June 11, 2024 – An agency order prohibiting certain energy market bids that was issued without following rulemaking procedures was an invalid rule because it had the effect of law and implemented state statutes, the Wisconsin Court of Appeals (District IV) has ruled in Midwest Renewable Energy Association v. PSC, 2022AP968 (May 31, 2024).

In 2008, the Federal Energy Regulatory Commission issued an order requiring market operators to accept demand-response bids made by aggregators of retail customers (ARC) who aggregate bids from customers of utilities that had distributed more than 4 million MWh, unless a state agency prohibited ARCs from making such bids.

In April 2009, the state Public Service Commission (PSC) issued an order prohibiting the market transfer of demand-response load reductions of retail customers of the four Wisconsin utilities that had distributed more than 4 million MWh, whether the transfers were made by retail customers or ARCs.

The PSC did not comply with rulemaking requirements of Wis. Stat. section 227 in issuing the order.

Lawsuit Challenges Order

In 2021, Midwest Renewable Energy Association (Midwest) sued the PSC in Portage County Circuit Court.

Midwest sought a declaratory judgment that the order was invalid because it was a rule that should have been promulgated under the rulemaking requirements of ch. 227.

The PSC moved to dismiss the complaint for failure to state a claim. The circuit court granted the motion, and Midwest appealed.

By Any Other Name

Judge Chris Taylor began her opinion for a three-judge panel by explaining that an agency action can be challenged under section 227.40(4)(a) as an invalid, unpromulgated rule without being called a rule by a state agency.

The PSC argued that the circuit court’s dismissal of Midwest’s rulemaking claim should stand because Midwest failed to challenge the PSC order within 30 days, as required by section 227.53(1)(a)2m.

Section 227.53(1)(a)2m. requires that petitions for review in non-contested cases must be filed within 30 days of personal service or mailing of an agency’s decision.

But Judge Taylor pointed out that the Wisconsin Supreme Court has held that the judicial review of a decision under section 227.53(1)(a)2m. is different from a judicial review of a rule under section 227.40.

Primary Jurisdiction Doctrine

The PSC also argued that the circuit court’s dismissal was proper because, under the primary jurisdiction doctrine, the PSC is better positioned to set energy regulatory policy and handle the complicated subject matter of the agency’s order.

But Taylor reasoned that the primary jurisdiction doctrine didn’t apply because: 1) the circuit court didn’t discuss the doctrine; and 2) the relevant issue was a legal one that didn’t require the application of the PSC’s expertise.

“It is true that the technical and regulatory aspects of the production, distribution, and sale of energy are complex in numerous respects,” Judge Taylor wrote.

“But Midwest’s rulemaking claim does not require fact-finding or specialized knowledge of those fields. Instead … Midwest’s claim involves the interpretation of statutes and the language of the Order to determine whether the Order satisfies the statutory definitional of an unpromulgated rule.”

Declaratory Adjudication Proper

Taylor concluded that the circuit court, in ruling on the PSC’s motion to dismiss, should have adjudicated the request for a declaratory judgment instead of dismissing the complaint for failure to state a claim, based on the Wisconsin Supreme Court’s holding in Iowa Nat. Mut. Ins. Co. v. Liberty Mut. Ins. Co., 42 Wis. 2d 280, 168 N.W.2d 610 (1969).

“The proper procedure in this case, given the circuit court’s views, would have been for the court to render a declaratory adjudication that the Order is not a rule rather than to dismiss the rulemaking claim on the merits,” Judge Taylor wrote.

Order Was an Invalid Rule

Judge Taylor interpreted the definition of “rule” under section 227.01(13) and concluded that the order was indeed a rule – one invalidly promulgated by the PSC.

Taylor explained that the Supreme Court has established a five-part rubric for determining whether an agency action constitutes a rule that’s required to comply with the rulemaking requirements of ch. 227.

The rubric asks whether the agency action: 1) is a regulation, standard, statement of policy, or general order or 2) has a general application that 3) has the effect of law, and 4) was issued by an agency to 5) implement, interpret, or make specific legislation enforced or administered by the agency.

The parties agreed that the Order was issued by an agency. Judge Taylor concluded that the order satisfied the rubric’s other four elements.

Regulation of General Application

The order was a regulation, Taylor reasoned, because it controlled the conduct of retail customers and third-party ARCs by disallowing them from participating in demand response in the federal wholesale markets for electricity.

The PSC argued that the order was not a regulation of general application because it applied only to the four utilities named in the order, rather than a general class of retail customers and third-party ARCs.

But Judge Taylor noted that the order’s prohibitory sentence applied to “demand-response load reductions of retail customers of the four Wisconsin electric utilities which distributed more than 4 million MWh per year.”

“The Order regulates existing and future retail customers and third-party ARCs because it prohibits the activities of these individuals and entities, and therefore controls them by restricting their conduct,” Taylor wrote.

Effect of Law  

The order had the effect of law, Judge Taylor wrote, because it “uses mandatory language and applies uniformly without violation.”

Taylor noted that the order both: 1) identified section 196.37(2) as the source of the PSC’s authority to issue the order; and 2) stated that the transfer of demand-response load reductions by parties subject to the order could be discriminatory under sections 196.22, 196.60(1), and 196.60(3).

Consequently, Taylor wrote, the order satisfied the fifth element of the rubric because it “carries out and gives practical effect to these statutes.”

The Court of Appeals reversed and remanded the case with directions.