Court finds FERC erred on capacity auction revision under FPA

United States Court of A ppeals FOR THE DISTRICT OF COLUM BIA CIRCUIT Argued November 17, 2025 Decided Janu ary 13, 2026 No. 24-1353 M ARYLAND O FFICE OF P EOPLE ’ S C OUNSEL, ET AL., P ETITIONER S v. F EDERAL E NER GY R EGULATORY C OMMISS ION, R ESPONDENT PJM I NTERCONN ECTION, L.L.C., ET AL., I NTERVENOR S On Petition for Review of Orders of the Federal Energy Regulatory Commission Jeffrey A. Schw arz argued the cause for petitioners. With him on the briefs were David S. Lapp, William F. Fie lds, Scott H. Strauss, Peter J. H opkins, Lauren L. Springett, John McCaff rey, Timothy G. McCormick, Christian F. Tucker, Robert A. Weishaar, Jr., Adrienne E. Clair, Gerit F. Hu ll, Thomas L. Rudebusch, Bhavee ta K. Mody, Miles H. Mitc hell, and Ransom E. Ted Davis. Jason T. Perkins, Attorney, Federal Ene rgy Regulatory Commission, argued the cause for respondent. With him on

2 the bri ef were David L. Morenoff, Acting General Counsel, and Robert H. Solomon, Solicitor. Paul W. Hughes argued the cause for intervenors in support of respondent. With him on the brief were Ste ffen N. Johnson, Nicholas M. Gladd, Kels ey C. Cat ina, David G. Tewksb ury, Andrew A. Lyons- Berg, Connor J. Su ozzo, Ryan J. Collins, Christopher C. O’Hara, Zachary C. Schauf, Zachary B. Cohen, and Arjun R. Ramamurti. Vivian W. Chum ent ered an appe arance. Before: H ENDERSO N, P ILLARD and G ARCIA, Circuit Judges. Opinion for the Court filed by Circuit Judge H ENDERSON. K AREN L E C RAFT H ENDER SON, Circuit Judge: PJM Interconnection, LLC (PJ M) asked t he Federal En ergy Regulatory Commission (FERC) for permission to amend its tariff under section 205 of the Fe deral Power Act (FPA) before it fin alized a capaci ty auc tion t hat was s et to saddle con sumers with hundreds of millions of dollar s in inf lated elec tricity prices. FERC approved PJM’s request, but the Unit ed States Court of Appeals for the Third Circuit vacated t hat decision, reason ing that the tar iff amendmen t violated the f iled - rate doctrine. PJ M Power Providers Grp. v. FERC, 96 F.4th 390, 399–4 02 (3d Cir. 2024). FE RC complied with the Third Circui t’s man date and di rected PJ M to com plete t he auctio n using the unamended version of its tariff. PJM obl iged and, as expected, rates s oared. St ate agencies, PJM custom ers and private entities representing the customers’ intere sts filed a complaint under section 206 of the FPA, asking FERC to modify the auction result. FERC declined, reasoning that the Third Circ uit’s decisio n tied its hands. Unsa tisfied w ith

3 FERC’s explanation, the co mplaina nts have petitioned this Court for rev iew. There may have been a sound basis for FERC to deny relief. But the only reason it ar ticulated — tha t the Third Circuit resolve d the matter — was anything but sound. The Third Circuit held that the filed - rate doctri ne for eclo sed FERC ’s efforts to m odify PJ M’s rate - setting process under section 205 of the FPA. But it never addre ssed whether the auction result is subject to revision under sec tion 206. FERC’s conclusion to the cont rary was erron eo us. We therefore grant the petition f or review. I. Legal and Factual Background The filed - rate doctrine prohibits regulate d entities from charging rates “other than those properly filed with the appropriate federal regulatory authority,” Ark. La. Gas Co. v. Hall, 453 U.S. 571, 577 (1981), and pe rmits those rates to be changed “only prospectively,” Okla. Gas & Elec. Co. v. FERC, 11 F.4th 821, 829 (D.C. Cir. 2021). 1 The doctrine has long provided “necessary predictability” in our Nation’s electric ity 1 S ome of our decision s have attributed the prohibit ion on retroa ctiv e ra te mod ifica tions to th e file d - rate do ctrine’ s “corolla ry,” the rule against retroactiv e ratemaking. OXY USA, Inc. v. FERC, 64 F.3d 679, 699 (D.C. Ci r. 1995); see Asso ciate d Gas Dis tribs. v. FERC, 898 F.2d 809, 810 (D.C. Cir. 1990) (Williams, J., concurring in denial of rehe aring and rehearing en banc) (“We ha ve not alway s clearly d istinguish ed bet ween the fi led rate do ctrine and the retroact ive ratemak ing doctr ine, doub tless becau se they o ften ov erlap.”).

4 markets. Elec. Dist. No. 1 v. FERC, 774 F.2d 490, 493 (D.C. Cir. 1985). The “contours” of the filed - rate do ctrine h ave hist orically been drawn by the judiciary. Ark. La. Gas Co., 453 U.S. at 599 (Stevens, J., dissenting); see g eneral ly Gustavus H. Robinson, The Filed Rate in Public Utility Law: A Study in Mechanical Jurisprudence, 77 U. Pa. L. Rev. 213 (1928). But the doctrine has always been “ statutorily grounded.” Columbia Gas Transmission Corp. v. FERC, 895 F.2 d 791, 7 95 (D.C. Ci r. 1990). The ear liest decisions ar ticulating the filed - rate doctr ine rested on interpretations o f the Interstate Commer ce Act of 1887. Se e, e.g., Pa. R.R. Co. v. Int’l Coal Mining Co., 230 U.S. 184, 196 – 97 (1913). Over time, the doctrine found footing in other statutes and expande d “across the spectrum of regulated utilities.” Ark. La. Gas Co., 453 U.S. at 577. I n the context of FERC’s re gulation of e lectricity mar kets, the file d - rate do ctrine primarily “rests on two provis ions” of the FPA: section 205 and section 206, 16 U.S.C. §§ 824d, 824e. Towns of Concord, Norw ood & Wel lesley v. FERC, 955 F.2d 67, 71 – 72 (D.C. Cir. 1992). Section 205 and section 206 are “related but di stinct.” FirstEnergy Serv. Co. v. FERC, 758 F.3d 346, 348 (D.C. Cir. 2014). Both require that the rates charged by utilities subject to FERC’s jurisdiction be just and reasonable. Kan. Gas & Elec. Co. v. FERC, 758 F.2d 713, 716 (D.C. Cir. 198 5). But they enforce that mandate differently. Section 205 requires regula ted entities to file their ra tes with FERC and thus primarily involves “newly filed rates.” Papago Tribal Util. Auth. v. FERC, 723 F.2 d 950, 956 (D.C. Cir. 1983). Section 206, on the other hand, focuses on “exis ting rates,” empowering FERC to modify those that it dee ms unjust or unreasonable. First Energ y Serv. C o., 758 F.3d at 348. All told, FERC’s role under section 206 is “more active” than the

5 “essenti ally p assive and reactiv e” role contem plate d by sect ion 205. City of Winnfield v. FERC, 744 F.2d 871, 876 (D.C. Cir. 1984). FERC oversees Regional Transmission Organizations (RTOs), which “are independent organizations that manage the transm issio n of electr icit y over th e electric g rid an d ensure electr icity is relia bly available fo r consumers.” Advanced Energy Mgmt. All. v. FERC, 860 F.3d 656, 65 9 (D.C. Cir. 2017) (per curiam). RTOs fulfil l their respo nsibilities by carrying out “several functions.” Citadel FN GE Ltd. v. FERC, 77 F.4th 842, 848 (D.C. Cir. 2023). One suc h function is procuring capacity, which “is not elec tricity itself but the ability to produce it when necessary.” Conn. Dep’t of Pub. Util. Control v. FERC, 569 F.3d 477, 479 (D.C. Cir. 2009). PJM is an RTO that mana ges the transmission of electr icity in “all or parts of thirteen Mid - Atlantic and Midwester n states an d the District o f Columbia. ” Advanced Energy Mgmt. All., 860 F.3d at 659. 2 It procur es capacit y by conducting auctions “years in advance of when the capacity offered at the auct ion wil l be needed.” N.J. Bd. of Pub. Utils. v. FERC, 744 F.3d 74, 84 (3d Cir. 2014). The results of PJM’s capacit y aucti ons h ave a di rect effect o n th e prices th at downstream consumers pay for ele ctricity. See Hughes v. Talen Energy Mktg., LLC, 578 U.S. 150, 159 (2016). In other words, when PJM pays more for capacity, consumers pay more for electr icity. PJM’s Op en Access Trans missi on Tariff (Tariff) “ provides a detailed roadmap” of how PJM’s capacity auctions must be conducted. PJM P ower Providers Grp., 96 F.4th at 2 PJM takes its nam e from P ennsylvani a, New J ersey an d M aryland: “th e first three stat es in which it operated.” Long Island Power Auth. v. FERC, 27 F.4th 705, 709 (D.C. Cir. 2022).

6 395. The Tariff requires PJM to calculate and publish various “parameters, or inputs,” it intends to use in each auction. Id. One of th ose param eters is th e Location al Del ivery Ar ea Reliability Req uirement (L DA Reliability Requir ement), which rep resent s “th e amou nt of cap acity t hat mu st be produced to meet peak demand” in a particular PJM zone. Del. Div. of the Pub. Advoc. v. FERC, 3 F.4th 461, 463 – 64 (D.C. Cir. 2021). After PJ M publ ishes t he auction p arameters, capaci ty suppliers review that information and decide whether to submit a bid. PJM Power P roviders Grp., 96 F.4th at 395. At the conclusion of the bidding period, PJM runs an algorithm that determines which bids to accept. Id. PJM begins by accepting the low est - priced bid and repeats that process until it secures suffici ent cap acity. Id. The pric e of th e final accep ted bid constitutes th e clearing price, and all suppliers whos e bids are accepted are p aid that pri c e. Hughes, 578 U.S. at 156. 3 If PJM fails t o secure su ffici ent cap acity and there i s no natural clearing price, the au ction cl ears at a p redet ermin ed price cap. This case involves PJM’s 2024/2025 capacity auction. That auction “proceeded smoothly at first.” PJM Po wer Providers Grp., 96 F.4th at 396. More recent developments have been anything but smooth. In August 2022, PJM posted parameters for the 2024/2025 auction and gave suppliers more than three months to dec ide whether to bid. Shortly after bidding closed, PJM noticed an issue pertaining to th e Delmarva Power & Light Company South Zone (DPL South Zone), a subsection of the DPL Pricing Zone that consists of 3 See Hughe s, 578 U.S. at 156 n.1 (“[I]f four power plants bid to sell capacity at, respective ly, $10/unit, $20/unit, $30/unit, and $40/unit, and the first thre e plants provide enough capa city to satisfy projected demand, P JM will purchase capacity only f rom those thr ee plants, each of wh ich will receive $30/un it, the clearing price.”).

7 parts of Delaware, Maryland and Virginia. The DPL South Zone’s L DA Reliability Requireme nt rested o n PJM’s belief that cer tain supplier s would partic ipate in the auction, but that prediction proved to be wrong. As a result, the LDA Reliab ility Requi rement r eflect ed a need fo r subst antiall y m ore capa city than the DPL South Zone in fact needed. 4 If left unaddressed, this mismatch w ould infla te the clear ing price and likely le ad to more than $100 million in excess capacity charges. Seeking to avoid an anomalous (and expensive) outcome, PJM requested relief under section 205 and se ction 206 of the FPA. Both filings sought FERC’s approva l of a tariff amendment that would authorize PJM to modify the LDA Reliability Req uirement be fore finalizing the au ction. In February 2023, FERC approve d PJM’s request to amend its Tariff under section 205 and denie d its section 206 filing as moot. PJM quickly amended its Tariff, revised the LDA Reliability Req uirement a nd completed the auction. Capa city suppliers that would have benefitted f rom a higher clearing price chal lenged FERC’s approval o f PJM’s tariff amendm ent. The Third Circuit granted their petition, reasoning that the tariff amendment operated retroactively in violation of t he filed - rate doctrine. PJM Pow er Pro viders G rp., 96 F.4th at 401. The Thir d Circuit starte d with the pre mise tha t the filed - rate doctri ne permit s on ly pros pective rat e chang es. Id. at 394. It then looked to Landgraf v. USI Film Products, 511 U.S. 244 (1994), and subsequent decisions applying it, to establish 4 S pecifica lly, PJM h ad pr edicted th at certain “large power plants and solar facilities” would participate in the auction. PJM Power Prov iders Grp., 96 F.4th at 396 n.3. P JM considered these to be “relatively unrel iable sources of power, ” so it factored in a need for a “correspond ingly larg e amount” of bac kup capac ity. Id. Whe n those suppliers declin ed to participate in the auct ion, the additiona l backup capa city beca me un necessary. Se e id.

8 a defin ition of retroactivity. PJM Power Providers Grp., 96 F.4th at 398. Relying on those ca ses, it reasoned that an action is retro active if it “ alter[s ] the l egal consequ ence[s ] att ached t o a past act ion,” id. at 399, and define d the “relevant inquiry” as whether P JM’s “Tari ff Am endment alter[ed] the leg al consequences attached to past actions,” id. at 40 0. The Third Circuit held th at it was retroa ctive t o change t he LDA Reliability Req uirement mid - a uction because the Tariff required that par ameter to b e “cal culate [d]” and “pos t[ed]” “prior to conducting the Auction and then use[d]. . . in the Auction.” Id. at 399. Th e “leg al cons equen ce” th at the Third Circuit h eld FERC al tered was the Ta riff’s req uirem ent “to use [the LDA Reliability Requiremen t] in the Auction.” Id. at 400. Thus, in the Third Circuit’s view, the tariff amendment was “retro active, and FER C vio lated the fi led rate do ctrine by approving it.” Id. at 401. The Third Circuit the refore vacat ed the portion of FERC’s orde rs permitting the tariff ame ndment to apply to PJM’s 2024/2025 auction. Id. at 402. Shortly afte r the Thir d Circuit issued its manda te, PJM petitioned FERC for confirmation that it should re - run the auction us ing the initial L DA Reliability Requiremen t. A group consisting of agencies i n t he Marylan d and D elaware st ate governments, PJM customers and private entities representing the custome rs’ interests (collec tively, the DPL Customers) proteste d the petition. FERC sided w ith PJM and instructed it to re - run the auction as if its Tariff had not be en amended. PJM re - ran the auction and was un abl e to secu re eno ugh capacit y for the auc tion to clear naturally, cau sing it to clear at the predete rmined price cap. Compare d to the ear lier iteration o f the auction, PJM spent an additional $182.8 milli on to procure just 1.9 per cent more capacity. While the DPL Customers were protesting PJM’s petiti on, they also filed a complaint under section 206 of the FPA

9 (Complaint). The Complaint asked FE RC to declare the re- run “auction resul ts ... unjust and unreasonable” and “replace them” with th e “eff icient market ou tcome” tha t prevailed at th e original auction. App. at 3. FERC denied the Complaint, reasoning that it could not reach an “outcome that would be inconsisten t with the Thir d Circuit’ s ruling.” PJ M Load Parties v. PJM Interconnection, LL C, Order Denying Complaint, 188 FERC ¶ 61,020, P 21 (2024). FERC elaborated on its views in a subsequent order denying rehe aring, contending that it was powerle ss to grant r elief that w ould fail “the Third Cir cuit’s test for retroactivity” and “lead to an outcome inconsistent with the Third Circuit’s ruling.” PJM Load Parties v. PJM Interconnection, LLC, Order Addressing Arguments R aised on Rehearing, 189 FERC ¶ 61,199, P 12 (2024). Dissatisfied with FERC’s denial of their Complaint, the DPL Customers petitioned this Court for review. PJM has since intervened in support of FERC, as have s everal cap acity su ppliers and t heir tr ade associ ation. II. Analysis We have jurisdiction under 16 U.S.C. § 825 l (b). We ordinarily review FERC’s orders under the Administrative Procedure Act’s arbitrary and capricious standard. See Mo. River En ergy Ser vs. v. FERC, 918 F.3d 954, 957 (D.C. Cir. 2019). But FERC’s denial of the Complaint rested entirely on its interpretation of the Third Circuit’s decision. And we “give[] no deference to an agenc y’s interpretation of judicial preceden t.” SFPP, L.P. v. FERC, 967 F.3d 788, 795 (D.C. Ci r. 2020) (per curia m). “We therefore are not limited to, and do not employ, the deferenti al arbitrary and capricious standard.” City of Ukiah v. FERC, 729 F.2d 793, 796 (D.C. Cir. 1984). Instead, our review is de novo. S ee Ass’n of Civilian Technicians v. FLRA, 353 F.3d 46, 50 (D.C. Cir. 2004).

10 The Thir d Circui t was pres ented wi th a dis crete leg al question: whether FERC acted lawfully when it us ed its section 205 authority to modify the process PJM use s to procure capacity. It answered that question in the ne gative, reasoning that FERC ’s orders a pproving P JM’s tariff a mendment were retroactive as applied to t he 2024/2025 auction and therefore violated the filed - ra te doctrine. PJM Power Provide rs Grp., 96 F.4th at 402. The Third Circuit was simply not presented with, nor did it answer, the question of whether a subsequent use of FERC’s section 206 authority to modify the r esulting auction price w ould be retroactiv e, much less imp ermissible. We recogni ze that co urt s somet imes ans wer questio ns implicitly. But the “impor tant diffe rences” between section 205 and section 206 make it impossible to predict how the Third Circuit would have resolved a challenge to FERC’s modification of PJM’s auction - set capaci ty price u nder s ection 206. Ala. Power Co. v. FERC, 993 F.2d 1557, 1571 (D.C. Cir. 1993). Indeed, when the capacity suppliers arg ued th at the tariff am endment w as im permis sibly retroacti ve “becau se it allowed PJM to disregard the Auction results,” the Third Circuit expressly declined to take up that argument. PJM Power Providers G rp., 96 F.4th at 401 n.8. And even if the Third Circuit had telegraphed how it would resolve a se ction 206 challenge to the auction results, FERC would not be bound by it s tel egraph. Feder al courts are pow erless to an swer “hypothetical questions.” FBI v. Fikre, 601 U.S. 234, 241 (2024). And when the Third Circuit issued its decision, the DPL Customers had not yet filed their Complaint. The cu rrent controversy had simply no t yet mater ialized. Because the Third Circuit did not answer the different legal questions raised by t he DPL Customers’ Complaint —and could not have done so even if it had w anted to — we have little difficulty concluding that the Third Circuit’s decision did not

11 mandate the Complaint’s d enial. FERC r esists this c onclusion, but its arguments lack force. FERC contends that, under the Third Circuit’s reasoning, any modification to PJM’s auction - set capacit y pri ce would be retroa ctive. Even w ere th at tru e, “agenci es rel y on. . . dictum at their own risk.” Alaska Dep’t of Env’t Conservation v. EPA, 540 U.S. 461, 514 (2004) (K ennedy, J., dissenting). And they are not bound by their hypotheses about how a court might have ruled on questions that were never presented or answered. More fundamentally, FERC’s argument wrongly assumes that the f iled - rate doctrin e catego rical ly bars al l backwar d -looking rate modifications. No doubt, the filed - rat e doctrine generally f orbids the retr oactive mod ification of ra tes. Okla. Gas & Elec. Co., 11 F.4th at 829. But that is only a default rule because the doctrine does not operate independently of the “interconnected statutory” provisions that undergird it. Id.; see E. Tex. Elec. Coop., Inc. v. FERC, 90 F.4th 579, 589 n.7 (D.C. Cir. 2024). If a filed rate is “changed in [a] manner pro vided b y the [Federal P ower] Act,” th e earlie r rate is no longer “binding upon the seller a nd the purchaser.” Nw. Pub. Serv. Co. v. Montana - Dakota Utils. Co., 181 F.2d 19, 22 (8th Cir. 1950), aff’d, 341 U.S. 246 (1951). That is no less true of retroa ctive r ate chang es. Consider section 206(b), which directs FERC to establish a “refund effecti ve dat e” upo n the comm encement of a sect ion 206 proceeding. 16 U.S.C. § 824e(b). If FERC eventually finds that the rate being charged is not just and reasonable, it may provide refunds for “amounts paid,” during the pendency of the section 206 proceeding, “in excess of thos e which would have been paid under the just and r eason able rat e.” Id. When FERC exercises this authority, it permissibly effectuat es what might be thought of as “re t roacti ve ... rate dec reas es.” City of

12 Anaheim v. FERC, 558 F.3d 521, 524 (D.C. Ci r. 2009); cf. Verso Corp. v. FERC, 898 F.3d 1, 10 (D.C. Cir. 2018) (explaining that section 206(b) does not endo w FERC with “concomitant authority. . . to retroacti vely corre ct rates that were too l ow”). If the fi led - rat e doctr ine op erated as a categori cal bar to all “ retroactive ” rate modifications, section 206(b) would be a dead letter. But, by concluding otherwise, we have given effect to the Congress’s command, recognizing section 206(b) for what it is: “a n arrow exception” to the filed - rate doctri ne’s gen eral proh ibiti on of retr oacti ve rate modifications. E xxon Mobil C orp. v. FERC, 571 F.3d 1208, 1211 (D.C. Cir. 2009); see E. Tenn. Nat. Gas Co. v. FER C, 863 F.2d 932, 942 (D.C. Cir. 1988) (explaining that a n analogous refund provision in the Natural Ga s Act is a “statutory exception to the rule prohibiti ng retroactive rate changes”). We do not mean to suggest that the DPL Customers are necessarily entitl ed to a refund under section 206(b). 5 We hold only that labeling the relief they see k as “retroactive” should not foreclose the possibility that it is available under section 206. FERC also contends that it could not “render t he Third Circuit’s jud gment economica lly meaningle ss,” FERC Br. at 28, because th at court “e xpected ” its deci sion t o have cert ain “economi c effe cts, ” id. at 36. We disagree. To star t, we do not share FE RC’s cert aint y about the effect s the Third C ircuit expected its decision to have. That court said only that its applica tion of the file d - rat e doctri ne “ could potentially produce a harsh result.” PJM Power Providers Grp., 396 F.4th at 401 (emphasis added). That c ould be read to suggest that the Third Circuit was aware tha t FER C had not yet exhausted all the tools in its regulatory arsenal. Additionally, and more importantly, even if the Third Circuit did expec t its decision to have certa in 5 We leave that ma tter to FERC for resolu tion in the first instance. Cf. City of A naheim, 558 F.3d a t 525.

13 economi c effects, that ex pectat ion wou ld have b een irrel evant. The Third Circuit is a court, “not an economic regulator.” Reply Br. at 8. And when a court finds that an “agency based its decision upon an improper legal ground,” the agency “might later. . . r each th e sam e” or a simil ar “resu lt fo r a dif ferent reason.” FEC v. Akins, 524 U.S. 11, 25 (1998). Nothing required FERC to adopt a use - it -or-lose- it appro ach when considering the different ways it might address the proble ms caused by PJM ’s fo recas ting error. And we decline to impose such a requirement without a statutory basis. The Third Circuit’s decision rejecting FERC’s efforts to modify PJM’s auction process under section 205 simply di d not resolve whether FERC might later use its section 206 authority to set aside the auction r esult. In reaching a diffe rent conclusion, FERC committed le gal err or. * * * For the foregoing reasons, the petition for revie w is granted. We vacate FER C’s orders denying the Complaint and remand the case to FERC for further proceedings. So ordered.