Xo Energy Ma, Lp and Xo Energy LLC v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued January 24, 2023 Decided July 14, 2023
No. 22-1096
XO ENERGY MA, LP AND XO ENERGY LLC,
P ETITIONERS
v.
FEDERAL ENERGY R EGULATORY C OMMISSION,
R ESPONDENT
M ONITORING ANALYTICS , LLC,
INTERVENOR
On Petition for Review of Orders
of the Federal Energy Regulatory Commission
Peter B. Siegal argued the cause and filed the briefs for
petitioners.
Matthew J. Glover, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on
the brief were Matthew R. Christiansen, General Counsel, and
Robert H. Solomon, Solicitor.

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Jeffrey Whitefield Mayes argued the cause for intervenor
for respondent Independent Market Monitor for PJM
(Monitoring Analytics, LLC).
Before: C HILDS and P AN , Circuit Judges, and R OGERS ,
Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
R OGERS .
R OGERS , Senior Circuit Judge: XO Energy petitions for
review of the Federal Energy Regulatory Commission’s
approval of filings implementing a regional transmission
organization’s (“RTO”) revised Forfeiture Rule for Financial
Transmission Rights (“FTRs”). It contends that the
Commission erred as a matter of law in declining to issue
refunds to market participants who incurred forfeitures under
the unapproved interim Rule. It further contends that the
Commission’s approval of the revised 2021 Rule was arbitrary
and capricious because the Rule captures competitive
transactions and burdens legitimate hedging activities in ways
that do not deter potentially manipulative transactions.
Specifically, according to XO Energy, the Commission erred
by failing to require that the RTO consider traders’ entire FTR
portfolios and whether a transaction is “leveraged,” that is,
whether it creates net profit for the FTR holder. For the
following reasons, the court affirms the Commission’s orders
denying refunds and remands for further explanation of the
Commission’s decision to exclude consideration of “leverage”
as a required element of the Rule.
I.
Section 205(a) of the Federal Power Act mandates that
“[a]ll rates and charges” within the Commission’s jurisdiction,

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as well as “all rules and regulations” pertaining to those rates
and charges, be “just and reasonable.” 16 U.S.C. § 824d(a); see
also Towns of Concord, Norwood, & Wellesley v. FERC, 955
F.2d 67, 68 (D.C. Cir. 1992). Section 205(c) of the Act requires
regulated utilities to file with the Commission all jurisdictional
rates and charges, as well as the practices affecting such rates
and charges. 16 U.S.C. § 824d(c). Section 206 of the Act, in
turn, requires the Commission to ensure that any rates charged
are just and reasonable. Id. § 824e.
One way the Commission ensures that these filed rates are
compliant is by guarding against sellers’ abuse of market
power. See Pub. Citizen, Inc. v. FERC, 7 F.4th 1177, 1183–84
(D.C. Cir. 2021). In so doing, the Commission can initiate
enforcement proceedings either unilaterally or upon a
complaint from a third party. 16 U.S.C. § 824e(a). If the
Commission finds that any rate demanded by a utility within
its jurisdiction is “unjust, unreasonable, unduly discriminatory
or preferential,” the Commission must set aside that rate and
impose its own just and reasonable rate. Id. The burden of
proof lies with the party initiating the proceeding. Id.
§ 824e(b).
A.
PJM Interconnection, L.L.C. (“PJM”) is an RTO that
exercises operational control over all transmission facilities
located within its region, spanning thirteen states and the
District of Columbia. NRG Power Mktg., LLC v. FERC, 862
F.3d 108, 110–11 (D.C. Cir. 2017). In addition to coordinating
transmission service, RTOs run auction markets for electricity
and capacity sales. Morgan Stanley Cap. Grp. v. Pub. Util.
Dist. No. 1, 554 U.S. 527, 537 (2008). Because these auctions
determine the wholesale rates of energy in interstate
commerce, they are subject to Commission oversight. FERC

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v. Elec. Power Supply Ass’n, 577 U.S. 260, 266 (2016); see 16
U.S.C. § 824(b)(1).
In the PJM market, electricity is allocated through day-
ahead and real-time auctions, which enable suppliers to meet
demand from the utilities and other “load-serving entities” that
buy power at wholesale for resale to users. Elec. Power Supply
Ass’n, 577 U.S. at 268. When market participants purchase
electricity, they pay a “Locational Marginal Price,” which
reflects the cost of production and delivery to a particular
location on the electrical grid. See, e.g., Sacramento Mun. Util.
Dist. v. FERC, 616 F.3d 520, 524–25 (D.C. Cir. 2010). That
price includes any costs associated with congestion on the
transmission path, which occurs during periods of high demand
when the limitations of the grid require electricity to be
dispatched through pathways that are more costly. PJM
INTERCONNECTION, L.L.C., FTR S : P ROTECTION AGAINST
C ONGESTION C HARGES (2020), https://perma.cc/7VUP-8CEB.
Because congestion is unpredictable, PJM allows market
participants to hedge congestion risks in its day-ahead market
using FTRs, a long-term financial contract that entitles the
holder to profit or creates liability based on the hourly day-
ahead congestion prices between the starting and ending
locations on a transmission path. If the price is higher at the
end point than at the source, the FTR is a benefit to the holder;
if lower, the FTR is a liability. See id.
PJM also offers “virtual” transactions, which allow market
participants to buy (or sell) electricity in the day-ahead market,
and then sell (or buy) an equal quantity in the real-time market.
PJM Interconnection, L.L.C., Report on the Impact of Virtual
Transactions 1, FERC Docket No. ER13-1654-000 (Feb. 7,
2014). Virtual transactions financially benefit the trader if the
price differential between the real-time and day-ahead markets
is favorable. Id. Because virtual transactions can increase the

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amount of congestion in the day-ahead market, they may create
the potential for cross-product manipulation by market
participants that also hold FTRs. According to PJM and the
Commission, such participants may have an incentive to make
virtual trades they otherwise would not make in order to affect
congestion and thereby benefit an FTR position. See PJM
Interconnection, L.L.C., 178 FERC ¶ 61,079, at ¶ 2 (Jan. 31,
2022) (“Compliance Order”).
To counter potential manipulation, PJM added the FTR
Forfeiture Rule to its tariff filed with the Commission in 2000.
Id. The Rule is intended to deter manipulative conduct by
preventing virtual traders from “creat[ing] congestion that
benefits their related FTR positions.” PJM Interconnection,
L.L.C., 158 FERC ¶ 61,038, at ¶ 25 (Jan. 19, 2017). As initially
adopted, the Rule required an FTR holder to forfeit the profits
from its rights when it submitted a related virtual transaction
resulting in higher day-ahead prices than real-time prices for
that transmission path. Id. Petitioners XO Energy MA, LP and
XO Energy LLC (together, “XO Energy”) participate in the
PJM energy markets affected by the Rule.
B.
In 2013, PJM filed tariff revisions expanding the definition
of virtual transactions to include “Up-to Congestion”
transactions, and the Commission launched a Section 206
investigation of the Rule’s application. In a 2017 order, the
Commission determined that PJM’s “application of its FTR
Forfeiture Rule to virtual transactions [was] no longer just and
reasonable,” and directed PJM to issue a compliance filing in
accordance with the Commission’s findings. Id. ¶¶ 2, 4 (“2017
Order”); Compliance Order ¶ 3; see also 16 U.S.C. § 824d(a).

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In April 2017, PJM proposed a new Forfeiture Rule (the
“2017 Proposed Rule”), which it began applying retroactively
to January 2017. PJM Interconnection, L.L.C., 175 FERC
¶ 61,137, at ¶ 109 (May 20, 2021) (“2021 Order”). Under the
2017 Proposed Rule, forfeiture would be triggered when the
trader’s virtual transaction (1) had an “appreciable impact,”
which in most circumstances would mean it increased
congestion by more than 10%, and (2) increased the value of
the trader’s FTR by one cent or more. Id. ¶ 18.
XO Energy filed a Section 206 complaint against PJM in
April 2020, arguing that the Forfeiture Rule was unjust and
unreasonable because it captured competitive market conduct
and “could not detect financial leverage or assess intent to
profit from illegitimate trading activity.” 2021 Order ¶ 2; see
16 U.S.C. § 825e. It sought refunds of FTR forfeitures dating
back to the implementation of the 2017 Proposed Rule. In May
2021, the Commission determined that certain aspects of the
2017 Proposed Rule were not just and reasonable. 2021 Order
¶¶ 27, 35. It found that the one-cent trigger threshold would
penalize transactions with only “de minimis, incidental effects”
on FTR values, and ordered PJM to “strike[] a more
appropriate balance between deterring manipulative behavior
and not burdening legitimate hedging activity.” Id. ¶¶ 51, 27.
It also ordered PJM to report on the feasibility of ordering
refunds for the period during which the 2017 Proposed Rule
had been in effect. Id. ¶ 111.
PJM thereafter proposed a new Forfeiture Rule in July
2021 (the “2021 Rule”), which was also challenged by market
participants, including XO Energy. Compliance Order ¶ 1;
Pet’rs’ Br. 15. The Commission approved PJM’s revised
compliance filing in the orders challenged here, finding that the
2021 Rule was just and reasonable. Compliance Order ¶ 1;
PJM Interconnection, L.L.C., 179 FERC ¶ 61,010, at ¶¶ 1–2

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(May 5, 2022) (“Reh’g Order”). It declined to order refunds
for losses incurred due to PJM’s implementation of the
unapproved interim Rule, despite finding that rate unlawful.
2021 Order ¶¶ 110–11. It also rejected two other protests from
XO Energy: that PJM should be required to evaluate the net
financial effect on an FTR holder’s portfolio, and to exempt
non-leveraged positions from the Rule because they provide no
economic incentive to engage in manipulative conduct.
Compliance Order ¶ 43; Reh’g Order ¶¶ 10, 19; see also 2021
Order ¶ 76. XO Energy petitions for review of the
Commission’s orders denying refunds and approving the 2021
Rule. PJM’s Independent Market Monitor intervened on
behalf of the Commission.
II.
The scope of this court’s review is limited. It will reverse
Commission action only if it is “arbitrary, capricious, an abuse
of discretion, or otherwise not in accordance with law.” 5
U.S.C. § 706(2)(A); Hoopa Valley Tribe v. FERC, 913 F.3d
1099, 1102 (D.C. Cir. 2019). “[G]reat deference” is accorded
to the Commission’s expertise under this standard, and the
court “may not substitute [its] own judgment for that of the
Commission,” particularly in “technical area[s] like electricity
rate design.” Elec. Power Supply Ass’n, 577 U.S. at 292. “[I]n
rate-related matters, the court’s review of the Commission’s
determinations is particularly deferential because such matters
are either fairly technical or involve policy judgments that lie
at the core of the regulatory mission.” Ameren Ill. Co. v. FERC,
58 F.4th 501, 505 (D.C. Cir. 2023) (citing S.C. Pub. Serv. Auth.
v. FERC, 762 F.3d 41, 54–55 (D.C. Cir. 2014) (internal
quotation marks omitted)). In fashioning remedies, the
Commission’s discretion is at its “zenith.” See Sacramento
Mun. Util. Dist., 616 F.3d at 541 (quoting Towns of Concord,
955 F.2d at 76).

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A.
XO Energy’s challenge to the Commission’s denial of
refunds to market participants that incurred forfeitures under
the 2017 Proposed Rule is ultimately unpersuasive. XO
Energy maintains that the Commission lacked discretion not to
order refunds and therefore erred as a matter of law in denying
them here. Pet’rs’ Br. 21–26. But that argument is contrary to
settled law. The Commission has broad discretion to determine
remedies for violations of the statutes it administers, see, e.g.,
Towns of Concord, 955 F.2d at 72–76, and that discretion
extends to denying refunds, see Keyspan-Ravenswood, LLC v.
FERC, 474 F.3d 804, 812 (D.C. Cir. 2007). In Towns of
Concord, this court explained that “examination of the Federal
Power Act reveals no statutory command mandating refunds
when the rate charged exceeds that filed,” 955 F.2d at 72, and
that Section 309 affords the Commission general remedial
discretion to effectuate each provision of the Act, including
Sections 205 and 206, id. at 71–73 (citing 16 U.S.C. § 825h).
The use of “may” in each of these provisions indicates that the
Commission has the authority, but not the obligation, to
provide a remedy for a statutory violation, including a filed-
rate violation. See id. at 72–73 (citing 16 U.S.C. § 824d(e) and
16 U.S.C. § 824e(b)); Anglers Conservation Network v.
Pritzker, 809 F.3d 664, 671 (D.C. Cir. 2016); see also
Compliance Order ¶ 57 & n.101; Reh’g Order ¶ 14 & n.33.
XO Energy persists that, even assuming the Commission
has such discretion, its stated justifications for refusing to order
a refund are arbitrary. Specifically, it maintains the
Commission erred in invoking the difficulty of calculating
refunds as a rationale; in considering the passage of time as a
reason to deny relief; and in stating that any repayments would
need to be limited to amounts in excess of the Pre-2017 Rate,
which was itself unlawful. Pet’rs’ Br. 27–35. But “[a] court

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is not to ask whether a regulatory decision is the best one
possible or even whether it is better than the alternatives.”
Elec. Power Supply Ass’n, 577 U.S. at 292. Rather, the court
“simply ensures that the agency has acted within a zone of
reasonableness and, in particular, has reasonably considered
the relevant issues and reasonably explained the decision.”
FCC v. Prometheus Radio Project, 141 S. Ct. 1150, 1158
(2021); see also Ky. Mun. Energy Agency v. FERC, 45 F.4th
162, 174 (D.C. Cir. 2022).
The Commission adequately justified its decision not to
order refunds. It considered record evidence submitted by
PJM, which explained that calculating refunds would be a
difficult task requiring “considerable software development
and testing work that would take months to complete.” Reh’g
Order ¶ 14. Without that software development, PJM would
not be able to determine whether and when a given market
participant would have violated the Pre-2017 Rule. See
Compliance Order ¶ 15; see also PJM Interconnection, L.L.C.,
FTR Forfeiture Rule Compliance Filing 13–14, FERC Docket
No. ER17-1433-003 (July 19, 2021) (“2021 Compliance
Filing”). Undertaking this process would be unavoidable, the
Commission explained, because the Pre-2017 Rule used an
entirely different software code that PJM had not maintained.
See Compliance Order ¶¶ 15, 59. The Commission recognized,
moreover, that “[t]hese efforts would come at considerable
expense, which would presumably be passed on to
transmission ratepayers.” Id. ¶ 59.
Further, the Commission explained that changes to market
participants’ ownership and structure during the four-and-a-
half-year period in which the interim Rule was in effect would
render it difficult to ensure that the correct parties received
refunds, which would lessen the refunds’ remedial value. Id.
The issuance of refunds would depend on “what reasonable

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assumptions to make about” market participant behavior,
which would involve extensive discretionary judgment and
implicate the accuracy of resulting refunds. 2021 Compliance
Filing 14; Compliance Order ¶ 59 & n.103. It also pointed to
the reasonable reliance interest of market participants, which
“weigh[ed] against granting refunds in this case” because
market participants likely adjusted their behavior to avoid
forfeiture under the 2017 Proposed Rule when those same
actions may have resulted in forfeiture under the Pre-2017
Rule. Compliance Order ¶ 61. The Commission therefore
acted within a “zone of reasonableness” and “reasonably
explained [its] decision” not to issue refunds to the affected
traders. Prometheus Radio Project, 141 S. Ct. at 1158. And
although the Commission had determined that the Pre-2017
Rate was no longer just and reasonable, that rate remained the
effective rate on file during the interim Rule period, and so the
Commission did not abuse its discretion in stating that any
refund issued would be limited to charges in excess of those
covered under the Pre-2017 Rate. Reh’g Order ¶¶ 16–18; see
Sacramento Mun. Util. Dist., 616 F.3d at 541.
B.
XO Energy challenges the 2021 Rule as overbroad,
contending that it burdens legitimate hedging activity in the
course of deterring potentially manipulative transactions.
Compliance Order ¶¶ 108–10. It maintains that the 2021 Rule
fails to account for market participants’ entire portfolios and
punishes non-leveraged sets of transactions, which XO Energy
contends cannot possibly be manipulative. Pet’rs’ Br. 35–41.
PJM’s Independent Market Monitor, as intervenor, argues
that neither of these arguments are within the proper scope of
the appeal because the orders on review “do not revisit the
findings of the 2021 Order” on the portfolio and leverage issues

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previously rejected by the Commission. Intervenor Br. 1–3.
But the 2021 Order was conditioned on a future compliance
filing by PJM. See 2021 Order ¶¶ 108, 111. And regardless,
the orders on review affirmed the Commission’s previous
findings on the portfolio and leverage issues, and in so doing
permitted XO Energy to challenge the Commission’s approval
of the 2021 Rule on those grounds. Compliance Order ¶ 43;
Reh’g Order ¶¶ 10, 19; cf. Pub. Citizen v. Nuclear Regul.
Comm’n, 901 F.2d 147, 150–52 (D.C. Cir. 1990).
1.
XO Energy contends that the Commission abused its
discretion by failing to instruct PJM to consider the entirety of
market participants’ FTR portfolios in its revised Rule. It
maintains that this requirement might reveal that the trader has
other FTR positions that resulted in no overall profit. See 2021
Order ¶ 76; Compliance Order ¶ 43; Reh’g Order ¶ 19. The
Commission explained, however, that PJM focused its Rule on
virtual transactions impacting particular FTRs and not on the
net effect to FTR portfolios, because it is virtual transactions
that facilitate manipulative conduct by affecting congestion on
the grid. 2021 Order ¶ 76. FTRs themselves “have no impact
on the dispatch or energy flow on the system either individually
or cumulatively,” and furthermore, consideration of an entire
FTR portfolio “would create opportunities to mask the
manipulation of individual FTRs.” Id. The Commission also
endorsed the analysis of PJM’s Independent Market Monitor,
finding that a portfolio rule “would result in discriminatory
treatment” of particular FTR paths “based on whether or not
they were part of a portfolio.” 2021 Order ¶ 75.
The Commission recognized in the 2017 Order that
considering a trader’s entire virtual transaction portfolio was
necessary to “accurately reflect the net impact of a market

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participant’s overall portfolio of virtual transactions on a
constraint related to an FTR position.” 2017 Order ¶ 57. But
it explained in its 2021 Order that the same is not true of entire
FTR portfolios, because whether a trader is making a net profit
from its total FTRs has no bearing on whether its virtual
transactions are causing or alleviating congestion in a manner
benefiting a particular FTR. See 2021 Order ¶ 76; Compliance
Order ¶ 45; Reh’g Order ¶ 19. XO Energy shows no error.
Because the Rule’s objective was to deter manipulation in the
form of targeted virtual transactions that would affect grid
congestion and benefit particular FTRs, it was not
unreasonable for the Commission to omit a requirement for
PJM to take traders’ entire FTR portfolios into account in
addition to their virtual transaction portfolios.
2.
Still, XO Energy contends that the Commission erred
when it failed to require PJM to exempt non-leveraged
positions from the 2021 Rule, because they provide no
economic incentive to engage in manipulative conduct. Pet’rs’
Br. 40–41. If a trader’s FTR gains exceed the losses incurred
from that trader’s virtual transactions, that trading position is,
according to XO Energy, “leveraged.” If losses from virtual
transactions exceed the trader’s gains from FTRs, the trade is
not “leveraged.” See 2017 Order ¶ 74 n.60. In XO Energy’s
view, the required balance between preventing manipulative
conduct and not burdening legitimate hedging activity can be
achieved only if non-leveraged positions are exempted from
the 2021 Rule. Pet’rs’ Br. 40–41. Essentially, XO Energy
maintains that “leverage” is a necessary condition to market
manipulation, and the Commission erred in not requiring PJM
to consider it.

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The arbitrary and capricious standard requires that an
agency’s decision be both “reasonable and reasonably
explained.” Nw. Corp. v. FERC, 884 F.3d 1176, 1181 (D.C.
Cir. 2018). The Commission offers a brief, but inadequate,
explanation of why it declined to order a forfeiture exemption
for non-leveraged transactions. Compliance Order ¶ 43; Reh’g
Order ¶¶ 10, 19; see also 2017 Order ¶ 80. Although the
Commission acknowledges that leverage might be one way to
determine cross-product manipulation, it states that it opted to
allow PJM to employ other means to detect this conduct rather
than require exemptions based on leverage. 2017 Order ¶ 80;
see also Compliance Order ¶¶ 43, 48; Reh’g Order ¶ 19. That
is the extent of the Commission’s explanation. It does not
address XO Energy’s position that market manipulation cannot
occur when the net losses of a trader’s virtual transaction
portfolio exceed the net profits from its FTR portfolio. Nor
does it explain why the exclusion of this requirement strikes
the appropriate balance between preventing manipulative
conduct and not hindering legitimate hedging activity. Absent
such explanation of its decision, the Commission’s failure to
order a leverage exemption appears arbitrary and capricious.
Vacatur of the 2021 Rule is, nonetheless, not appropriate
here. Although “vacatur is the normal remedy” for an unlawful
agency decision, Allina Health Servs. v. Sebelius, 746 F.3d
1102, 1110 (D.C. Cir. 2014), this court employs a two-factor
test to determine whether vacatur is appropriate: (1) “the
likelihood that ‘deficiencies’ in an order can be redressed on
remand”; and (2) “the ‘disruptive consequences’ of
vacatur.” Black Oak Energy, LLC v. FERC, 725 F.3d 230, 244
(D.C. Cir. 2013) (quoting Allied-Signal, Inc. v. U.S. Nuclear
Regul. Comm’n, 988 F.2d 146, 150 (D.C. Cir. 1993)). Both
factors weigh against vacatur. On remand, the Commission
can redress the deficiency of its reasoning by providing a more
fulsome explanation for its decision not to order PJM to

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account for leverage. Given “a significant possibility that the
Commission may find an adequate explanation for its actions”
on remand, vacatur is less proper. See Williston Basin
Interstate Pipeline Co. v. FERC, 519 F.3d 497, 504 (D.C. Cir.
2008). Vacatur of the order approving the 2021 Rule would
unduly disrupt PJM’s markets as well. Because market
participants have relied on the Commission’s approval of the
2021 Rule, preservation of the status quo is appropriate
pending the Commission’s further explanation of its reasoning.
Accordingly, the court grants the petition in part and
denies it in part. The court affirms the Commission’s denial of
refunds and remands without vacating the 2021 Rule for further
explanation of the Commission’s decision to exclude
consideration of leverage as a required element of the Rule.

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