In other contexts, as in FERC's market-based tariffs, it is not at all clear that regulators routinely
evaluate conduct and exercise authority to protect against nondiscrimination.
For example, the Ninth Circuit recently rejected the presumption that the filed-rate doctrine applies to market-based rates. Lockyer v. FERC held that the filed-rate doctrine could apply to FERC's market-based rates, but only if FERC does something more than make a cursory finding of no market power in accepting a rate filing.6 FERC also needs to exercise remedial authority to more actively monitor market-based rates for market abuses. If FERC does not do this, the Ninth Circuit panel suggests, "the purpose of the filed-rate doctrine is undermined" and "the tariff runs afoul of … the FPA."7 Otherwise, an enforcement gap-as in Texas-will exist.
Nondiscrimination is a questionable regulatory goal in today's regulatory environment, in which markets, not regulators, are increasingly determining prices. It should no longer give rise to a presumptive filed-rate defense. In addition, federal courts have at their disposal commonly used doctrines that better promote the other purposes of the filed-tariff doctrine - federal pre-emption and deference. There is no reason to give a filed tariff an independent legal effect to further these goals.
Courts, for example, routinely find that national regulatory programs pre-empt state law remedies for breach of contract and tort. Such determinations, however, are not automatic. Instead, courts carefully evaluate the scope of the regulatory scheme and the extent to which it presents a conflict with state remedies. By contrast, courts applying the filed-rate doctrine as in Norwood often use the mere existence of a filed tariff to imply federal preemption, with little or no analysis of whether a regulatory conflict in fact exists. Borrowing from federal pre-emption analysis, courts should generally apply a presumption against pre-emption in this context.
In addition, the doctrine of primary jurisdiction-widely used in federal judicial proceedings involving agency regulation-makes it unnecessary for courts to apply the filed-tariff doctrine to further the goal of agency deference. While the filed-rate doctrine bars both present and future claims, primary jurisdiction does not confer complete immunity to the allegedly anticompetitive conduct. Instead, in applying the doctrine, courts temporarily stay any judicial enforcement pending agency regulation of the conduct at issue. As Professor Louis Jaffe recognized long ago, the application of the doctrine of primary jurisdiction emphasizes that referral of a matter from a court to an agency is not based solely on agency expertness, but on the entire statutory scheme.8 Thus, its inquiry is more suited to the problem federal courts routinely address in asserting or declining jurisdiction over a matter within a federal agency's jurisdiction-whether an exercise of judicial power unduly trespasses onto agency expertise and decision-making authority in enforcing regulatory goals. Primary jurisdiction provides a less blunt tool for courts to respect agency deference in a dual jurisdiction enforcement context involving both federal agencies and courts, as frequently arises under the antitrust laws.
Finally, in antitrust cases such as TCE's complaint against TXU Energy and other suppliers potentially regulated by a state agency (see "A Texas Sized Gap in Regulatory Enforcement,"
p. 20), the filed-rate doctrine is a completely inappropriate - and astonishinglyoverbroad-defense to the claim. Apart from this case, it seems that the filed-rate doctrine has never been extended in such a context, particularly since an alternative doctrine is available to deal with deference to the state regulator. State action immunity is an important federal defense to the application of the antitrust laws. This judicially created antitrust defense originated when the Supreme Court rejected a Sherman Act challenge to a California marketing program brought by a grower because the program derived "its authority and its efficacy from the legislative command of the state."9 As modern courts apply the doctrine, "First, the challenged restraint must be 'one clearly articulated and affirmatively expressed as the state policy'; second, the policy must be 'actively supervised' by the state itself."10
The Texas federal district court, which dismissed TCE's complaint, failed to make any effort to determine whether the supplier's alleged misdeeds are immune given state regulatory action under the federal antitrust laws. Indeed, since Texas affirmatively adopted a competitive market model but did not give the Texas PUC plenary enforcement authority over suppliers, a claim of state action immunity in this case is unlikely to succeed.
These alternative legal doctrines are much more precise and effective means of promoting the goals of federal pre-emption and agency deference than the filed-rate doctrine. Unlike the filed-rate doctrine, they are not triggered by firm-specific actions but focus on the agency regulator's authority and actions. In this sense, they provide a more complete picture of the public interest in ensuring some enforcement of legal standards against energy-market abuses than resorting to the filed-rate doctrine. To the extent the doctrine is purely a matter of state law, courts should apply it with similar enforcement concerns in mind. As a matter of federal law, though, in most instances involving energy regulation today, the filed-rate doctrine's goals could readily be served if lawyers and courts were to look to other legal rules.
As a recent editorial in Public Utilities Fortnightly suggests, applying the filed-rate doctrine in deregulated wholesale markets is akin to pounding "a square peg into a round hole."11
Ultimately, if competitive markets are to succeed, Congress must explicitly detariff federal electric power, in a manner similar to deregulated telecommunications markets. Indeed, H.R. 6, the proposed "Energy Policy Act of 2003," would have moved the basic authority to set rates from FERC to the Commodity Futures Trading Commission, making the death of the filed tariff shield a fait accompli in the electric power and natural gas settings. Even if FERC were to move in this direction on its own-regulating markets over prices-the question of injury to those losing money due to market manipulation would likely be resolved by courts.12
In the meantime, courts would best serve the development of competitive energy markets by looking to alternative legal doctrines to serve the purposes of the filed-rate doctrine. Rate and tariff filings in the deregulated energy context should be of no less legal consequence than other regulatory instruments. But they also should not be of any more legal consequence.
Jim Rossi is Harry M. Walborsky Professor and Associate Dean for Research at Florida State University College of Law. He has served as an expert witness and consultant. Contact him at jrossi@law.fsu.edu.
Endnotes
1. 202 F.3d 408 (1st Cir. 2000).
2. Id., 202 F.3d 408 (1st Cir. 2000).
3. Id. at 419.
4. Jim Rossi, "Lowering the Filed Tariff Shield: Judicial Enforcement for a Deregulatory Era,
56 Vanderbilt Law Review, 1591, 1615-29 (2003).
5. For example, a federal bankruptcy court rejected PG&E's filed-rate defense based on a transmission tariff filing with FERC. In re Pacific Gas & Electric Co., 295 B.R. 635 (Bankruptcy, N.D. Cal. 2003).
6. __ F.3d __ (2004), 2004 WL 2002833.
7. Id. at __.
8. Louis L. Jaffe, "Primary Jurisdiction," 77 Harvard Law Review 1037, 1057 (1964) (observing that "[a] special problem arises where the administrative agency is not given jurisdiction to award reparations," specifically mentioning the FPC, FERC's predecessor).
9. Parker v. Brown. 317 U.S. 341, 350 (1943).
10. California Retail Liquor Dealers Association v. Midcal Aluminum Inc. 455 U.S. 97, 105 (1980) (citation omitted).
11. Richard Stavros, "Lost in Translation: Critics Say FERC's Filed-Rate Doctrine Is Wrong for the Times," Public Utilities Fortnightly, June 2004, p. 4.
12. Robert C. McDiarmid, "Trading Spaces: Will the CFTC Move Into FERC's House?," Public Utilities Fortnightly, January 2004, p. 39.
A Little History & Context
Historically, federal courts developed the filed-rate doctrine to further the purpose of natural monopoly regulation, protecting consumers against discrimination in utility service rates. A utility with a filed tariff is prohibited from offering customers rebates and discounts at odds with the filed tariff, which historically reflected a regulator's careful evaluation and affirmative approval costs and prices.
In addition to the non-economic goal of fairness, the non-discrimination principle behind the filed-rate doctrine also has an economic purpose. The general idea behind a regulator prohibiting price discrimination is to preclude a monopolist from using its market power to extend its monopoly into secondary markets.1 For most of the 20th century, cost-of-service regulation provided regulators a ready forum for ensuring that rates did not discriminate in ways that caused serious losses to social welfare.
While nondiscrimination in rates is the primary purpose courts give for applying the filed-rate doctrine, two other goals of the doctrine play an important role for historically regulated industries, such as electric power.
First, where a federal court is asked to apply substantive state law, as often occurs in a fraud or breach of contract claim, there is a federal preemption strand to the filed-rate doctrine. For example, the Ninth Circuit invoked the filed-rate doctrine to bar California's governor from commandeering expensive wholesale power contracts during the state's recent deregulation crisis.2 The court's rationale for invoking the doctrine was that the state's action would present a conflict with a tariff filed with the Federal Energy Regulatory Commission (FERC). While the court relied on the filed-rate doctrine, at bottom line it was making a legal determination that federal preemption precluded a state regulatory action.
Second, and especially relevant to judicial consideration of federal antitrust claims, there is an agency deference strand to the doctrine. Courts find the filed-rate doctrine particularly inviting where a matter is highly complex and technical, as many energy disputes are. The leading case on this is Keogh v. Chicago & Northwestern Railway Co.,3 decided by the Supreme Court in 1922. Keogh held that a private antitrust plaintiff is precluded from recovering treble damages against a carrier based on the claim that a tariff filed with the Interstate Commerce Commission was allegedly monopolistic. Noting that section eight of the Interstate Commerce Act gave shippers injured by illegal rates actual damages plus attorney's fees, Justice Brandeis reasoned that the issue of rates is best determined by the agency, not by a court.4
While federal courts have almost presumptively applied the filed-rate doctrine to matters that have undergone a rate hearing, there are two recognized exceptions to the doctrine. First, courts generally do not apply it where the injured party is a competitor, rather than a consumer, as in this context a judicial remedy would not necessitate a departure from the filed rate. Second, courts have been very reluctant to apply it to antitrust claims raising colorable price-squeeze concerns, as in this context regulators lack jurisdiction to remedy allegedly illegal conduct.-J.R.
Endnotes
1. For discussion, see Jim Rossi, "Lowering the Filed Tariff Shield: Judicial Enforcement for a Deregulatory Era,"
56 Vanderbilt Law Review 1591, 1598-1601 (2003).
2. Duke Energy Trading & Mktg., L.L.C. v. Davis, 267 F.3d 1042 (9th Cir. 2001).
3. 260 U.S. 156 (1922).
4. Id. at 162-64.
A Texas-Sized Gap in Regulatory Enforcement
In June 2004, the U.S. District Court for the Southern District of Texas, Corpus Christi Division, applied the filed-rate doctrine to preclude antitrust claims for illegal conduct in deregulated wholesale power markets against numerous power supply companies and the Electric Reliability Council of Texas (ERCOT).1 The case provides a clear illustration of why federal courts need to revisit the filed-rate doctrine in the deregulated environment.
The claim, brought by Texas Commercial Energy (TCE), alleged that 24 defendants, including TXU Energy Inc., American Electric Power, Inc., and other energy marketers within ERCOT engaged in anticompetitive market abuses in violation of federal and state antitrust laws, as well as fraud, negligent misrepresentation, breach of contract, defamation, business disparagement, civil conspiracy, and malicious and willful/flagrant conduct under state law. TCE alleged that these wrongful acts caused prices in the Balancing Energy Service Market (BES)-a bid-based market for short-term power-to rise drastically, forcing TCE to pay higher prices in the BES market and forcing it to withdraw credit-based collateral from its bilateral partners.
As is typical in most cases involving the filed-rate doctrine, the U.S. District Court in Texas dismissed TCE's lawsuit without addressing the substantive merits of the market abuse claims. Although FERC possesses no authority over the Texas electricity market, the court reasoned that the doctrine is intended to allow markets to operate under rules approved by state regulators.
In declining to consider the merits of the federal antitrust claim, the court reasoned that the agency charged by the state legislature with overseeing the Texas electricity market, the Texas Public Utilities Commission (TPUC), possesses the "institutional competence to address rate-making issues in the BES market, one of the principles underlying the filed-rate doctrine."2 The court observed that TPUC is required by statute to ensure "safe, reliable, and reasonably priced electricity," including in BES markets.3 The court noted, for example, that in August 2001 the Market Oversight Division of TPUC ordered market participants to return $30 million in illicit profits due to abusive and improper scheduling practices in the BES market. In addition, rates in the BES market are capped at $1,000/MWh.
After finding that the filed-rate doctrine bars federal and state antitrust claims, the court also determined that it bars breach of contract and other claims based on federal law. While the court's decision echoes the approach of many other federal courts, which often presumptively apply the filed-rate doctrine to refuse consideration of a market abuse claim, it also exposes substantial flaws with the doctrine in the deregulated environment.
To begin, the court's premise that TPUC's "institutional competence" precludes consideration of the claim fails entirely to confront the predicate issue of the agency's authority to remedy harms. A regulator could only possess institutional competence if it also has the authority to act. However, Texas has no express or implied private right of action for injured purchasers, and TPUC also lacks authority to order refunds and damages. While the district court referred to a previous $30 million settlement in Texas as evidence of TPUC's power, this depended entirely on TPUC voluntarily assuming the role, brokering a settlement agreement and persuading the companies to disgorge some of their wrongfully obtained profits. While TPUC may have the political power to broker a deal, TPUC affords customers no formal complaint and restitution process when they are injured in the BES market.
Even to the extent there is a complaint and adjudication process for restitution, the filed-rate doctrine precludes antitrust claims in which treble damages are available to serve a more meaningful deterrence function. The absence of restitution coupled with the lack of meaningful penalties means that a Texas-sized enforcement gap will exist in ERCOT's deregulated wholesale market.
Moreover, in discussing the filed-rate doctrine, the district court in Texas completely confused federal and state law. The Keogh case, on which the court relied extensively, involved the application of the doctrine as a matter of federal law to suspend application of federal antitrust laws to activities regulated by a federal agency. Here, no federal agency had regulatory authority-only a Texas state agency had any claim to regulatory authority. To the extent the doctrine involves state regulation, the tariff should be treated as a matter of state law or, as is suggested in the accompanying article, under state action immunity-the appropriate federalism defense to the antitrust laws. The district court, however, did not reference a single Texas case involving the filed-rate doctrine, and it failed completely to evaluate whether state regulation of the BES market gives rise to state action immunity.-J.R.
Endnotes
1. Texas Commercial Energy v. TXU Energy, Inc., __ F.Supp.2d __
(S.D. Tex., Corpus Christi 2004).
2. Id. at __.
3. Tex. Util. Code. § 39.101(a)(1).
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