A crucial federal appeals court ruling has invalidated a key decision by the Federal Energy Regulatory Commission (FERC), thrusting a contentious dispute over an estimated $183 million in excessive electricity capacity costs back into the regulatory spotlight. This judicial action reopens a critical pathway for state regulators and consumer advocates who have been fighting to shield ratepayers across the Delmarva Peninsula from the financial fallout of a power auction that was admittedly flawed from the start. The decision centers on the proper scope of FERC’s authority to correct market errors after the fact and sets the stage for a renewed battle over who should ultimately bear the cost of a significant technical mistake.
The Flawed Auction and the First Legal Setback
A Critical Error Inflates Prices
The complex legal saga began with a December 2022 capacity auction conducted by PJM Interconnection, the grid operator for a region spanning 13 states and the District of Columbia. These auctions are designed to ensure sufficient power generation resources are available to meet future electricity demand. However, a critical error was discovered during an internal review by PJM after the auction had concluded but before the results were made public. The results for a specific area, the Delmarva Power & Light Co. South zone (DPL South), were flagged as “anomalous.” This was not the result of competitive market forces or unexpected bidding behavior; rather, it stemmed from the use of a flawed technical planning parameter. This error created a significant misalignment with the actual supply and demand conditions within the DPL South zone, leading to a direct and substantial artificial inflation of capacity prices and projecting an additional cost burden of approximately $183 million on consumers in the affected region.
The technical nature of the auction error underscores the complexities inherent in modern energy markets, where sophisticated models and parameters are used to forecast future needs and secure resources. The flawed planning parameter essentially sent a false signal to the market, indicating a greater need for capacity in the DPL South zone than actually existed. This distortion directly influenced the clearing price in the auction for that specific zone, forcing it to a level that did not reflect the underlying physical realities of the power grid. PJM’s own acknowledgment of the anomaly was a critical factor in the subsequent proceedings, as it established from the outset that the resulting high prices were not a legitimate outcome of market competition. The grid operator’s immediate recognition of the mistake and its potential financial impact on consumers in parts of Delaware, Maryland, and Virginia became the foundational premise for all subsequent attempts to find a fair and legally sound remedy.
The Failed Attempt at a Retroactive Fix
In its initial effort to rectify the acknowledged mistake, PJM Interconnection sought permission from its federal regulator, FERC, to revise its market rules. The proposal was made under Section 205 of the Federal Power Act (FPA), a provision that governs how utilities file for new rates and rate changes. PJM’s plan was to retroactively apply the correct planning parameters to the DPL South zone’s auction results, a move that would have effectively recalculated the outcome to produce lower, more accurate capacity prices that aligned with true market fundamentals. Recognizing the clear error and the significant financial harm to consumers, FERC concurred with PJM’s approach and granted approval for the correction. This initial decision was seen by many stakeholders as a pragmatic and just solution to an undisputed technical flaw, aiming to prevent ratepayers from being penalized for a mistake that was not of their making. The revised calculations demonstrated that a fair market outcome would have been substantially less costly.
However, this remedy was short-lived. The decision was immediately challenged in court, and in March 2024, the U.S. Court of Appeals for the Third Circuit overturned FERC’s approval. The court’s ruling was not based on the merits of the correction itself but on a fundamental principle of utility regulation known as the filed-rate doctrine. This long-standing legal doctrine generally prohibits retroactive ratemaking, meaning that once a rate is filed and accepted, it cannot be changed retroactively to charge more or less for past services. The Third Circuit concluded that PJM’s rule change, implemented under Section 205 after the capacity auction had already closed, constituted precisely this type of impermissible retroactive action. The court’s decision effectively prioritized the strict application of this legal principle over the correction of a known market error, thereby invalidating the fix and sending the entire matter back into a state of uncertainty.
A New Challenge and a Decisive Ruling
Consumer Advocates File a New Complaint
Bound by the Third Circuit’s strict interpretation of the filed-rate doctrine, FERC was compelled to reverse its course. The commission directed PJM to revert to and implement the original, admittedly “anomalous” auction results that contained the artificially inflated prices. This directive effectively placed the $183 million burden of the technical error squarely on the shoulders of consumers. The move galvanized a broad and diverse coalition of stakeholders representing the interests of ratepayers in the DPL South zone, who swiftly mounted a new legal challenge. This coalition included state regulatory bodies like the Delaware Public Service Commission and the Maryland Public Service Commission, consumer representatives such as the Delaware Division of the Public Advocate and the Maryland Office of People’s Counsel, and various utility groups, including American Municipal Power and the Old Dominion Electric Cooperative, all united in their opposition to what they viewed as an unjust outcome.
This time, the coalition pursued a different legal strategy. Instead of seeking a retroactive rule change, they filed a formal complaint with FERC under Section 206 of the Federal Power Act. This section of the law serves a distinct purpose from Section 205; it empowers FERC to investigate existing rates and to modify any rate that it determines, after a hearing, to be unjust, unreasonable, or unduly discriminatory. The complainants argued that the anomalous auction results, now officially filed as the governing rates, were fundamentally unjust and unreasonable due to the known error that produced them. They contended that FERC had both the authority and the obligation under Section 206 to set aside these flawed rates and provide a remedy. However, in May 2024, FERC rejected this new complaint, concluding that the prior Third Circuit ruling tied its hands. This rejection became the basis for the most recent and ultimately successful appeal.
Court Finds FERC Misunderstood Its Authority
On January 13, 2026, the U.S. Court of Appeals for the D.C. Circuit delivered a decisive ruling that vacated FERC’s May 2024 rejection of the Section 206 complaint. The court determined that FERC had committed a significant legal error by fundamentally misinterpreting the scope of its own authority and the implications of the earlier Third Circuit decision. The D.C. Circuit’s reasoning was meticulous, drawing a sharp distinction between the powers granted to FERC under Section 205 and Section 206 of the Federal Power Act. The court clarified that the Third Circuit’s decision was narrowly focused on the prohibition against retroactive ratemaking specifically under Section 205, which deals with the filing of new rates. That ruling, the D.C. Circuit asserted, “simply did not resolve whether FERC might later use its section 206 authority to set aside the auction result.” The court emphasized that Section 206 serves a different function: it empowers the commission to investigate existing rates and provide prospective relief if they are found to be unlawful.
Furthermore, the D.C. Circuit found that FERC had incorrectly applied the filed-rate doctrine as an absolute and insurmountable barrier to any form of backward-looking rate adjustment. The court pointed out that FERC’s own statutory powers under the Federal Power Act, such as its authority to order refunds for rates found to be unjust or unreasonable, are inherently retroactive in their effect. This established precedent demonstrates that the filed-rate doctrine is not an ironclad prohibition in all circumstances, particularly when the commission is exercising its consumer protection responsibilities to address existing rates that are proven to be unlawful. By assuming that the doctrine barred any potential remedy under Section 206, FERC had, in the court’s view, abdicated its regulatory duty to fully and properly consider the merits of the complaint brought forward by the coalition of state advocates and utilities. The ruling effectively stated that FERC had mistakenly declared itself powerless when it had a clear statutory tool at its disposal.
A Mandate for Reconsideration
The D.C. Circuit’s decision ultimately remanded the case back to the Federal Energy Regulatory Commission, breathing new life into the fight against the flawed auction results. The ruling did not dictate a final outcome or order a specific remedy, but it unequivocally instructed the agency to properly reconsider the Section 206 complaint that it had previously dismissed. This provided the coalition of state advocates and utilities a critical second chance to argue their case on its merits. The focus of the dispute has now shifted from a procedural question of which legal statute applies to a substantive one: whether the anomalous, high-priced results are indeed “unjust and unreasonable” under the Federal Power Act. FERC is now obligated to conduct a thorough review and determine if it has the authority and the obligation to provide a remedy that protects consumers from the consequences of the $183 million technical error.
