The Supreme Court Has Just Dismantled Traditional Energy Regulation And Created A Whole New Paradigm Dominated By The Judiciary Rather Than Administrative Agencies

July 2, 2024

In a trio of Supreme Court rulings over the last week, the Court has signaled its intention to crack down on the amount of authority and discretion that federal agencies have enjoyed over the last several decades, and to assert the power of the federal judiciary in a manner that will have significant ramifications for the regulation of energy by the Federal Energy Regulatory Commission ("FERC"). In Loper Bright Enterprises v. Raimondo ("Loper"), the Court ruled that in cases governed by the Administrative Procedures Act ("APA") courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority, expressly overruling the longstanding Chevron doctrine that required courts to defer to an agency's permissible interpretation of a statute if the statute's language is ambiguous. In Securities and Exchange Commission v. Jarkesy ("Jarkesy"), the Court significantly limited the ability of agencies to try certain types of cases in-house by holding that when the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial. And in Corner Post v. Federal Reserve ("Corner Post"), the Court held that in APA cases, petitioners have six years from when they are injured by an agency action - not just six years from the agency ruling itself - to petition for judicial review. These cases together represent a significant blow to federal agency authority, and likely portend a substantial increase in administrative law litigation. While Corner Post's impact on FERC may be somewhat limited by the Federal Power Act's provisions regarding rehearing and appeal of FERC decisions, the other two cases will certainly have a significant impact on FERC.

The overruling of the Chevron doctrine in Loper will allow courts to take a much more active role in reviewing FERC's interpretation of federal energy statutes. The forty-year-old Chevron doctrine, set forth in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), required courts to use a two-step framework to interpret statutes administered by federal agencies - the court must first assess whether the statute is clear with respect to the question at issue, then, if the statute is silent or ambiguous with respect to the question at issue, the court must generally defer to the agency's formal interpretation if it was based on a permissible construction of the statute, even if the court reads the statute differently than the agency did. Chevron was founded on the notion that in writing ambiguous statutes on regulatory and especially technical subjects, Congress probably intended ambiguities to be resolved by a single federal agency deploying its specialist expertise rather than by whatever judges the case came before. The Supreme Court in Loper, however, found that this deference could not be squared with the APA's command that courts decide "all relevant questions of law" (5 U.S.C. § 706), which, it explained, implements traditional understandings of courts' role under Article III of the Constitution. Under the APA, the Court held, courts must determine the single best answer to what a statute means, without deferring to agencies.

While Loper represents a significant shift of interpretive responsibility from agencies to courts, it is subject to several caveats that may, subject to how they are refined in further litigation, limit its effect. First, Loper expressly retains the older doctrine of Skidmore v. Swift & Co., 323 U.S. 134 (1944), which had been largely overshadowed by Chevron. Under Skidmore, and now Loper, agency interpretations are entitled to respect and should be consulted, along with other traditional tools of statutory interpretation, to the extent that they are "made in pursuance of official duty," embody "experience and informed judgment," and have the "power to persuade." Precedents applying Skidmore suggest that the agency's "power to persuade" will be greatest when the issue is highly technical, when the agency interpretation was adopted shortly after the statute was enacted and has remained consistent, and when the agency interpretation cannot be characterized as expanding its own jurisdiction. Second, while overruling Chevron, the Loper Court stated that specific decisions upholding specific statutory interpretations under Chevron generally remain protected by stare decisis. Third, the Court made clear that nothing prevents Congress from writing a statute that expressly delegates discretionary power, including the power to define specific statutory terms, to an agency. How Loper will impact FERC remains to be seen. The courts have often deferred to FERC's technical expertise under Chevron and will likely continue to respect that expertise under Skidmore in technical areas that are clearly within FERC's jurisdiction.

Loper, however, could have a significant impact on FERC's ability to further the government's effort to make the clean energy transition where statutes such as the Federal Power Act are silent or ambiguous as to the treatment of new energy resources, particularly battery storage, demand response, and energy efficiency. The Court may, for example, issue an order later this week in Edison Electric Institute v. FERC, Case No. 22-1246 ("EEI"). In EEI, the D.C. Circuit deferred under Chevron to FERC's decision that a 160MW solar-battery project in Montana could be treated as a "qualifying facility" under the Public Utility Regulatory Policies Act even though it exceeds that act's 80MW eligibility limit because the 160MW plant is only capable of injecting 80 MW onto the grid. The Supreme Court may well remand EEI to the D.C. Circuit for reconsideration in light of Loper.

The Court's ruling in Jarkesy could have an even more striking effect on FERC's ability to impose civil penalties, particularly with respect to fraud. In Jarkesy, the Court concluded that a statutory provision authorizing the Securities and Exchange Commission ("SEC") to adjudicate and assess civil penalties for fraud-related claims violates the Seventh Amendment; the SEC must instead bring such cases in court, where the defendant has a right to jury trial. The case involved delineating the distinction between "suits at common law," which are subject to the Seventh Amendment, and matters of "public right," which can be adjudicated by an agency, subject to judicial review. The majority first concluded that SEC civil penalties claims for fraud-related conduct are, for Seventh Amendment purposes, suits at common law, primarily because the remedy sought (civil penalties) is a monetary remedy that goes beyond the exercise of equitable powers to restore a preexisting status quo, and secondarily, because they broadly resemble fraud claims known to the common law. It then rejected the dissent's argument that statutory civil penalties claims brought by Government agencies are "matters of public right," generally confining that "exception" to matters of immigration, international commerce, tribal rights, public lands, public benefits, pensions and patent rights. And it left explicitly unresolved whether Atlas Roofing Co. v. Occupational Safety & Health Review Commission, 430 U.S. 442 (1977), which approved administrative adjudication of civil penalties for statutory workplace safety violations, remains good law.

The implications of Jarkesy for FERC and other agency enforcement actions are uncertain, but likely dramatic. The unsettled fate of Atlas Roofing may be key: if the public rights exception still applies to permit administrative civil penalties proceedings when the substance of the case does not resemble fraud or another common-law action (which is far from certain and will no doubt be the subject of substantial further litigation), a significant range of administrative civil penalties jurisdiction may survive. But even on that narrow reading, Jarkesy appears to invalidate the provisions of the Energy Policy Act of 2005 that authorize FERC to impose civil and criminal penalties for the filing of false and fraudulent information relating to the price of electricity and natural gas and prohibiting any manipulative or deceptive device or contrivance as those terms are used in 15 U.S.C. §78j(b) of the Securities Exchange Act. 16 U.S.C. §§824u, 824v, 825o and 825o-1. Further, as Justice Sotomayor noted in dissent (slip op. at 35), FERC is one of several agencies that, unlike the SEC, has no general authority to pursue civil penalties in court - Congress only authorized it to do so through the administrative adjudication procedure that Jarkesy appears to prohibit. See, e.g., 16 U.S.C. § 823b(c). Absent a new statute, therefore, FERC's ability to assess (and achieve settlements by threatening) civil penalties is now in question. That represents a highly significant change for FERC which, according to its Office of Enforcement, assessed over $874 million in civil penalties since 2007.