Regulatory Review: Electric Power Sales; Orphan Drugs Other Uses; Spring 2014 Unified Agenda & Memorial Day, 2014

Lee Beck's roundup of recent happenings in government regulation.

The Friday before the long Memorial Day weekend is either a desert of regulatory activity or – as last week – a cornucopia in need of distillation. Three highlights warrant note, though many rules were published, placed on inspection, or otherwise released. The United States Court of Appeals for the District of Columbia Circuit vacated a Federal Energy Regulatory Commission (FERC) electric distribution pricing rule while the United States District Court for the District of Columbia vacated a Department of Health and Human Services (HHS) orphan drug pricing rule. Look now for the next round of economic mischief by regulation in the Office of Management and Budget (OMB) under-the-radar release of the Spring 2014 Unified Agenda. And lest we forget ….

Electric Power Sales: The D.C. Circuit vacated as ultra vires a FERC final rule incentivizing retail customers to reduce electricity consumption when economically efficient because the rule exceeded FERC’s statutory authority to regulate wholesale and interstate electricity distribution by regulating intra-state retail sales – the province of state public utility commissions (PUCs) – in Electric Power Supply Assoc. v. FERC.

Congress declared “the policy of the United States that time-based pricing and other forms of demand response . . . shall be encouraged . . . and unnecessary barriers to demand response participation in energy, capacity and ancillary service markets shall be eliminated” but did nothing to change the jurisdictional lines between FERC and state PUCs. Everyone seems to agree that “jurisdiction over demand response is a complex matter that lies at the confluence of state and federal jurisdiction” but disagree over whether FERC or the PUCs have that jurisdiction.

FERC, in short, incentivized by regulation participation in the wholesale electricity market over which it has jurisdiction by permitting and encouraging aggregators of retail customers to make wholesale time/demand-based purchases rather than retail purchases that it does not regulate. In effect, these can be programs that act like “buying clubs” that sell cheaper electricity when members lower consumption during peak demand times or allow temporary interruption of air conditioning in the middle of a summer day.

Citing the clear distinction drawn by Congress between wholesale and retail, the court found no silence or ambiguity under which it must defer to FERC’s interpretation of its jurisdiction under Chevron and City of Arlington. The D.C. Circuit, therefore, set aside the agency action “in excess of statutory jurisdiction, authority, or limitations” under the Administrative Procedure Act (APA). A “policy” to “encourage” demand response does not create jurisdiction to “regulate.”

► The panel (2 to 1) vacated the entire rule as ultra vires, and its remand order simply sends the paperwork back to FERC because FERC cannot correct its mistake in this rule (although it might try a different rule). The decision and dissent illustrate the complicated economics of power generation, distribution, and consumption. In this instance, the economic winners are electric power generators; the economic losers are consumers, but that is where Congress left the statute and FERC cannot stretch its authority.

Sponsored

Orphan Drugs Other Uses: Meanwhile, downstairs (literally), the district court concluded, in Pharmaceutical Research and Manufacturing Association v. United States Department of Health and Human Services, that HHS did not have statutory authority to promulgate a rule requiring discount prices for “orphan drugs” by new Obamacare (Patient Protection and Affordable Care Act or PPACA) eligible entities.

“Orphan” drugs treat rare diseases or conditions and are called “orphans” because the costs of research and production would not be economically feasible for private companies if Congress did not provide incentives – (1) a seven-year (rather than two-year) market exclusivity period for the orphan drug; (2) a clinical tax credit for any expenses incurred in developing an orphan drug; (3) research grants for clinical testing; and (4) an exemption from new drug application fees. Under the oft-amended Public Health Service Act pharmaceutical companies must enter into contracts with HHS as a precondition to Medicaid purchases to grant certain entities discount prices, expanded by Obamacare, but then orphan drugs were excluded from the expansion, at least insofar as the purchase was made for the orphan disease or condition. HHS adopted a rule with the practical effect that newly added Obamacare entities could not purchase an orphan drug at the discounted price for their intended orphan use, but a newly added entity could purchase the orphan drug for an often far more numerous and well known non-orphan at the discount price.

The rule effectively upset the economic balance of orphan drugs – and the arcane enforcement mechanism incentivized imbalance. HHS relied on five different statutory authorizations for the regulation, but

Ultimately, the Court finds that the statutory provisions HHS has strung together to give it rulemaking authority are much like the provisions in [prior cases], in that they are specific grants of authority that do not authorize the orphan drug rule implemented here. As such, the Court “must give effect to the unambiguously expressed intent of Congress,” and vacate the final rule under Chevron step one.

As the court points out in detail, four of the five statutes provide precise delegations of authority – management of the Public Health Service (PHS), procedure for designating orphan drugs, enforcement of an entirely different statute, and determine what drugs are excluded from Medicaid – simply are inapplicable. Within the orphan drug statute, HHS relied upon rulemaking authority to (1) establish an administrative dispute resolution process, (2) precisely defined methodology standards for calculation of ceiling prices, and (3) the imposition of monetary civil sanctions. The court found none of these provisions could stretch so far as HHS attempted to stretch them.

Sponsored

► A great deal of effort is needed (and expended by the district court) in understanding the complexities of the statutory provisions and how HHS sought to implement those statutes by rule, but HHS create regulatory authority out of the confluence of different specific statutory delegations. An agency has only the authority that Congress grants. Synthesizing specific statutory grants of rulemaking authority does not create a general rulemaking authority that can adapted by the agency as it wishes – what Congress has given is all that Congress has given.

Spring 2014 Unified Agenda: The OMB Office of Information and Regulatory Affairs (OIRA) released the Spring 2014 Unified Agenda (UA) as most of Washington was packing up and leaving for the Memorial Day weekend. Cynics might think the timing is a ploy to avoid media coverage (and are probably correct). The UA database is actually run by the General Services Administration (GSA) as a compilation of the agency reports required in April and October of each year by the Regulatory Flexibility Act (RFA). The database was reiterated to reflect the current agency agendas with no fanfare, no announcement, no nothing.

▼ Oddly, the official link to the Spring 2014 UA is mislabeled as “The 2013 Spring Agenda was published on 7/3/2013” but that would appear to be little more than a mistake.

► A quick review of rules of interest reveals no surprises, but both agencies concerned with related rules of other agencies and private practitioners need to check their favorite proposals, rules, and subjects to ensure they understand the state of play. The stealth release places a premium on daily review of the great game.

Memorial Day, 2014:

Then out spake brave Horatius,

The Captain of the Gate:

“To every man upon this earth

Death cometh soon or late.

And how can man die better

Than facing fearful odds,

For the ashes of his fathers,

And the temples of his Gods.

– Lord Thomas Babington Macaulay, Horatius XXVII (1842)