New England Power Gen. Assoc. v. FERC

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 19, 2013 Decided July 8, 2014
No. 12-1060
NEW ENGLAND POWER GENERATORS ASSOCIATION, INC.,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
PSEG ENERGY RESOURCES & TRADE LLC, ET AL.,
INTERVENORS
Consolidated with 12-1074, 12-1085, 12-1149
On Petitions for Review of Orders of the
Federal Energy Regulatory Commission
Stephen L. Teichler argued the cause for petitioners
NSTAR Electric Company/Public Systems. With him on the
briefs was Mary E. Grover.
2
Jeffrey A. Schwarz argued the cause for petitioners
Massachusetts Municipal Wholesale Electric Company, et al.
With him on the briefs were Scott H. Strauss and Peter J.
Hopkins.
Jeffrey A. Lamken argued the cause for petitioners New
England Power Generators Association, Inc., et al. With him
on the briefs were Martin V. Totaro, Ashley C. Parrish, David
G. Tewksbury, Stephanie S. Lim, Matthew S. Owen, and
Abraham Silverman.
John Lee Shepherd Jr. argued the cause for intervenors
PSEG Energy Resources & Trade LLC, et al. With him on
the brief was Jodi L. Moskowitz.
John S. Wright and Michael C. Wertheimer, Assistant
Attorneys General, Office of the Attorney General for the
State of Connecticut, were on the brief for intervenor George
Jepsen, Attorney General for the State of Connecticut, in
support of petitioners.
F. Anne Ross was on the brief for intervenor New
England Conference of Public Utilities Commissioners, Inc.
in support of petitioner.
Robert M. Kennedy Jr., Attorney, and Beth G. Pacella,
Senior Attorney, Federal Energy Regulatory Commission,
argued the causes for respondent. With them on the brief
were David L. Morenoff, Acting General Counsel, and Robert
H. Solomon, Solicitor.
Kimberly Frank argued the cause for intervenor
Connecticut Public Utilities Regulatory Authority. With her
on the brief were Randall L. Speck, Gregory S. Wagner,
3
Robert A. Weishaar, Jr., F. Anne Ross, and Stephen L.
Teichler.
Ashley C. Parrish and David G. Tewksbury were on the
brief for intervenor New England Power Generators
Association, Inc. in support of respondent.
Before: BROWN and GRIFFITH, Circuit Judges, and
SENTELLE, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
SENTELLE.
SENTELLE, Senior Circuit Judge: Multiple petitioners
seek review of orders of the Federal Energy Regulatory
Commission (“FERC” or “the Commission”) affecting the
administration of the Independent System Operator-New
England (“ISO-NE”) and specifically directed to curtailment
of the exercise of market power in the New England energy
market. While competing petitioners raise numerous and
often opposite objections to FERC’s orders, upon review we
conclude that none of the petitioners establishes that FERC
has committed reversible error, and we therefore deny the
petitions for review.
I. BACKGROUND
A. Statutory and Regulatory Framework
The Commission is charged under the Federal Power Act
(“FPA”) with regulating the sale and transmission of electric
energy, primarily ensuring that energy is provided at a just
and reasonable rate. 16 U.S.C. § 824d(a). The Commission
has jurisdiction over such sale and transmission, but states
retain the right to regulate the facilities responsible for the
4
generation of electric energy. Id. § 824(b). In exercising its
duty to oversee the wholesale electricity market, FERC has
undertaken to regulate capacity markets, which dictate the
amount of electricity available for production and
transmission when needed. See Conn Dep’t of Pub. Util.
Control v. FERC, 569 F.3d 477, 479 (D.C. Cir. 2009). At the
foundation of FERC’s current regulatory scheme of the
electric market stands Order No. 888. 1 In Order No. 888,
FERC undertook to promote wholesale competition through
open access and nondiscriminatory transmission services. As
part of that undertaking, FERC “encouraged the formation of
independent system operators (ISOs) to administer
transmission services and new markets for wholesale
electricity transactions.” Sithe/Independence Power Partners,
LP v. FERC, 285 F.3d 1, 2 (D.C. Cir. 2002). The regulatory
scheme contemplates that the ISOs will “adopt transmission
(and ancillary services) pricing policies to promote the
efficient use of, and investment in, generation, transmission,
and consumption” of wholesale electric power in specific
energy capacity systems. Id. One such ISO is the
Independent System Operator-New England, responsible for
the electric energy capacity system in the New England
region.
1
Promoting Wholesale Competition Through Open Access Non-
Discriminatory Transmission Servs. By Pub. Utils.; Recovery of
Stranded Costs by Pub. Utils. & Transmitting Utils., Order No.
888, FERC Stats & Regs. ¶ 31,036 (1996), order on reh’g, Order
No. 888-A, FERC Stats & Regs ¶ 31,048 (1997), order on reh’g,
Order No. 888-B, 81 FERC ¶ 61,248 (1997), order on reh’g, Order
No. 888-C, 82 FERC ¶ 61,046 (1998), affirmed in relevant part,
remanded in part on other grounds sub nom. Transmission Access
Policy Study Grp. v. FERC, 225 F.3d 667 (D.C. Cir. 2000), aff’d
sub nom. New York v. FERC, 535 U.S. 1 (2002).
5
To ensure reliable electrical power, a system operator
such as ISO-NE must implement a scheme that will incent
resources to provide sufficient energy capacity, or energy
available for later use. New England’s chosen scheme
involves a Forward Capacity Market (“FCM”), which sets
capacity price for the following three years via auction. After
completing two auctions in 2008 under the most recent
capacity market regime, New England market participants
submitted on December 1, 2008 a filing to the Commission
identifying certain parameters of the capacity market
requiring further attention. Subsequently, after Auction 3,
New England participants proposed revisions to the capacity
market rules in a February 22, 2010 filing. FERC entered
four orders regarding these and subsequent requests for
modification that are before us.
In its orders, FERC imposed buyer- and supplier-side
mitigation measures which, apparently, satisfied exactly none
of its constituents. Petitioners NSTAR Electric Company
(“NSTAR”), along with Massachusetts Municipal Wholesale
Electric Company and New Hampshire Electric Cooperative,
Inc. (together, “Public Systems”), challenge FERC’s buyer-
side mitigation measures as going too far. Public Systems
also assert that the Commission lacks jurisdiction under the
Federal Power Act to impose these mitigation measures, an
argument joined by Intervenors the Attorney General for the
State of Connecticut (“Connecticut”) and the New England
Conference of Public Utilities Commissioners (“New England
Commissioners”).
Petitioners New England Power Generators Association,
Inc. (“NEPGA”) and several electricity generators, NRG
Power Marketing LLC, Connecticut Jet Power LLC, Devon
Power LLC, Middletown Power LLC, Montville Power LLC,
Norwalk Power LLC, and Somerset Power LLC (together,
6
“Suppliers”), challenge the buyer-side mitigation measures as
too lenient, while contending that the seller-side measures are
too harsh.
For the reasons explained below, we hold that the orders
on review fall within FERC’s statutory rate-making authority
conferred by the FPA. Because FERC undertook its
balancing responsibilities in the capacity market with
appropriate consideration and based its decision on substantial
evidence, we defer to the Commission’s sound judgment in
crafting mitigation measures responsive to the needs of the
New England Forward Capacity Market, and therefore deny
each of the petitions before us.
B. The Devon Power Settlement
The New England market fashioned the particulars of its
capacity market via a settlement including stakeholders of all
stripes. FERC initially approved the Forward Capacity
Market, Devon Power LLC, 115 FERC ¶ 61,340 (“Settlement
Order”), order on reh’g, 117 FERC ¶ 61,133 (2006)
(“Settlement Rehearing Order”), and all aspects of the
Commission’s determination were eventually affirmed by this
Court and/or the Supreme Court. See Me. Pub. Utils.
Comm’n v. FERC, 520 F.3d 464, 467 (D.C. Cir. 2008), rev’d
in part sub nom. NRG Power Mktg. v. Me. Pub. Utils.
Comm’n, 558 U.S. 165 (2010).
The settlement contemplated use of auctions through
which utilities can secure obligations to provide capacity.
Before each auction, ISO-NE determines the amount of
capacity that will be required for system reliability in three
years—the Installed Capacity Requirement. Conn. Dep’t, 569
F.3d at 480. Each energy provider is required to purchase
enough capacity to meet its share of the Installed Capacity
7
Requirement. Id. The auction is a “descending clock
auction” in which the price gradually drops until the total
amount of capacity offered by suppliers equals the Installed
Capacity Requirement. The starting price for the auction is
set at twice the estimated “Cost of New Entry.” Id. Cost of
New Entry is the price of capacity, expressed in $/kilowatt-
month, that is needed to attract new capacity. Settlement
Order ¶ 130. Theoretically, such a pricing scheme allows for
the market to signal its need for additional electrical
generation, while enabling generators to recover their costs.
See TC Ravenswood, LLC v. FERC, 741 F.3d 112, 114 (D.C.
Cir. 2013).
The settlement provided several features designed to
assure that the Forward Capacity Market did not suffer from
the exercise of buyer-side market power, wherein the price of
capacity drops too low to produce just and reasonable
electricity rates. First, an Internal Market Monitor was to
review the bids to ensure that they actually reflect a resource’s
long-run costs. Settlement Order ¶ 109. Any bid below those
costs would be deemed out-of-market (also known as “below-
cost” or “uneconomic”). Id. When such a bid is discovered,
the capacity clearing price (i.e., the closing price of the
auction) would be reset under the Alternative Price Rule to
either (1) Cost of New Entry or (2) the price at which the last
in-market resource withdrew from the auction via a de-list bid
minus $0.01. Id. Secondly, under the settlement, load-
serving entities (“LSEs”), essentially electric utility
companies, could designate some resources as self-supply:
either utility-owned generation facilities or facilities with
which the utility had contracted. Id. ¶ 20. These self-
supplied resources could be used to offset the utility’s
required share of the Installed Capacity Requirement, even
though they participate in the auction at prices below their
long-run costs and are thus out-of-market. ISO New England,
8
Inc., 138 FERC ¶ 61,027, nn.99 & 103. Finally, the capacity
market was to be subject to a clearing price floor in its first
three auctions; the clearing price could not be set below 0.6
times Cost of New Entry. Settlement Order ¶ 19.
The settlement also included features designed to protect
against supplier-side market power. While it allowed for
several types of de-list bids, where suppliers of capacity
resources could exit the market as the price dropped, certain
of these de-list bid types were subject to review by the
Internal Market Monitor. Id. ¶ 28. A static de-list bid is one
that allows a utility to exit the auction for a year, but must be
submitted before the auction and must be reviewed by the
Internal Market Monitor. ISO New England, Inc., 135 FERC
¶ 61,029 n.75. A dynamic de-list bid occurs when a capacity
resource exits during the auction without Internal Market
Monitor review. Id. n.74; ISO New England, Inc., 119 FERC
¶ 61,045 P.35.
C. Procedural History
In 2008, ISO-NE held the first two auctions under the
FCM regime outlined by the settlement and approved in the
Settlement Order and Settlement Rehearing Order. On
December 1, 2008, New England market participants
submitted a filing proposing that modifications be made to the
FCM and calling for stakeholder input. In June 2009, the
Internal Market Monitor issued an initial assessment of the
capacity market. The third auction took place in October
2009. After a stakeholder process, several market participants
submitted on February 22, 2010 proposed FCM changes that
would go into effect on April 23, 2010, some three months
before the scheduled August 2, 2010 fourth auction. This
original proposal sought, among other things, to revise the
Alternative Price Rule, extend the price floor beyond the third
9
auction, and revise the Cost of New Entry calculation. ISO
New England, Inc., 131 FERC ¶ 61,065 P.6. The original
proposal contemplated that other parameters would need yet
additional stakeholder review and input.
FERC issued four orders in connection with these and
subsequent proposed changes to the New England capacity
market. In the first order, FERC found certain parameters of
the proposal to satisfy the “just and reasonable” standard and
accepted them as proposed. ISO New England, Inc., 131
FERC ¶ 61,065, Order on Forward Capacity Market
Revisions and Related Complaints, April 23, 2010 (“First
Order”) ¶ 16. FERC set other issues for paper hearing, but
made the proposed changes effective as of the date of the
order, April 23, 2010, to provide certainty heading into the
fourth auction scheduled for August 2, 2010. Id. ¶¶ 17–19.
The Commission later issued a second order clarifying certain
portions of the First Order. 132 FERC ¶ 61,122, Order
Granting in Part and Denying in Part Requests for
Clarification and Rehearing and Denying Motion for
Disclosure, August 12, 2010 (“Second Order”). On the paper
hearing, ISO-NE presented a July 1, 2010 revised proposal
outlining changes to the Forward Capacity Market, and
various stakeholders responded to both the original and the
revised proposal.
FERC issued two orders responding to the revised
proposal. 135 FERC ¶ 61,029, Order on Paper Hearing and
Order on Rehearing, April 13, 2011 (“Third Order”); 138
FERC ¶ 61,027, Order on Rehearing and Clarification and
Order Accepting Compliance Filings, January 19, 2012
(“Fourth Order”). FERC identified “two major and
interrelated issues . . . in this case: (1) whether the FCM
design in New England will provide sufficient income to
incent market entry when necessary without the assistance of
10
supplemental revenue streams from outside ISO-NE markets
and (2) the proper design of market power mitigation regimes
to protect against both buyer and seller market power.” Third
Order ¶ 15. As a result, it found the majority of the proposal
unjust and unreasonable, but accepted portions of ISO-NE’s
July 1, 2010 revised proposal. Id. ¶ 16.
FERC found that the proposals did not adequately
mitigate buyer-side power in that they failed to provide
sufficient regulation of below-cost entry, but also found that a
component of the revised proposal based on “benchmark
pricing” could lead to a just and reasonable buyer-side
mitigation measure. Id. ¶¶ 17, 165. Significantly, the
Commission ordered ISO-NE to develop a minimum-offer
price rule (“MOPR” or “offer-floor mitigation”) specific to
resources’ asset class. FERC “require[d] ISO-NE to work
with its stakeholders to develop a mitigation regime that relies
on these benchmarks but does not procure more capacity than
[the Installed Capacity Requirement], that is, to develop an
offer-floor mitigation construct . . . .” Id. ¶ 165.
FERC found it inappropriate to adopt a categorical
mitigation exemption for state-sponsored and self-supply
entities, Third Order ¶¶ 170–71, but nothing in the order
eliminated any right that entities might have to request
mitigation exemptions, Fourth Order ¶ 91. The Commission
extended the price floor through Auction 6, but did not further
mitigate resources that had been deemed below-cost in the
first five auctions once the MOPR construct was in place.
Third Order ¶ 217.
FERC found that the proposals also failed to adequately
mitigate supplier-side power. The Commission lowered the
dynamic de-list bid price to $1/kilowatt-month, requiring de-
list bids over this price to be subject to review by the Internal
11
Market Monitor. Third Order ¶ 313; Fourth Order ¶¶ 121–
28.
D. Petitions for Review
Before us, Petitioners NSTAR and Public Systems
challenge the buyer-side mitigation measures as going too far.
Public Systems first contends that FERC lacks jurisdiction
under the FPA to impose mitigation requirements upon
uneconomic entrants to the Forward Capacity Market. Both
NSTAR and Public Systems go on to argue that, assuming
jurisdiction, FERC’s orders imposing mitigation requirements
in order to produce just and reasonable rates were not based
on substantial evidence. Finally, NSTAR and Public Systems
assert that the Commission acted arbitrarily and capriciously
in declining to create a categorical mitigation exemption for
self-supplied and state-sponsored resources.
Conversely, petitioners NEPGA and Suppliers challenge
the buyer-side mitigation measures as too lenient, while
contending that the supplier-side mitigation measures are too
harsh. On the buyer-side measures, they first argue that
FERC acted arbitrarily and capriciously in declining to
regulate uneconomic entrants from Auctions 1–5 in later
auctions using the offer floor mitigation scheme. Secondly,
they argue that the Commission erred in determining which
resources constitute new import resources subject to offer-
floor mitigation. Regarding the seller-side measures, they
claim that it was arbitrary and capricious for FERC to lower
the dynamic de-list price to $1/kilowatt-month.
We consider each allegation in turn.
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II. STANDARD OF REVIEW
This Court reviews final orders issued by the
Commission under the arbitrary and capricious standard of the
Administrative Procedure Act, 5 U.S.C. § 706(2)(A). An
agency action will be upheld if the agency “articulate[d] a
satisfactory explanation for its action including a ‘rational
connection between the facts found and the choice made.’”
Motor Vehicle Mfrs. Ass’n of United States, Inc. v. State Farm
Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (quoting
Burlington Truck Lines, Inc. v. United States, 371 U.S. 156,
168 (1962)). The Commission’s factual findings will be
upheld if supported by substantial evidence. 16 U.S.C.
§ 825l(b).
The question of an agency’s interpretation of a statutory
ambiguity that concerns the scope of the agency’s authority is
reviewed under the Chevron standard. “[T]he question in
every case is, simply, whether the statutory text forecloses the
agency’s assertion of authority, or not.” City of Arlington,
Tex. v. FCC, __ U.S. __, __, 133 S. Ct. 1863, 1871 (2013).
III. DISCUSSION
A. FERC’s Jurisdiction
We begin by noting that the Settlement Order and
Settlement Rehearing Order in this case entertained concerns
over whether FERC had jurisdiction over the settlement.
However, the Settlement Orders were devoted to considering
the broad issue of FERC’s jurisdiction to regulate charges for
capacity as opposed to wholesale energy. Settlement Order
¶ 201 (collecting cases in which “[c]ourts have confirmed that
the Commission has jurisdiction under the FPA to regulate the
charges for capacity in wholesale markets”). The Settlement
13
Orders did not consider the precise jurisdictional question
before us.
Our question is whether FERC has jurisdiction to
regulate capacity where its regulation touches on which
energy facilities may be used to fulfill capacity obligations.
Public Systems argue that FERC exceeded its jurisdiction
when it imposed buyer-side mitigation measures because the
orders serve to dictate which resources a utility must use to
satisfy its capacity obligations, in violation of the FPA.
Intervenor Connecticut joins Public Systems’ jurisdictional
argument, contending that FERC’s orders impermissibly
determine the makeup of a state’s resource portfolio.
Under 16 U.S.C. § 824(b)(1), “[t]he Commission shall
have jurisdiction over all facilities for such [interstate]
transmission or sale of electric energy, but shall not have
jurisdiction . . . over facilities used for the generation of
electric energy . . . .” Said another way, states regulate
facilities, while FERC regulates sale and transmission. We
have previously held that the Commission has jurisdiction to
regulate certain parameters of the capacity market related to
the price of capacity, even if those determinations touch on
states’ authority. See, e.g., Conn. Dep’t of Pub. Util. Control
v. FERC, 569 F.3d 477, 481–83 (D.C. Cir. 2009) (FERC may
regulate Installed Capacity Requirement as it affects FERC
jurisdictional rates, even if the requirement could result in the
construction of facilities, a matter under state jurisdiction);
Municipalities of Groton v. FERC, 587 F.2d 1296, 1300–03
(D.C. Cir. 1978) (FERC approval of a capacity deficiency
charge does not encroach on state jurisdiction, even though it
14
may “motivate [utilities] to develop sufficient capacity to
meet their load requirements”). 2 We do so again here.
Out-of-market resources—whether self-supplied, state-
sponsored, or otherwise—directly impact the price at which
the Forward Capacity Market auction clears. As the price of
capacity is indisputably a matter within the Commission’s
exclusive jurisdiction, FERC likewise has jurisdiction to
mitigate buyer-side market power as to out-of-market
entrants. We agree with the Commission’s finding that it has
jurisdiction over mitigation matters “affecting or relating to
wholesale rates” under FPA § 201 and 206. Third Order
¶ 220 (emphasis omitted) (citing Conn. Dep’t of Pub. Util.
Control, 569 F.3d at 478, 481). We stress that FERC’s
mitigation measures here do not entail direct regulation of
facilities, a matter within the exclusive control of the states.
See 16 U.S.C. § 824(b)(1). The Commission also found that
uneconomic entry, regardless of resource and regardless of
intent, “can produce unjust and unreasonable prices by
artificially depressing capacity prices.” Id. ¶ 170. As it is
FERC’s statutory obligation to ensure that rates are
appropriate, we must respect its decision to maintain just and
reasonable rates through curbing or mitigating buyer-side
market power. See Fourth Order ¶ 79 (“By regulating the
mechanism that ultimately produces the capacity clearing
price, the Commission is properly exercising its jurisdiction
over rates, terms and conditions of service.”).
Public Systems’ and Intervenor Connecticut’s arguments
largely rest on the proposition that the Commission is
2
However, we have never held, and do not now hold, that
regulation related to the price of capacity is within FERC’s
authority if it entails direct regulation of generation facilities. Such
matters are the province of the states. 16 U.S.C. § 824(b)(1).
15
improperly regulating “facilities used for the generation of
electric energy.” 16 U.S.C. § 824(b)(1). However, their
arguments fail: states remain free to subsidize the construction
of new generators, and load serving entities to build or
contract for any self-supply they believe is necessary; FERC’s
orders simply regulate the “price constructs that result in
offers into the capacity market from these resources that are
not reflective of their actual costs.” Third Order ¶ 170.
Moreover, this Court has already rejected in Connecticut
Department of Public Utility Control the argument that the
type of regulation at issue here constitutes “direct regulation
of generation facilities.” 569 F.3d at 481–82. There, we held
that FERC had jurisdiction to regulate “a key input into the
market-based mechanism.” Id. at 478. Just so here. This
mitigation parameter operates no differently.
FERC’s rate-making authority confers broad power “to
act in the public interest.” Miss. Indus. v. FERC, 808 F.2d
1525, 1549 (D.C. Cir. 1987) (internal quotations omitted),
vacated and remanded in part on other grounds, 822 F.3d
1104 (D.C. Cir. 1987). We hold that FERC has jurisdiction to
regulate the parameters comprising the Forward Capacity
Market, and that applying offer-floor mitigation fits within the
Commission’s statutory rate-making power.
B. Buyer-Side Mitigation
As we have discussed, the orders on review address
buyer-side market power by imposing a number of mitigation
measures. Essentially, the arguments before us on each of the
buyer-side mitigation measures are these: Petitioners NSTAR
and Public Systems contend that FERC went too far in its
measures designed to stop uneconomic entry. Petitioners
NEPGA and Suppliers argue that FERC did not go far enough
16
in preventing this buyer-side market power. The Commission
argues that it struck the appropriate balance.
1. Necessity of Buyer-Side Mitigation Measures
The Commission bears the statutory responsibility of
ensuring that rates are just and reasonable. Therefore, our
first consideration is whether FERC’s mitigation measures
against buyer-side market power were undertaken in the
establishment of just and reasonable rates. NSTAR argues
that they were not. It contends that FERC erred in ignoring
the settlement in place in this case, that its orders were not
supported by substantial evidence, and that it acted arbitrarily
and capriciously in imposing buyer-side mitigation.
Similarly, Public Systems argue that FERC erred in its
determination that self-supply artificially depresses capacity
prices, causing the Commission’s mitigation measures to be
unreasonable. We disagree with both sets of Petitioners and
hold that FERC reasonably mitigated buyer-side market
power.
In its orders, the Commission determined that neither of
ISO-NE’s proposals based on the Alternative Price Rule
would result in just and reasonable rates, due to the exercise
of buyer-side market power. Third Order ¶¶ 17–19, 59–61.
The Alternative Price Rule is a mitigation tool intended to
discourage buyers from suppressing market clearing capacity
prices below a competitive level, and to ensure that the price
of capacity is truly reflective of the cost of new entry into the
market. By design, the Rule is to provide an upwards price
adjustment for out-of-market resources. In practice, however,
the Commission found that the Alternative Price Rule failed
to adequately address the price suppressive effect of capacity
that entered the market through below-cost auction bids, due
to having too narrow a triggering mechanism. Id. ¶¶ 17–19,
17
59. The Rule was only set to trigger when the Installed
Capacity Requirement was higher than the amount of existing
capacity, and thus there was a need for new capacity to make
up the difference. First Order ¶ 70. However, new capacity
may be needed in scenarios other than meeting the Installed
Capacity Requirement, such as to replace existing capacity
entering retirement. Id. Further, the Commission found, the
Alternative Price Rule did not account for out-of-market
resources that affect prices even when no new capacity is
needed, by displacing other price-setting resources. Id.Indeed, the Rule was never triggered in the New England
auctions despite the entrance of significant amounts of out-of-
market capacity. Third Order ¶ 58. FERC specifically found
that “[out-of-market] capacity suppresses prices regardless of
intent,” Id. ¶ 170, and necessitates action by the Commission
to correct for unjust and unreasonable outcomes.
Even in rejecting ISO-NE’s proposals, the Commission
did find that one element of the revised proposal, the principle
of benchmark pricing, “form[ed] the basis for a just and
reasonable buyer-side mitigation measure.” Id. ¶ 165. Under
this approach, the Internal Market Monitor would establish
resource-specific benchmark prices approximating the cost of
new entry into the market. Id. ¶¶ 165, 169. Bids below a
specified percentage of the relevant benchmark would be
deemed uneconomic and would be subject to mitigation. The
Commission therefore required ISO-NE “to work with its
stakeholders to develop a mitigation regime that relies on
these benchmarks but does not procure more capacity than
[necessary], that is, to develop an offer-floor mitigation
construct . . . .” Id. ¶ 165. Under the offer-floor mitigation
scheme, if the clearing price falls below the set benchmark,
the new resource would not clear in the auction and would not
obtain a capacity supply obligation. Id. ¶¶ 165–69.
18
According to NSTAR, there is no evidence that the
Alternative Price Rule is not working as designed to mitigate
out-of-market entry. The Alternative Price Rule, NSTAR
argues, should be aimed at preventing buyers from
intentionally depressing capacity prices. It is true that the
New England capacity market suffers from the exercise of
buyer-side market power specifically at the hands of those
interested in depressing capacity prices. However, NSTAR
views too narrowly the circumstances in which the
Alternative Price Rule is designed to operate. The
Commission found that capacity offered into the market
through below-cost bids can suppress prices even when no
actor has the intent to do so. Third Order ¶ 170 (“[Out-of-
market] capacity suppresses prices regardless of intent . . . .”);
see also N.Y. Indep. Sys. Operator, Inc., 124 FERC ¶ 61,301P.29 (2008). The Alternative Price Rule “is a market power
mitigation rule intended to discourage buyers who have the
incentive and ability to suppress market clearing capacity
prices below a competitive level from doing so,” not simply
the intent to do so. First Order ¶ 69 (emphasis added). FERC
stated that its objective is “to ensure that the prices in capacity
markets reflect the market cost of new entry when new entry
is needed.” Id. However, the Commission “agree[d] with the
[External Market Monitor] and the commenters that ISO-
NE’s existing [Alternative Price Rule] does not fully meet this
objective.” Id. ¶ 70.
Such a finding that the Rule is not working was based on
substantial evidence. The External Market Monitor found
that “[out-of-market] capacity can lead to a clearing price in
the [auction] that is inefficiently low” and “can distort . . .
prices by shifting the supply in the [auction] such that a bid
with a substantially lower bid price . . . sets the clearing
price.” External Market Monitor (Potomac Economics)
Report at 4–6. In declining to accept the proposed
19
amendments to the Alternative Price Rule, the Commission
relied also on the External Market Monitor’s finding that “the
proposed [Alternative Price Rule] changes fail to trigger when
new capacity is not needed or when the [out-of-market]
quantity is less than the amount of new capacity needed, even
though in both cases [out-of-market] capacity can
substantially lower prices without an [Alternative Price Rule]
adjustment.” First Order ¶ 50; External Market Monitor
(Potomac Economics) Report at 14–15.
In short, the Alternative Price Rule would not be
triggered in all the scenarios necessary to produce just and
reasonable rates. “[T]he existing [Alternative Price Rule]
provides a price adjustment for [out-of-market] resources only
when there is a need for new capacity as reflected by an
[Installed Capacity Requirement] that exceeds all existing
capacity.” First Order ¶ 70. The Rule would not be triggered
when new capacity is needed because existing capacity is
retiring, or when uneconomic capacity would displace “what
would otherwise be the marginal, price-setting existing
resource.” Id. Moreover, even in those circumstances where
the Rule would be triggered, it would not produce the same
price that would have arisen had all the out-of-market entrants
offered capacity truly reflective of their long-run costs. Id.Upon evidence that the Alternative Price Rule failed to
capture all of the instances of price-shifting out-of-market
capacity, FERC acted within its authority to adjust parameters
of the settlement and in fact “has a continuing obligation to
ensure that . . . rates are just and reasonable.” OXY USA, Inc.
v. FERC, 64 F.3d 679, 690 (D.C. Cir. 1995) (internal
quotation marks omitted).
Likewise, we defer to the Commission’s decision to
mitigate buyer-side power because its determination was not
arbitrary or capricious, but instead a proper exercise of its role
20
in balancing competing interests. FERC evaluated the
relative importance of several parameters—allowing
uneconomic resources to clear the market, preventing
uneconomic resources from distorting the market clearing
price, and limiting the purchased capacity to the Installed
Capacity Requirement—and reasonably determined that it
was more important to prevent price distortion and excess
capacity purchase than it was to allow out-of-market
resources to clear. Third Order ¶¶ 159–66; Fourth Order
¶¶ 28, 75. Such a juggling act would not benefit from our
rearranging. See, e.g., Sacramento Mun. Util. Dist. v. FERC,
616 F.3d 520, 541–42 (D.C. Cir. 2010) (the court “properly
defers to policy determinations invoking the Commission’s
expertise in evaluating complex market conditions,” where
the Commission “reflected on the competing interests at stake
to explain why it struck the balance it did”) (internal
quotations omitted).
We are also unconvinced by Public Systems’ contentions
concerning buyer-side mitigation in the context of self-
supplied resources. They argue that lower prices are the
natural result of the increased supply of capacity now
available as states and other entities can produce or contract
for their own capacity. For the reasons already discussed,
FERC sufficiently explained how the Alternative Price Rule
as contemplated in the settlement does not adequately adjust
prices or prevent out-of-market resources from distorting
prices irrespective of motivation. That conclusion does not
change in consideration of the out-of-market resource’s status
as self-supplied.
2. Categorical Mitigation Exemption
If there is to be mitigation of buyer-side market power,
Petitioners contend, some resources—those which are self-
21
supplied and those which are state-sponsored—should be
categorically exempt. We again defer to the Commission’s
reasoned determination to the contrary.
We first decide that the question of categorical mitigation
exemptions is ripe for review. FERC contends that this issue
is unripe because ongoing agency proceedings will consider
mitigation exemptions for these resources. Respondent’s Br.
at 4–8. However, states and LSEs are currently harmed by
their inability to develop their portfolios for future years, as
they are acting pursuant to orders declining to exempt them
from mitigation. Moreover, since the completion of the
briefing in this case, FERC has gone on to deny proposed
tailored exemptions for both self-supplied and state-sponsored
entities. See Public Systems’ Rule 28(j) letter at 2. In light of
these factors, there is no reason to stay our consideration of
the issue.
Public Systems argue that allowing LSEs to choose
which resources they will use to fulfill their capacity
obligations is a cornerstone of the settlement in this case, and
that the mitigation measures prevent them from electing to
self-supply capacity because their bids will not clear the
market. Intervenors New England Commissioners agree and
argue that the Commission acted arbitrarily and capriciously
when it failed to meaningfully consider the states’ request for
a categorical exemption for state-sponsored resources, which
are unlikely to be used for the purpose of suppressing capacity
prices.
It is true enough that, under the settlement, self-supplied
and state-sponsored resources are available to fulfill capacity
obligations, provided that they adhere to “the same
performance obligations and qualification requirements as
other resources participating in the [Forward Capacity
22
Market] and the [auctions.]” See Settlement Order ¶ 20.
However, FERC did not act arbitrarily and capriciously in
determining that new self-supplied resources should meet the
additional burden of mitigation and should not be
categorically exempt. Rather, it recognized the need for
modification of the existing mitigation schemes in response to
the failings of the Alternative Price Rule as applied to all
uneconomic entry, including self-supplied and state-
sponsored resources, and mitigated accordingly.
The Commission found that designating a new resource
as self-supply “has the same price effect as offering the . . .
resource [into the auction] at a price of zero.” Fourth Order
¶ 60. This low price will serve to displace a higher-priced
resource that otherwise would have set the clearing price; as a
result, a lower offer will then set the clearing price. See id.
¶ 72. This is definitional market distortion in favor of buyers.
Further, it is the same market distortion that the Alternative
Price Rule failed to correct, necessitating the introduction of
the offer-floor mitigation scheme. Why then would identical
distortions be treated differently?
Simply, we uphold the Commission’s determination that
because self-supply serves to depress capacity prices, a
categorical exemption from mitigation is unwarranted. To
categorically exempt new self-supplied resources “would
allow the mitigation mechanism to be circumvented” and
result in unjust and unreasonable rates. Id. ¶ 60. FERC is
within its jurisdiction to consider the economic, as well as the
technical, attributes of a capacity resource.
We note that, in any event, the mitigation measures do
not apply to existing resources, id. ¶ 74, leaving current self-
supply purchasing decisions undisturbed and allowing state-
sponsored projects already in the market to fulfill capacity
23
obligations, id. ¶ 88. LSEs are free to shape their portfolios as
they choose, including with new self-supplied resources,
“provided these new resources clear the auction.” Id. ¶ 74.
Though the Commission has not yet approved any proposals,
the orders also permit parties an opportunity to develop
appropriately tailored exemptions for self-supplied and state-
sponsored resources through the stakeholder process. See id.
¶¶ 70, 91. Finally, the Commission “reiterate[d] that state
parties have the statutory right under [FPA] section 206 to file
to . . . seek[ ] an exemption . . . .” Id. ¶ 89.
Public Systems attempt to persuade us that FERC could
adopt a system wherein self-supply—often renewable energy
technology—is prevented from affecting the Forward
Capacity Market clearing price but is still allowed to displace
other, less competitive resources. Perhaps so. However, the
Commission reasonably determined that self-supply
negatively affects prices, and reasonably acted to balance
competing interests. In this instance, the Commission chose
to value most strongly the concept of preventing price
distortion; unfortunately for Public Systems, that decision
came at the expense of their uneconomic resources’ ability to
enter the market. FERC made the judgment that encouraging
renewable energies was less important than allowing such
out-of-market entrants to depress capacity prices. Such is
FERC’s prerogative. That it is unfortunate does not make it
arbitrary.
FERC’s considered conclusion that certain resources, by
definition, depress capacity prices falls within its duty of
ensuring that rates are just and reasonable. Third Order ¶ 170.
We defer to the Commission’s decision to decline a
categorical mitigation exemption for self-supplied and state-
sponsored resources.
24
3. Declining to Subject Auction 1–5 Uneconomic
Entrants to the Further Mitigation
We turn now to those issues in which a separate set of
Petitioners asserts that the buyer-side mitigation measures did
not go far enough to address uneconomic entry and the
attendant capacity price distortion.
While the proposals at issue in the case came under
review by the Commission, the Forward Capacity Market
marched on, holding three auctions, with Auctions 4 and 5
soon to follow. During and after the first three auctions,
FERC considered and rejected two ISO-NE proposals on
buyer-side mitigation as unjust and unreasonable. Third
Order ¶¶ 61–62 (rejecting original proposal); id. ¶¶ 159–64
(rejecting revised proposal). Having decided in the Third
Order that the Alternative Price Rule was insufficient to curb
buyer-side market power, the Commission directed
development of the offer-floor mitigation scheme for future
auctions. At that point in issuing the Third Order, FERC was
left with a decision on whether to mitigate further those out-
of-market entrants who had obtained capacity in Auctions 1–3
and might well do so in Auctions 4 and 5. Ultimately, FERC
extended the clearing price floor of 0.6 times Cost of New
Entry that had been in place for the first three auctions,
Settlement Order ¶ 19, through Auction 6, but declined to
apply any other mitigation measures to uneconomic entrants
in Auctions 1 through 5. Third Order ¶¶ 214–17, n.146;
Fourth Order ¶¶ 38–46. Of course, having just been
conceived, the offer-floor mitigation construct was not yet in
effect in any of Auctions 1–5, and thus was not a viable
mitigation mechanism.
NEPGA and Suppliers argue that FERC should have
applied mitigation, beyond merely extending the price floor,
25
to the uneconomic entrants in Auctions 1–5 until the
minimum offer price rule went into effect. They claim that
FERC’s finding that the Alternative Price Rule was
inadequate is overwhelming evidence that additional
mitigation was necessary. Due to the Commission’s failure to
mitigate, the rates in future auctions will be affected and will
therefore be unjust and unreasonable in violation of the FPA.
However, our view is that FERC offered well-supported
reasons in declining to further mitigate as to each of the
auctions in question.
As the Commission noted, the fundamental purpose of
buyer-side mitigation is to prevent uneconomic entry, and
further mitigation of out-of-market resources already in the
market would not serve that end. Third Order ¶¶ 21, 214–15,
n.151 (citing N.Y. Indep. Sys. Operator, 122 FERC ¶ 61,211PP.100–01, 118–19); Fourth Order ¶ 39. Instead, further
mitigation would send inappropriate price signals, such that
older, higher-cost resources would remain in the Forward
Capacity Market during a time of capacity surplus. Fourth
Order ¶ 39. For these two reasons, FERC declined to further
mitigate uneconomic entrants from Auctions 1–3.
FERC found that the same rationale—inability to prevent
uneconomic entry through mitigation—applied equally to
those resources deemed out-of-market in Auctions 4 and 5, as
the newly-minted offer-floor mitigation construct would not
go into effect until after those auctions had taken place.
Fourth Order ¶¶ 45–46. In addition, there was a notice
problem as to these interim uneconomic entrants: FERC had
tentatively accepted the original mitigation proposal to
provide certainty for Auction 4, but did not issue a final
rejection of the original mitigation proposal until after the
fourth auction and just before the fifth auction. Id.Participants in these auctions, even with some awareness that
26
the Commission was considering stronger mitigation rules,
could not adjust their offers effectively.
NEPGA is correct when it tells us that FERC’s duty is to
ensure that rates are just and reasonable, not ensure
equitability between participants. Pet’rs Br. at 35–36.
However, that the Commission also considered notice and
fairness is hardly a reason to discredit its decision on the
amount of mitigation to impose. The Commission reasonably
determined that, in addition to inability to deter entry, fairness
concerns militated in favor of declining further mitigation as
against these interim out-of-market resources. The
Commission ruled that the entry and notice concerns were
removed beginning with Auction 6 and thus, going forward,
FERC did provide for mitigation of uneconomic entrants; the
Commission found that uneconomic “resources entering in
[Auction] 6 or any subsequent [auctions] prior to the
implementation of the new rules will be carried forward under
the existing rules and treated as new in the first auction in
which offer floor mitigation is put into place.” Fourth Order
¶ 47.
Intervenor PSEG argues that FERC should not have
considered whether its mitigation measures would encourage
older resources to stay in the market. However, this type of
decision is precisely the sort of policy matter FERC is
charged with considering. Again, we defer to FERC’s
expertise, as the agency is best equipped to manage
competing policy rationales.
4. Subjecting only Certain Import Resources to the
Offer-Floor Mitigation Construct
Some resources did escape FERC’s mitigation measures.
In the orders on review, FERC required buyer-side
27
mitigation—that is, application of the offer-floor construct—
of capacity originating outside the New England market in
limited circumstances. These so-called imports are subject to
mitigation only when both of two conditions are met: (1) “a
specific new external resource is identified as the sole support
for the import;” and (2) “a significant investment (such as the
construction of a new transmission line to import power from
an adjacent control area) is made to provide capacity to New
England.” Third Order ¶ 191.
Petitioner NEPGA and others proposed an alternative
standard that would have mitigated imports that satisfied
either condition. NEPGA and Intervenor PSEG contend that
FERC’s mitigation of only certain import resources was
arbitrary and capricious. According to them, FERC’s
standard allows too many resources to avoid mitigation,
resulting in the introduction of “unneeded capacity into the
New England market,” Fourth Order ¶ 98, which “can
produce unjust and unreasonable prices by artificially
depressing capacity prices,” Third Order ¶ 170.
The Commission determined that when imports involve
“new resources that are devoted to the New England market
over the long term,” they should “be treated like new internal
resources for mitigation purposes.” Id. ¶ 191. That is,
imports committed to New England should be no different
than new internal resources committed to New England; they
should be mitigated because potential for buyer-side market
power is high. However, FERC did not provide a blanket
policy on mitigation of imports as is feasible between new
and existing internal resources. In response to the
“significantly more complicated” task of categorizing new
and existing import resources, Third Br. of ISO-NE before
FERC at 44, FERC put into place a workable standard to
identify those resources that actually support an import and
28
therefore should be treated as a new resource. Therefore, we
defer to its standard.
Further, the Commission responded to NEPGA’s
alternative proposal to impose mitigation when only one of
the two factors is met, and found it would be “contrary to the
principles of open access and non-discrimination” among
resources. Fourth Order ¶ 98. Such a system would unfairly
differentiate between internal and external resources, as well
as between service provided by new and existing transmission
facilities. Id.NEPGA disagrees with FERC’s open-access and
discrimination rationales, but cannot demonstrate that they are
arbitrary and capricious. FERC’s standard on mitigating
imports was reasoned and supported by the record, namely
ISO-NE’s undisputed submission that “the ‘new’ versus
‘existing’ distinction should be avoided for imports where
possible, and should be based on more concrete distinctions
when differentiation is necessary.” Third Br. of ISO-NE
before FERC at 44 (responding to First Order and Second
Order). FERC found that it should, in essence, err on the side
of caution in mitigating import resources, and determined that
most imports should be treated like existing, rather than new,
resources. The Commission was aware of, and considered,
the effect such a decision would have on capacity prices.
Such a balancing function is precisely the role of expert
agencies, and the record provides no basis on which FERC’s
decision should be disturbed.
C. Supplier-Side Mitigation
Finally, we turn to the claim by NEPGA and Suppliers
that FERC improperly constricted the ability of suppliers to
withdraw from the Forward Capacity Market. FERC, of
29
course, contends that its supplier-side mitigation measure—
lowering the dynamic de-list bid threshold—was also striking
a balance between interests. We agree.
We briefly review the dynamic de-list concept. A
dynamic de-list bid is one allowing a resource to exit an
auction as the capacity price drops, and is not subject to
review by the Internal Market Monitor. In the proposals put
forth here, ISO-NE proposed to lower the threshold price at
which de-list bids are reviewed by the Internal Market
Monitor, so that more bids would be reviewed and the
potential for supplier-side market power would be lessened.
In its proposal, ISO-NE explained that the existing dynamic
de-list bid threshold of 0.8 times Cost of New Entry was not
representative of a resource’s costs. Third Order ¶ 305 (“ISO-
NE notes that the current threshold of 0.8 [times the Cost of
New Entry] bears no particular relationship to a resource’s
opportunity or going forward costs and is a reasonable
threshold only under the former approach to determining
zones . . . .”). Without review by the Internal Market
Monitor, a de-list bid at 0.8 times Cost of New Entry could
not be assured to be competitive and allowed to set zonal
prices in an auction.
To ensure that the Forward Capacity Market is
competitive, review of bids by the Internal Market Monitor is
required; thus, suppliers should only be permitted to exit via
dynamic de-list bids, and escape Internal Market Monitor
review, at amounts low enough that the exercise of supplier-
side market power is unlikely. ISO-NE proposed that the
threshold be set at $1/kilowatt-month instead. It arrived at
this number using the lowest clearing price of three capacity
reconfiguration auctions in the New England Market. In a
reconfiguration auction, resources seeking to reduce their
capacity supply obligations trade with resources willing to
30
take on those obligations. Because reconfiguration auctions,
unlike the garden-variety capacity auctions thus far discussed,
have no floor price, a reconfiguration auction’s clearing price
represents a competitive market price. Therefore,
reconfiguration auctions serve as a reasonable proxy for a
capacity price.
NEPGA and Suppliers argue that FERC was arbitrary
and capricious in lowering the de-list threshold: it mitigated
seller-side market power that it never found existed,
inappropriately decoupled the de-list threshold from Cost of
New Entry, and borrowed its structure from a reconfiguration
auction rather than a capacity auction. FERC’s careful
consideration of the de-list process survives all these
complaints.
The impetus for the Commission’s decision to accept
ISO-NE’s proposal to lower the de-list bid amount was the
New England market’s move to a zonal modeling system in
its capacity market pursuant to the settlement. In this system,
the market responds to the amount of capacity needed in each
of New England’s eight load zones. Internal Market
Monitoring Unit Review of the Forward Capacity Market
Auction Results and Design Elements, ISO New England Inc.
Market Monitoring Unit (June 5, 2009) at 13, 17, available at
http://iso-
ne.com/markets/mktmonmit/rpts/other/fcm_report_final.pdf.
If a zone’s projected capacity is below its requirements, that
zone is “modeled” as a separate zone and allowed to have a
higher clearing price in the auction than the rest of the market.
First Order ¶ 131. As a result, high de-list bids are in the
position to set clearing prices, but were not reviewed by the
Internal Market Monitor.
31
In undertaking to ensure that rates are just and
reasonable, the Commission properly lowered the de-list
threshold. That ISO-NE and the Internal Market Monitor
agree with this decision underscores its reasonableness. All
of these parties determined that increased review of de-listing
is necessary given the move to a zonal modeling system,
because suppliers are incented to withhold their capacity to
create a separately modeled zone with a higher clearing price.
Fourth Order ¶ 123. It is irrelevant that de-list bids were not
previously wielded as market power because the zoning
system dramatically changes the Forward Capacity Market.
The orders’ de-list price of $1/kilowatt-month was also
reasonable; the threshold reflects one at which supplier-side
market power is unlikely to be exercised and thus Internal
Market Monitor review is not necessary, as reflected in the
reconfiguration auction results.
In setting this price, FERC agreed with ISO-NE that the
previous level of 0.8 times Cost of New Entry did not
represent a competitive de-list bid in the zonal modeling
version of the Forward Capacity Market, and thus the
dynamic de-list threshold could be decoupled from the Cost
of New Entry. Third Order ¶ 315. It responded to parties
who disagreed and offered its acceptable rationale:
A resource’s de-list bid is not intended to serve as a
price stabilizer; it is intended to represent the offer a
competitive supplier would accept voluntarily to
commit its resource as a capacity resource. . . . No
assurance for cost recovery is made for participating in
competitive markets, only an opportunity to do so.
Id.32
Finally, FERC carefully considered the options for
auctions to use as a proxy in setting the de-list price. The
Commission found that a reconfiguration auction was a
reasonable proxy because it accomplished the goal of finding
the offer at which “a competitive supplier would accept
voluntarily to commit its resource as a capacity resource.” Id.¶¶ 313–15. See also Fourth Order ¶ 122.
The dynamic de-list bid is but one option in a
constellation of strategies available to a supplier in making
cost-effective capacity determinations. We note, as did the
Commission, that Suppliers can still submit de-list bids above
the threshold, so long as the de-list bids are static and thus
presented in advance. Third Order ¶ 313. Further, we take
the Commission at its word that the threshold will be updated
to account for new information. Id. ¶ 314.
We hold that FERC’s determination of the dynamic de-
list threshold, set in agreement with ISO-NE and the Internal
Market Monitor, was neither arbitrary nor capricious. FERC
reasonably determined that the zonal modeling system would
have such an effect on the Forward Capacity Market, and act
to incent suppliers to exercise market power, that
preemptively providing for Internal Market Monitor review of
most bids was the prudent course of action. FERC adequately
explained why Cost of New Entry has become irrelevant to
de-list bids, why the reconfiguration auction served as an
appropriate proxy, and why the de-list price chosen was likely
to prevent the exercise of supplier-side market power.
Therefore, the Commission did not err.
33
IV. CONCLUSION
For the foregoing reasons, we deny the petitions for
review.
So ordered.