Belmont Municipal Light Department v. FERC ( 2022 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 21, 2021 Decided June 17, 2022
No. 19-1224
BELMONT MUNICIPAL LIGHT DEPARTMENT, ET AL.,
PETITIONERS
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
MAINE PUBLIC UTILITIES COMMISSION, ET AL.,
INTERVENORS
Consolidated with 19-1247, 19-1252, 19-1253
On Petitions for Review of Orders
of the Federal Energy Regulatory Commission
John P. Coyle argued the cause for petitioners New
England Consumer-Owned Systems. With him on the briefs
was Ashley M. Bond.
Christopher G. Aslin, Senior Assistant Attorney General,
Office of the Attorney General for the State of New Hampshire,
argued the cause for State petitioners. On the briefs were John
M. Formella, Attorney General, Daniel E. Will, Solicitor
2
General, Maura Healey, Attorney General, Office of the
Attorney General for the Commonwealth of Massachusetts,
and Timothy J. Reppucci, Assistant Attorney General at the
time the briefs were filed. Christina Belew, Assistant Attorney
General, entered an appearance.
Casey A. Roberts argued the cause for petitioners Sierra
Club and Union of Concerned Scientists. With her on the briefs
was Charles Carter Hall at the time the briefs were filed.
Devin McDougall entered an appearance.
Robert M. Kennedy, Senior 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.
Paul W. Hughes argued the cause for intervenor New
England Power Generators Association, Inc. in support of
respondent. With him on the brief were David G. Tewksbury
and Andrew A. Lyons-Berg.
Michael J. Thompson and Maria Gulluni were on the brief
for intervenor ISO New England Inc. in support of respondent.
Before: WILKINS, KATSAS and JACKSON, Circuit Judges.
Opinion for the Court filed by Circuit Judge WILKINS.

Judge Jackson was a member of the panel at the time the case was
argued but did not participate in the disposition of this matter.
3
WILKINS, Circuit Judge: The Northeast region of the
United States will likely face fuel energy security risks in
upcoming winters because of the stress the winter places on its
electricity grid. When the system is stressed, power plants
struggle to secure the fuel they need to produce energy. As a
result, emergency actions, such as rolling blackouts, become
necessary to protect the power grid. To mitigate these
impending risks, the Independent System Operator for New
England (“ISO-NE”) took action.
I.
In May 2018, pursuant to Section 205(d) of the Federal
Power Act (“FPA”), 16 U.S.C. § 824d(d), ISO-NE filed tariff
revisions with the Federal Energy Regulatory Commission
(“FERC” or “the Commission”) to compensate generators for
maintaining an inventory of energy during the winter months
of 2023–24 and 2024–25. The revisions implemented the
Inventoried Energy Program (“IEP”), under which ISO-NE
will provide additional payments to generators to maintain up
to three days’ worth of fuel on-site and convert it into
electricity. ISO-NE’s objective is to incent market participants
to acquire more inventoried energy than they otherwise would
and compensate these resources for improving winter energy
reliability.
On June 18, 2020, the Commission issued an order
accepting ISO-NE’s proposed tariff revisions. ISO New Eng.
Inc., 171 FERC ¶ 61,235 (2020) (“Order Accepting Tariff
Revisions”). FERC concluded that IEP is a just and reasonable
interim solution to address the Northeast region’s fuel security
risk while ISO-NE continues working on a long-term market
design solution. Order Accepting Tariff Revisions ¶¶ 2, 34.
The Secretary of the Commission issued notices denying
4
requests for rehearing by operation of law. ISO New Eng. Inc.,
172 FERC ¶ 62,095 (2020) (“August 2020 Notice”).
We consider four timely Petitions for Review challenging
FERC’s Order accepting ISO-NE’s proposed tariff revisions.
Petitioners include New England Consumer-Owned Systems
(“NECOS”), a group of municipally-owned electric utilities
and a municipal light plant cooperative owned by five
municipal electric utilities; the New Hampshire Office of the
Consumer Advocate, the New Hampshire Public Utilities
Commission, and the Attorney General of the Commonwealth
of Massachusetts (collectively, “State Petitioners”); and Sierra
Club and Union of Concerned Scientists (collectively,
“Environmental Petitioners”). Petitioners contend that FERC’s
decision to approve IEP imposes unjust and unreasonable,
discriminatory, and preferential rates.
Importantly, many market participants that ISO-NE has
proposed to compensate under IEP—namely nuclear,
hydroelectric, coal, and biomass generators—already maintain
“inventoried energy,” meaning that their standard operating
practice is to store more than three days’ worth of fuel on-site.
J.A. 12–13, 19, 356, 539. As such, IEP is designed to
compensate these market participants for maintaining the status
quo, not incent them to change their behavior to further
improve cold weather fuel security in New England. J.A. 11.
Furthermore, IEP’s compensation scheme is similar to that
of a previous winter energy security program proposed by ISO-
NE: the Winter Reliability Program. See ISO New Eng., Inc.,
154 FERC ¶ 61,133 (2016) (“Order Denying Rehearing”). In
July 2015, ISO-NE and New England Power Pool Participants
Committee (“NEPOOL”) submitted two alternative proposals
to increase energy reliability during the winters between 2015
and 2018. Id. ¶ 5. In 2016, the Commission issued an order
5
accepting NEPOOL’s proposal and rejecting ISO-NE’s
proposal to include coal, nuclear, and hydroelectric resources
in the Winter Reliability Program because “substantial expert
testimony” supporting NEPOOL’s proposal reflected that coal,
nuclear, and hydroelectric “resources are not likely to change
their behavior in response to the particular payments outlined
in the ISO-NE Proposal.” Id. ¶ 13. The Commission reasoned
that “the purpose of the Program is to incentivize additional
reliability services to ensure reliability during the winter
months.” Id. ¶ 11. “We are not persuaded by [the] argument
that nuclear, coal, and hydro resources are similarly situated
with respect to the Winter Reliability Program merely because
they are capable of storing on-site fuel.” Id. ¶ 13. “Because
the purpose of the Program is to ensure reliability during the
winter, we do not find it necessary to include resources that do
not provide any additional benefit to winter reliability for the
sake of fuel neutrality alone.” Id. All in all, FERC determined
that ISO-NE’s proposed compensation scheme was
inappropriate because it would award windfall payments to
nuclear, coal, and hydroelectric generators.
The Commission’s precedent regarding the Winter
Reliability Program is instructive to the resolution of the
petitions before us now. Like ISO-NE’s Winter Reliability
Program, IEP is “fuel neutral”; it is designed to compensate all
eligible market participants, including nuclear, coal, biomass,
and hydroelectric generators, without any assurance that this
group of generators will improve winter energy reliability.
Despite evidence in the administrative record indicating that
IEP’s payment framework would award a windfall to nuclear,
coal, biomass, and hydroelectric generators, FERC approved
their inclusion in IEP and abandoned the position it previously
took in the Order Denying Rehearing.
6
For the reasons discussed below, we find that pursuant to
the Administrative Procedure Act, 5 U.S.C. § 706(2)(A), the
Commission’s approval of IEP was arbitrary and capricious in
only one respect—its inclusion of coal, hydroelectric, biomass,
and nuclear generators. FERC’s acceptance of ISO-NE’s
proposal to compensate these market participants—despite
record evidence that they would not change their behavior in
response to payments—was not reasoned decisionmaking. The
Commission’s decision also conflicts with its past precedent on
ISO-NE’s Winter Reliability Program proposal. Accordingly,
we partially vacate the Commission’s June 18, 2020 order. We
will sever the portion of the Inventoried Energy Program that
is arbitrary and capricious: the program’s inclusion of nuclear,
biomass, coal, and hydroelectric generators.
This Court has jurisdiction under 16 U.S.C. § 825l(b). For
the reasons explained below, the Petitions for Review are
granted in part and denied in part.
II.
FERC is an independent regulatory commission within the
Department of Energy. Pursuant to the FPA, the Commission
has exclusive jurisdiction to “regulate[] the sale of electricity
at wholesale in interstate commerce.” Entergy La., Inc. v. La.
Pub. Serv. Comm’n, 539 U.S. 39, 41 (2003) (citing 16 U.S.C.
§ 824(b)). The FPA “empowers FERC to regulate the sale and
transmission of electricity to ensure that electricity is provided
at a ‘just and reasonable’ rate.” New England Power
Generators Ass’n v. FERC, 881 F.3d 202, 205 (D.C. Cir. 2018)
(“NEPGA”) (quoting 16 U.S.C. § 824d(a)). FERC retains
jurisdiction over “[a]ll rates and charges made, demanded, or
received by any public utility for or in connection with the
transmission or sale of electric energy.” 16 U.S.C. § 824d(a).
Under Section 205 of the FPA, a negatively affected party can
7
challenge a rate by filing a complaint with FERC. If the
challenging party establishes that the existing rate has become
unjust or unreasonable and FERC agrees, then Section 206 of
the FPA authorizes FERC to establish a new rate. NEPGA, 881
F.3d at 205 (citing 16 U.S.C. §§ 824e(a), (b)).
A.
As indicated, ISO-NE, a non-profit entity, operates the
Northeast’s transmission services by running auction markets
for energy. We assume familiarity with ISO-NE’s
administration of New England’s wholesale electric markets.
See, e.g., NextEra Energy Res., LLC v. FERC, 898 F.3d 14, 17
(D.C. Cir. 2018) (“The features of ISO New England’s
complex forward capacity market have been the subject of
multiple petitions for review.”); NEPGA v. FERC, 881 F.3d
202 (D.C. Cir. 2018); Emera Maine v. FERC, 854 F.3d 9 (D.C.
Cir. 2017); TransCanada Power Marketing Ltd. v. FERC, 811
F.3d 1 (D.C. Cir. 2015); PSEG Energy Res. & Trade LLC v.
FERC, 665 F.3d 203 (D.C. Cir. 2011).
ISO-NE conducts an annual forward capacity auction,
whereby distributors pay electricity suppliers for their
electricity production capacity three years into the future.
NEPGA, 881 F.3d at 205. This annual Forward Capacity
Market (“FCM”) auction guarantees future electricity capacity
in New England. Id. As this Court has previously explained:
In the forward capacity market, local utilities
contract with generators to buy quantities of
energy three years ahead of their energy needs.
With three years’ notice, demand in the forward
capacity market is able to signal that a new
entrant is needed while there is still time to
develop additional generation capability. ISO
8
New England sets prices in the forward capacity
market by administering a forward capacity
auction. First, ISO New England determines
the projected amount of capacity (“Installed
Capacity Requirement”) that the region will
require to operate reliably in three years. Next,
ISO New England holds a descending price
auction, in which generators submit offers to
provide quantities of power at certain prices,
three years in the future. If the bid capacity at a
given price exceeds the Installed Capacity
Requirement, ISO New England lowers the
auction price. As the auction price decreases,
generators offer less capacity to the auction or
exit the auction altogether. A “clearing price”
is reached at the lowest price that yields enough
supply to meet the Installed Capacity
Requirement set by ISO New England. All
generators that have successfully bid in the
auction are paid the clearing price for the
capacity they provide, even if they submitted a
bid lower than the eventual clearing price.
NextEra Energy Res., 898 F.3d at 17; see also NEPGA, 881
F.3d at 206. Under the FPA, FERC regulates the FCM auction:
ISO-NE administrates the auction consistent with rules set out
in a jurisdictional tariff approved by FERC. NextEra Energy
Res., 898 F.3d at 17; NEPGA, 881 F.3d at 205.
B.
IEP is not ISO-NE’s first foray into addressing New
England’s winter energy security risk. Before developing IEP,
ISO-NE undertook other efforts to mitigate the region’s
pervasive fuel security issues. For example, between the
9
winters of 2013–14 and 2017–18, ISO-NE operated the Winter
Reliability Program, whereby ISO-NE compensated oil and
natural gas generating resources to secure firm winter fuel
supplies and provide load incremental benefits in terms of
available energy. Order Accepting Tariff Revisions ¶ 48. The
Winter Reliability Program, which is now defunct, was aimed
at incremental fuel procurement. Id. ¶ 62. As mentioned, in a
previous order concerning the Winter Reliability Program,
FERC rejected ISO-NE’s “technology-neutral” proposal to
compensate market participants even if payments would not
incent them to provide any additional benefit to winter
reliability. See generally Order Denying Rehearing.
C.
Meanwhile, in January 2018, ISO-NE prepared an
Operational Fuel Security Analysis to better understand New
England’s impending winter energy security risks. The
Operational Fuel Security Analysis reflects that under a variety
of generation resource combinations, the possibility of energy
shortfalls will become acute by the winter of 2024–25 and
could materialize even earlier. J.A. 678–79, 706. In the event
of energy shortfalls, ISO-NE must undertake energy
conservation efforts, such as rolling blackouts, to keep the
power flowing. During cold snaps, the region generally relies
on power from coal, oil, and nuclear power plants, but
economic pressures have caused many of these plants to close.
J.A. 686. According to FERC, since 2013, 7,000 megawatts of
coal, oil, and nuclear generators have retired or have
announced plans for retirement in the coming years. Resp. Br.
14. ISO-NE projects that another 5,000 megawatts of oil and
coal generating facilities are projected to retire. J.A. 355, 506.
In total, there are currently about 31,000 megawatts of
generation capacity. Resp. Br. 15 (citing Key Grid and Market
Stats – Resource Mix, ISO New England Inc., https://www.iso-
10
ne.com/about/key-stats/resource-mix) (last updated Jan. 18,
2022)).
In March 2018, Exelon Generation Company LLC
announced its decision to retire two generators, the “Mystic”
units, which serve the greater Boston area. Order Accepting
Tariff Revisions ¶ 3. Following this announcement, in May
2018, ISO-NE petitioned the Commission for a waiver of
certain tariff provisions so that it could enter into cost-of-
service agreements to keep the Mystic units online for the
winters of 2022–23 and 2023–24. In July 2018, although it
recognized that New England faces a serious fuel security risk,
the Commission denied ISO-NE’s petition, and directed ISO-
NE to file tariff revisions that would implement cost-of-service
agreements that address short-term fuel security concerns
associated with the retirement of the Mystic units and improve
the market design in New England to better address fuel energy
security risks. In response to the July 2018 order, ISO-NE
proposed fuel security cost-of-service provisions that would
allow for the retention of resources for fuel security under a
short-term, cost-of-service agreement. In December 2018, the
Commission approved ISO-NE’s proposed tariff revisions, and
also accepted the cost-of-service agreement in connection to
the Mystic units.
In June 2018, ISO-NE carried out Pay-for-Performance.
Under Pay-for-Performance, ISO-NE compensates generators
for energy when generating reserves are scarce, subjects
generators to significant monetary penalties if they fail to meet
their capacity performance obligations when energy is in high
demand, and gives additional revenue to generators that over-
perform relative to their obligations. Resp. Br. 71–72.
On March 25, 2019, pursuant to Section 205 of the FPA,
ISO-NE filed proposed tariff revisions to implement IEP, an
11
interim solution to New England’s winter energy security
issues. Under IEP, ISO-NE pledged to compensate electric
generators that maintain “inventoried energy,” meaning
stockpiles of fuel, during the winters of 2023–24 and 2024–25.
ISO-NE designed IEP to mitigate the risk of generators being
unable to get the fuel they need to meet consumer demand
when the energy system is stressed during cold periods. In
support of IEP, ISO-NE relied on the testimony of Dr.
Christopher Geissler, an economist in ISO-NE’s Market
Development Department, and Dr. Todd Schatzki, an
economic consultant ISO-NE hired to assist with rates and cost
estimates associated with IEP. ISO-NE did not conduct a new
energy security analysis to back IEP. Rather, it relied on the
2018 Operational Fuel Security Analysis. ISO-NE determined
that it was appropriate to forgo additional analysis because the
next forward capacity auction was scheduled for February 2020
and the circumstances called for swift action.
During the agency proceeding, ISO-NE argued that the
Commission should approve IEP because unlike past solutions
and efforts, IEP uniquely addresses a misaligned incentive
problem in New England’s regional energy market design.
According to FERC, individual generators are not incentivized
to maintain additional fuel on-site because of high up-front
costs, even though doing so is a cost-effective mitigation
against high energy prices and potentially catastrophic
reliability risks. Resp. Br. 22. Because such fuel arrangements
reduce the market price for energy, individual generators face
a lower return on their investment. Id. IEP aims to address this
problem by compensating generators that provide inventoried
energy. In the FERC proceedings, ISO-NE represented to
FERC that IEP’s compensation scheme may motivate
generators to arrange for more fuel at the start of winter, or as
their inventory is depleted, and reduce generator retirement
risks because compensation received through the program
12
reduces the amount of revenue generators must recover through
the capacity markets to meet their going-forward costs.
Any generator may participate in IEP so long as it meets
three key requirements: its fuel inventory (1) can be converted
to electricity at ISO-NE’s direction; (2) is reduced after
conversion to electricity; and (3) can be measured by the
participant and reported daily. These criteria enable oil, coal,
hydroelectric, and nuclear generators to participate, whereas
wind, solar, and natural gas-fired generators are only eligible if
other conditions are met. J.A. 19–20. As mentioned, the
administrative record reflects that ISO-NE’s fuel neutral
compensation scheme will not incent certain market
participants—coal, nuclear, biomass, and hydroelectric
generators—to procure additional fuel or otherwise improve
winter energy reliability because these entities already
maintain more than three days’ worth of fuel on-site. J.A. 12–
13, 19, 356; see also ISO New Eng., Inc., 171 FERC ¶ 61,235,
62,732 (2020) (“Dissent from Order Accepting Tariff
Revisions”).
ISO-NE’s proposal provides that IEP will cost between
$148 million per year for 1.8 million megawatt hours of
inventoried energy if natural gas generators can fully
participate and $102 million per year for 1.2 million megawatts
of inventoried energy if natural gas generators do not
participate.
D.
On August 6, 2019, FERC issued a notice stating that the
Commission lacked a quorum and could not act on ISO-NE’s
proposal. ISO New Eng., Inc., FERC Docket No. ER19-1428-
001 (August 6, 2019) (“August 2019 Notice”). As a result,
ISO-NE’s proposed tariff revisions went into effect by
13
operation of law and requests for rehearing were also denied
by operation of law. Id. Petitioners sought judicial review,
and in the meantime, FERC regained a quorum and sought a
voluntary remand of the agency record so it could address
ISO-NE’s filing on the merits.
On June 18, 2020, the Commission issued a merits order
accepting ISO-NE’s proposed tariff revisions. Order
Accepting Tariff Revisions ¶ 2. FERC reasoned that IEP is “a
reasonable short-term solution to compensating, in a
technology-neutral manner, resources that provide fuel
security.” Id. ¶ 32. FERC agreed with ISO-NE that there exists
a “misaligned incentives problem”—that is, under current
conditions, fuel secure resources may not be incentivized to
make additional investments in energy supply arrangements,
and this could cause adverse efficiency and reliability
consequences. Id. ¶ 33 (internal quotation marks omitted).
According to FERC, IEP addresses this problem by providing
additional compensation to fuel secure resources and thereby
offsetting the misaligned incentives in the market, while ISO-
NE continues developing a long-term market solution.
Petitioners challenged the program during the agency
proceeding on the grounds that ISO-NE failed to meet its
burden, under Section 205 of the FPA, to demonstrate that IEP
is just and reasonable and not unduly discriminatory or
preferential. For instance, NECOS argued that ISO-NE
represents that IEP “‘may’ incent resources to take actions that
they otherwise would not take, but it does not explain how that
claimed incentive would work with such resources.” Order
Accepting Tariff Revisions ¶ 42. NECOS also contended that
there was no evidence that any of the types of generator
resources targeted by IEP are even likely to retire. NECOS and
the State Petitioners further reasoned that IEP unfairly
compensates resources that are unlikely to change behavior.
14
See id. ¶ 48 (“New Hampshire Parties argue that the
Inventoried Energy Program is unjust and unreasonable
because it would result in additional compensation being paid
to certain resources”—including nuclear, coal, biomass, and
hydroelectric generators—“to provide energy to the system
that those resources already provide in the normal course of
their operations in response to wholesale market prices.”).
Petitioners also challenged IEP because ISO-NE failed to
demonstrate how it would benefit consumers or why its high
costs were justified, because IEP would result in discriminatory
and preferential rates, and because it arbitrarily excludes most
renewable resources. Accordingly, based on these various
grounds, complainants participating in the agency proceeding
asked the Commission to reject ISO-NE’s proposal.
In the June 2020 order, FERC addressed the arguments
Petitioners raised in their requests for rehearing of the August
2019 Notice. The Commission ultimately disagreed with
Petitioners’ arguments and determined that IEP is just and
reasonable. FERC took no issue with ISO-NE’s failure to
demonstrate a need for IEP with a detailed cost-benefit analysis
based on its determination that such an analysis was not
required. In relevant part, FERC explained that IEP is a short-
term measure that resolves fuel security concerns presented in
the 2018 Operational Fuel Security Analysis by compensating
fuel-secure resources.
With respect to the argument that IEP unfairly
compensates generators that are unlikely to be incentivized to
change behavior or provide a reliability benefit, the
Commission summarily determined that “it is just and
reasonable to provide similar compensation for similar
service.” Id. ¶ 62. FERC distinguished IEP from previous
winter energy risk-mitigation efforts, such as Pay-for-
Performance and the Winter Reliability Program, reasoning
15
that IEP “is aimed at compensating resources for a specific
reliability attribute for which they are not currently
compensated to address the misaligned incentives problem that
ISO-NE identified.” Id. The Commission went on to explain
that
Unlike the winter reliability programs, the
Inventoried Energy Program includes a forward
component that will allow resources to account
for the program’s revenue in making retirement
and other de-list bid decisions. Accordingly, we
find it just and reasonable for the program to
allow broader eligibility. Moreover, we
disagree with NECOS that approval of the
Inventoried Energy Program is problematic
because the incentives are not “reasonably
calibrated to the behavior sought to be induced
by the incentives.” As we note above, we agree
with ISO-NE that the current market design
contains a misaligned incentives problem, such
that fuel secure resources may not be
sufficiently incented to make additional
investments in energy supply arrangements,
which may have adverse efficiency and
reliability consequences under the existing
market rules. However, we find that, by
providing additional compensation to fuel
secure resources, the Inventoried Energy
Program is a short-term solution that helps
address the misaligned incentives problem that
currently exists in the Tariff.
Id. The Commission thus concluded that the program
reasonably makes compensation incentives available to a
variety of generators that can provide inventoried energy; is
16
designed to motivate generators contemplating retirement to
stay in the market; and could increase the likelihood that
financially secure generators will maintain adequate fuel
supplies during periods of system stress. Commissioner Glick
dissented and reasoned that he was “troubled by the evidence
in the record that the program will hand out tens of millions of
dollars to nuclear, coal, and hydropower generators without
any indication that those payments will cause the slightest
change in those generators’ behavior.” Dissent from Order
Accepting Tariff Revisions ¶ 1. “Handing out money for
nothing is a windfall, not a just and reasonable rate.” Id.On August 20, 2020, requests for the rehearing of the June
2020 order were denied by operation of law. See August 2020
Notice. Many complainants who challenged ISO-NE’s IEP
proposal in the agency proceeding—NECOS, State Petitioners,
and Environmental Petitioners—petitioned for judicial review
of FERC’s June 2020 order as well as the other notices.
III.
Section 205 of the FPA, codified at 16 U.S.C. § 824d,
“confers upon FERC the duty to ensure that wholesale energy
rates and services are just and reasonable.” FirstEnergy Serv.
Co. v. FERC, 758 F.3d 346, 348 (D.C. Cir. 2014) (citing 16
U.S.C. § 824d(a)). “No public utility under FERC’s
jurisdiction may ‘make or grant any undue preference or
advantage to any person or subject any person or subject any
person to any undue prejudice or disadvantage’ in establishing
rates.” Id. (quoting 16 U.S.C. § 824d(b)). Furthermore, section
205 “requires regulated utilities to file with the Commission
tariffs outlining their rates for FERC’s approval.” Id. (citing
16 U.S.C. § 824d(c)). As the filing utility, ISO-NE bore the
burden of showing that the rates were just and reasonable. 16
U.S.C. § 824d(e).
17
“The statutory requirement that rates be ‘just and
reasonable’ is obviously incapable of precise judicial
definition, and we afford great deference to the Commission in
its rate decisions.” Morgan Stanley Cap. Grp. Inc. v. Pub. Util.
Dist. No. 1 of Snohomish Cnty., 554 U.S. 527, 532 (2008).
“Due to practical challenges and myriad divergent interests,
FERC must be given the latitude to balance the competing
considerations and decide on the best resolution in its
regulation of electricity markets.” NEPGA, 881 F.3d at 210
(internal quotation marks and citation omitted). Furthermore,
“Congress has entrusted the regulation of the electricity
industry to FERC, not to the courts.” Id. (internal quotation
marks and citation omitted). “Therefore, a presumption of
validity . . . attaches to each exercise of the Commission’s
expertise.” Id. (internal quotation marks and citation omitted).
Nevertheless, “[w]hile afforded wide latitude in ratesetting
due to its expertise and broad statutory mandate, FERC—like
all agencies—must engage in reasoned decisionmaking”
mandated by the Administrative Procedure Act, 5 U.S.C. §
706(2)(A). NEPGA, 881 F.3d at 210. The Administrative
Procedure Act’s arbitrary-and-capricious standard “requires
the agency to ‘examine the relevant data and articulate a
satisfactory explanation for its action including a rational
connection between the facts found and the choice made.’” Id.
(quoting Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto.
Ins. Co., 463 U.S. 29, 43 (1983)). The Commission’s factual
findings will be upheld if supported by substantial evidence.
16 U.S.C. § 825l(b).
Moreover, “[i]t is well established that the Commission
must respond meaningfully to the arguments raised before it.”
NEPGA, 881 F.3d at 210 (internal quotation marks and
citations omitted). In addition, “[i]t is textbook administrative
18
law that an agency must provide a reasoned explanation for
departing from precedent or treating similar situations
differently.” Id. (cleaned up). To be sure, FERC “need not
demonstrate to a court’s satisfaction that the reasons for [a] new
policy are better than the reasons for the old one,” but the
Commission must “ordinarily . . . display awareness that it is
changing position.” FCC v. Fox Television Stations, Inc., 556
U.S. 502, 515 (2009) (emphasis in original). “An agency may
not, for example, depart from a prior policy sub silentio or
simply disregard rules that are still on the books.” Id.“Although case-by-case adjudication sometimes results in
decisions that seem at odds but can be distinguished on their
facts, it is the agency’s responsibility to provide a reasoned
explanation of why those facts matter.” NEPGA, 881 F.3d at
211.
A.
“While FERC does not contest standing, we have an
‘independent obligation to assure ourselves that standing
exists.’” Exelon Corp. v. FERC, 911 F.3d 1236, 1240 (D.C.
Cir. 2018) (quoting Summers v. Earth Island Inst., 555 U.S.
488, 499 (2009)) (alteration accepted). In this case, we
conclude that it does. Article III standing is both a
constitutional and statutory requirement for reviewing the
petitions in this case. “As a constitutional matter, we must
assure ourselves that this is the type of dispute susceptible of
judicial resolution and appropriate for the exercise of judicial
power.” Orangeburg, S.C. v. FERC, 862 F.3d 1071, 1077
(D.C. Cir. 2017). “As a statutory matter, the Federal Power
Act affords judicial review only to those parties ‘aggrieved’ by
an order issued by FERC, 16 U.S.C. § 825l(b), and a party is
‘aggrieved’ only if it has Article III standing.” Id. (citation
omitted).
19
To establish Article III standing, Petitioners must satisfy a
familiar three-part test: (1) “an injury in fact”; (2) “fairly
traceable to the challenged agency action”; (3) “that will likely
be redressed by a favorable decision.” Kansas Corp. Comm’n
v. FERC, 881 F.3d 924, 929 (D.C. Cir. 2018) (citing Lujan v.
Defenders of Wildlife, 504 U.S. 555, 560–61 (1992)).
Where there are multiple plaintiffs who assert overlapping
arguments, at least one petitioner must have standing to seek
each form of relief requested in the petitions for review. Nat’l
Ass’n of Regul. Util. Commissioners v. FERC, 964 F.3d 1177,
1184 (D.C. Cir. 2020). Here, both NECOS and the State
Petitioners have standing. First, NECOS has established an
imminent injury-in-fact because it represents eighteen
electrical utilities that will be expected to pay ISO-NE’s
designated rates under IEP and a municipal lighting plant
cooperative that was a party to the proceedings before FERC.
Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361,
1367 (D.C. Cir. 2004); Carpenters Indus. Council v. Zinke, 854
F.3d 1, 5–9 (D.C. Cir. 2017). Next, State Petitioners have
established an imminent injury-of-fact because they represent
the interests of the states in protecting their citizens and electric
ratepayers in the traditional government field of utility
regulation. Maryland People’s Counsel v. FERC, 760 F.2d
318, 321 (D.C. Cir. 1985). With respect to the causational
element of Article III standing, these imminent injuries are
traceable to FERC’s approval of IEP. Ordering the relief
sought—granting their petitions, vacating FERC’s approval of
ISO-NE’s tariff provisions implementing IEP, and remanding
to the Commission—would redress their imminent injuries by
maintaining the status quo with respect to the Northeast’s
electricity rates. We conclude that NECOS and the State
Petitioners have established Article III standing, and so we
need not address whether the Environmental Petitioners also
have standing.
20
B.
Next, we consider the merits of the petitions. Petitioners
challenge several aspects of IEP. We reject all of the
challenges except one.
Most broadly, Petitioners attack IEP itself. Among other
things, they contend that it does not effectively address a
pressing fuel security risk, that it unnecessarily duplicates other
programs addressed to fuel security in New England, and that
its total costs are unreasonable. We find the Commission’s
reasoning on these points to be adequate, and so we reject these
challenges.
Petitioners fare better in their narrower challenge to one
aspect of IEP—that it “adds approximately $40 million per
year in new payments to nuclear, coal, biomass, and eligible
hydroelectric resources notwithstanding that these resources
are unlikely to change their behavior in response to these
payments.” NECOS Opening Br. 23.
FERC failed to respond adequately to this argument, most
notably the concern that IEP will not incentivize nuclear, coal,
biomass, and hydroelectric resources to change their standard
practices. See PSEG Energy Res. & Trade LLC, 665 F.3d at
208. Instead, the Commission summarily accepted ISO-NE’s
contention that IEP’s broad eligibility is appropriate because it
provides “similar compensation for similar service.” Order
Accepting Tariff Revisions ¶ 62. “This [response] completely
disregards the core of petitioners’ theory[,]” that IEP is overly
inclusive and will give windfall payments to biomass,
hydroelectric, nuclear, and coal generating resources. See
Dynegy Midwest Generation, Inc. v. FERC, 633 F.3d 1122,
21
1127 (D.C. Cir. 2011). In sum, FERC neglected its duties to
provide a reasoned analysis for approving IEP.
In addition, FERC’s approval of IEP’s inclusion of
biomass, coal, hydroelectric, and coal resources thwarts the
agency’s own “longstanding policy that rate incentives must be
prospective and that there must be a connection between the
incentive and the conduct meant to be induced.” San Diego
Gas & Elec. Co. v. FERC, 913 F.3d 127, 137 (D.C. Cir. 2019)
(internal quotation marks and citation omitted). In that regard,
this Court has long held that “[a] reward for past behavior . . .
does not induce future efficiency and benefit consumers.” Id.
at 138 (internal quotation marks and citation omitted). “Our
review of rate-based incentive programs has never questioned
the obvious proposition that the Commission will not, and
cannot, create incentives to motivate conduct that has already
occurred.” Id. (internal quotation marks and citations omitted).
Above all, the Commission has emphasized that “[t]he function
of an incentive is to encourage action that has not yet
occurred.” San Diego Gas & Elec. Co., 157 FERC ¶ 61,056,
at P 15 (Oct. 26, 2016), aff’d sub nom. San Diego Gas & Elec.
Co. v. FERC, 913 F.3d 127 (D.C. Cir. 2019). IEP’s
compensation scheme simply misses the mark.
Furthermore, FERC’s rationale for compensating
generators that are unlikely to change behavior—because IEP
is designed to provide “similar compensation for similar
service”—is not compelling, especially in light of the agency’s
precedent. Order Accepting Tariff Revisions ¶ 62. As
mentioned, in 2016, FERC concluded that compensating
“resources that do not provide any additional benefit to winter
reliability for the sake of fuel neutrality alone” is inappropriate.
Order Denying Rehearing ¶ 13. But in its June 2020 order,
FERC did not make any attempt to explain why it now believes
it is appropriate for ISO-NE to compensate generators that are
22
unlikely to respond to payment incentives or otherwise increase
winter energy security.
Thus, the Commission’s analysis in this case contradicts
its past rejection of ISO-NE’s proposal to compensate
generators that will not change behavior in response to program
compensation. See Order Denying Rehearing ¶ 13. Although
FERC is entitled to change its position on whether resources
that are unlikely to respond to compensation incentives should
be included in winter energy reliability solutions, it “may
not . . . depart from a prior policy sub silentio.” Fox Television
Stations, Inc., 556 U.S. at 515 (citation omitted); see also Sw.
Airlines Co. v. FERC, 926 F.3d 851, 856 (D.C. Cir. 2019) (“But
however the agency justifies its new position, what it may not
do is gloss over or swerve from prior precedents without
discussion.”) (cleaned up). There is nothing in the June 2020
Order that “display[s] awareness that [FERC] is changing
position” on this issue and as such demonstrates a lack of
reasoned decisionmaking. Fox Television Stations, Inc., 556
U.S. at 515; NEPGA, 881 F.3d at 211 (“Although case-by-case
adjudication sometimes results in decisions that seem at odds
but can be distinguished on their facts, it is the agency’s
responsibility to provide a reasoned explanation of why those
facts matter.”); PPL Wallingford Energy LLC v. FERC, 419
F.3d 1194, 1198 (D.C. Cir. 2005) (“We have stressed that
‘[u]nless the [agency] answers objections that on their face
seem legitimate, its decision can hardly be classified as
reasoned.’”) (quoting Canadian Ass’n of Petroleum Producers
v. FERC, 254 F.3d 289, 299 (D.C. Cir. 2001)). Instead of
grappling with Petitioners’ concerns about IEP’s windfall
payments to generating resources, FERC swept them under the
rug. “It [was] arbitrary and capricious to ignore such matters.”
See Fox Television Stations, Inc., 556 U.S. at 515.
23
In reviewing FERC’s June 2020 Order, we conclude that
FERC approved IEP without adequately considering legitimate
objections from complainants who pointed out that it would
result in windfall payments to nuclear, coal, biomass, and
hydroelectric resources. “If continued unchecked, [IEP] would
create an impression that the agency is engaging in an
uncontrolled giveaway . . . without Congressional warrant . . .
and that the courts were abdicating their review responsibility.”
Pub. Serv. Comm’n of N.Y. v. FERC, 589 F.2d 542, 560 (D.C.
Cir. 1978). Accordingly, we conclude that the June 2020
order’s acceptance of compensation incentives—for a distinct
category of generators that are unlikely to respond to those
incentives—was arbitrary and capricious. As noted above,
however, we do not believe that the Commission acted
arbitrarily or capriciously in approving other aspects of IEP.
We therefore turn next to determining the appropriate remedy.
IV.
On judicial review, whether an agency order is severable
turns on the agency’s intent. Sierra Club v. FERC, 867 F.3d
1357, 1367 (D.C. Cir. 2017) (citing Epsilon Elecs., Inc. v. U.S.
Dep’t of Treasury, 857 F.3d 913, 929 (D.C. Cir. 2017)).
“Where there is substantial doubt that the agency would have
adopted the same disposition regarding the unchallenged
portion if the challenged portion were subtracted, partial
affirmance is improper.” North Carolina v. FERC, 730 F.2d
790, 796 (D.C. Cir. 1984); see also Davis Cnty. Solid Waste
Mgmt. v. EPA, 108 F.3d 1454, 1459 (D.C. Cir. 1997); New
Jersey v. EPA, 517 F.3d 574, 583–84 (D.C. Cir. 2008).
Additionally, a reviewing court must consider “whether the
remainder of the regulation could function sensibly without the
stricken provision.” MD/DC/DE Broad. Ass’n v. FCC, 236
F.3d 13, 22 (D.C. Cir. 2001) (citing K Mart Corp. v. Cartier,
Inc., 486 U.S. 281, 294 (1988)); see 3 Kristin E. Hickman &
24
Richard J. Pierce, Jr., Administrative Law Treatise § 20.3 (6th
ed. 2019) (collecting cases where courts have vacated a
segment of an agency’s rule or final order and otherwise
remanded to the agency) (citing Arizona Pub. Serv. Co. v. EPA,
562 F.3d 1116 (10th Cir. 2009) and Sorensen Commc’ns Inc.
v. FCC, 755 F.3d 702 (D.C. Cir. 2014)).
In essence, to extract the agency’s intent, we ask whether
there is substantial doubt that FERC would have adopted IEP
if it omitted—from the outset—resources that would not
change their behavior in response to IEP. Although none of the
applicable cases definitively establish what is sufficient to
show “substantial doubt,” we have previously considered
whether the challenged portion of the agency order “is in any
way intertwined” with the unchallenged portion of the order or
if “they operate entirely independently of one another.” Davis
Cnty., 108 F.3d at 1459 (internal quotation marks and citation
omitted); Carlson, 938 F.3d at 351; Epsilon Elecs., 857 F.3d at
929; Telephone & Data Sys., Inc. v. FCC, 19 F.3d 42, 50 (D.C.
Cir. 1994). Our precedent reflects that the heart of the inquiry
is whether “‘there is substantial doubt that the agency would
have adopted’” IEP if it had never included nuclear, biomass,
coal, and hydroelectric generators in the first place “‘on its
own’” and whether IEP can “function sensibly” without them.
New Jersey, 517 F.3d at 584 (quoting Davis Cnty., 108 F.3d at
1459); North Carolina, 730 F.2d at 796; Sierra Club, 867 F.3d
at 1366–67; Am. Fuel & Petrochemical Mfrs. v. EPA, 3 F.4th
373, 384 (D.C. Cir. 2021).
For the reasons explained below, we determine that the
Commission’s June 18, 2020 order is severable with respect to
IEP’s inclusion of coal, nuclear, biomass, and hydroelectric
generators and therefore partial vacatur of the Commission’s
approval of IEP is appropriate. Based on the record before us,
there is not “substantial doubt” that the agency would have
25
adopted IEP without the inclusion of nuclear, coal, biomass,
and hydroelectric generators “on its own.” See Davis Cnty.,
108 F.3d at 1459. We believe FERC “would have adopted the
same disposition”—meaning that it would have approved
IEP—even if ISO-NE had not proposed to include
compensation for nuclear, coal, biomass, and hydroelectric
generators in the first place. See Carlson v. Postal Regul.
Comm’n, 938 F.3d 337, 351 (D.C. Cir. 2019). Moreover, the
parts of the FERC order approving IEP that remain in place can
“function sensibly without the stricken provision[s]” of IEP.
See id. at 351 (internal quotation marks and citations omitted).
To be sure, in its Order, FERC did not explicitly address
whether any portion of IEP was severable. Cf. Am. Fuel, 3
F.4th at 384.
Even so, the June 2020 order makes clear that the agency’s
primary concern is addressing the Northeast’s imminent and
dire fuel energy security risk with a stopgap, short-term
solution to a “misaligned incentives problem.” Order
Accepting Tariff Revisions ¶ 62. FERC does not say outright
that the coal, nuclear, biomass, and hydroelectric generators
face a “misaligned incentives problem” so it is conceivable that
FERC could have concluded that their exclusion would not
necessarily detract from IEP’s overall goal. But more
significantly, there are other categories of generators in the
program that would meet ISO-NE’s proposed conditions for
selling inventoried energy, including oil, refuse, and natural
gas generators. Thus, we do not believe there is substantial
doubt that FERC would have approved IEP had the coal,
nuclear, biomass, and hydroelectric generators not been
included from the start. Under those circumstances, the
administrative record supports the finding that in FERC’s view,
IEP could still be fairly described as “a short-term solution that
helps address the misaligned incentives problem that currently
26
exists in the Tariff” by “compensat[ing] fuel-secure resources
. . . which will likely provide reliability benefits.” Id. ¶ 58.
FERC’s own past precedent also reinforces this
conclusion. See ISO New Eng., Inc., 152 FERC ¶ 61,190(2015) (“Order on Proposed Tariff Revisions”). As mentioned,
in a prior order, FERC considered two competing winter
reliability proposals, including the Winter Reliability Program
proposal submitted by ISO-NE, and found unreasonable ISO-
NE’s pitch to compensate generators whose behavior would
not change in response to program payments. Id. ¶ 47 (“While
ISO-NE expanded the types of resources eligible to participate
in the program, the record does not reflect that including the
additional resource types under the same general program
principles will incent any additional fuel procurement.”).
NEPOOL, the other entity that submitted a proposal argued that
ISO-NE’s proposed program “would compensate nuclear, coal,
and hydro resources for doing precisely what they already have
been doing in preparation for energy and reserve market
operations during the winter months.” Id. ¶ 18. FERC rejected
ISO-NE’s proposal. Id. at 61,900; see also Order Denying
Rehearing ¶ 13. That FERC has previously rejected ISO-NE’s
inclusion of generators that would not change their behavior in
response to payments for storing energy reflects that there is
not substantial doubt that the Commission would have
approved IEP if ISO-NE had excluded that same category of
generators when it first proposed IEP.
We turn next to whether IEP can function sensibly without
the inclusion of nuclear, coal, biomass, and hydroelectric
generators, whose on-site energy storage practices are unlikely
to be affected by IEP’s compensation incentives. We believe
that the remainder of IEP can function without the inclusion of
these resources. The record reflects that other categories of
generators—including oil, refuse, and natural gas-based
27
resources—are eligible to participate in IEP and are in a
position to be incentivized to participate. Moreover, wind and
solar resources that are coupled with a battery storage system
are eligible to participate and contribute to IEP’s objective of
enhancing winter energy security. Finally, if IEP were to
include nuclear, coal, biomass, and hydroelectric generators,
these entities would store up to three days’ worth of fuel
anyway because it is their standard practice and thus, by
default, they contribute to energy reliability in the winters.
Therefore, there is strong record evidence that demonstrates
that IEP, even without the excluded resources, is designed to
improve the Northeast’s energy reliability when there is stress
on the region’s grid in future winters. Accordingly, we find
that this portion of IEP is severable from the remainder of the
Commission’s June 2020 order and therefore vacate this
portion.
In summary, we will leave intact the Commission’s June
2020 order except for the portion of IEP that is arbitrary and
capricious: the agency’s inclusion of nuclear, biomass, coal,
hydroelectric generators. We believe there is not substantial
doubt that FERC would have adopted IEP if it had not included
these resources in the first place. And IEP can function
sensibly without them.
V.
For the reasons discussed above, we uphold all but one
component of the Commission’s decision to approve ISO-NE’s
proposed tariff revisions implementing the Inventoried Energy
Program. We find that the Commission’s approval of the
proposal’s inclusion of nuclear, coal, biomass, and
hydroelectric generators was arbitrary and capricious, and so
we vacate that inclusion. As such, we grant in part and deny in
part the Petitions before us. We remand to FERC for further
proceedings consistent with this opinion.
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So ordered.