A landmark ruling from the U.S. Court of Appeals for the D.C. Circuit has reignited a fierce legal battle over the fairness of electricity pricing, effectively vacating a key federal decision and reopening a case concerning approximately $183 million in contested capacity costs for consumers across portions of Delaware, Maryland, and Virginia. This judicial action hands a significant victory to a coalition of state regulators and consumer advocacy groups, providing them with a renewed chance to challenge electricity capacity prices they have long argued are fundamentally unjust and unreasonable. The decision delves into the complex and often-conflicting authorities of the Federal Energy Regulatory Commission (FERC), highlighting the critical distinction between setting future rates and rectifying existing ones that may be flawed. At its core, the case scrutinizes the delicate balance between market stability, regulatory oversight, and the legal principles designed to protect consumers from bearing the financial burden of procedural errors.
The Genesis of a Costly Anomaly
The controversy’s origins lie in a December 2022 capacity auction conducted by PJM Interconnection, the grid operator responsible for ensuring a reliable electricity supply for a vast 13-state region and the District of Columbia. These auctions are designed to secure commitments from power generators to be available in the future, in this case for the 2024/2025 capacity year. However, after this specific auction concluded but before its results were made public, an internal review by PJM uncovered a critical error. The grid operator identified the results for the Delmarva Power & Light Co. South (DPL South) zone as “anomalous,” a direct consequence of a flawed planning parameter within the auction’s complex model. This technical mistake failed to accurately reflect the true supply and demand conditions in the region, leading to a severe and artificial inflation of capacity prices. The financial repercussion of this single flawed parameter was staggering, projected to impose an additional $183 million in costs on the area’s electricity customers.
Upon discovering the significant error, PJM moved swiftly to mitigate the financial harm to consumers by proposing a corrective plan to FERC. The grid operator sought to revise its market rules, which would allow it to substitute the flawed planning parameter with the correct one and recalculate the auction’s outcomes for the DPL South zone. FERC approved this proactive measure, and the subsequent implementation of the correction yielded significantly lower and more accurate capacity prices, aligning them with true market fundamentals. This seemingly logical fix was short-lived, however, as it was immediately challenged by market participants who had stood to gain financially from the erroneously high prices generated by the original, flawed auction. Their legal challenge argued that altering the results after the auction had concluded was an improper retroactive change, setting the stage for the first of several major court battles that would determine the fate of the $183 million in contested costs.
A Tangled Web of Legal Rulings
The initial legal challenge landed before the U.S. Court of Appeals for the Third Circuit, which delivered a pivotal ruling in March 2024. The court sided with the market participants who benefited from the flawed prices, overturning FERC’s decision to allow the correction. The Third Circuit’s judgment was based on a strict interpretation of the long-standing “filed-rate doctrine,” a legal principle that generally prohibits retroactive ratemaking. The court found that PJM’s rule change, proposed under Section 205 of the Federal Power Act (FPA), constituted such a prohibited action. According to the ruling, once the auction had concluded under a set of established rules, altering its parameters retroactively was impermissible, regardless of whether the original outcome was the result of an error. This decision effectively prioritized procedural finality over the correction of a known flaw, forcing regulators back to the drawing board and leaving consumers to face the consequences of the original, inflated prices.
Bound by the Third Circuit’s decision, both FERC and PJM were compelled to reverse their corrective actions. PJM developed a new plan to revert to the original, anomalous auction results, thereby reinstating the $183 million in additional costs for customers in the DPL South zone. FERC subsequently approved this reversion, a move that triggered a new and determined wave of legal opposition. A broad coalition representing consumer and state regulatory interests—including the PJM Load Parties, the Maryland Office of People’s Counsel, and the Delaware Public Service Commission, among others—formally challenged FERC’s approval of the reinstated high-priced results. Their strategy shifted, filing a complaint under a different legal provision: Section 206 of the FPA. This section empowers FERC to investigate existing rates. In May 2024, FERC rejected this complaint, setting the stage for the appeal that would ultimately land in the D.C. Circuit.
A Decisive Turn in the D.C. Circuit
The legal saga took another dramatic turn with the January 2026 decision from the U.S. Court of Appeals for the D.C. Circuit, which sided with the consumer advocates and vacated FERC’s May 2024 order. The court’s reasoning zeroed in on what it identified as a critical legal error in FERC’s analysis: its failure to properly distinguish between its separate and distinct authorities granted under Section 205 and Section 206 of the Federal Power Act. The D.C. Circuit panel clarified that the earlier Third Circuit decision was exclusively about Section 205, which governs the process for proposing new rates and the prohibition on retroactive changes. The court explicitly stated that the Third Circuit’s ruling “simply did not resolve whether FERC might later use its section 206 authority to set aside the auction result.” This crucial distinction formed the foundation of the D.C. Circuit’s decision to revive the challenge.
The court further dismantled FERC’s interpretation of the filed-rate doctrine, pointing out that the commission had incorrectly treated the doctrine as an absolute bar to any form of backward-looking rate adjustment. The ruling noted that the law provides for exceptions, highlighting FERC’s explicit authority to order refunds for rates found to be unjust and unreasonable—an inherently retroactive form of rate decision. In essence, the D.C. Circuit directed FERC to reconsider the Section 206 complaint purely on its merits. The commission was now tasked with evaluating whether the rates produced by the flawed December 2022 auction for the DPL South zone were, in fact, unjust and unreasonable, without being constrained by the previous court decision on Section 205. This ruling breathed new life into the sustained efforts by state regulators and consumer advocates to shield their constituents from what they consistently argued were illegitimate and procedurally flawed electricity costs.
