NRG Power Marketing, LLC v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued May 12, 2017 Decided July 7, 2017
No. 15-1452
NRG POWER MARKETING, LLC, AND GENON ENERGY
MANAGEMENT, LLC,
PETITIONERS
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
PSEG ENERGY RESOURCES & TRADE LLC, ET AL.,
INTERVENORS
Consolidated with 15-1454
On Petitions for Review of Orders of the
Federal Energy Regulatory Commission
John Lee Shepherd, Jr. argued the cause for petitioners.
With him on the briefs were John N. Estes III, Paul F. Wight,
Jeffrey A. Lamken, Abraham Silverman, and Cortney Madea.
Carol J. Banta, Senior Attorney, Federal Energy
Regulatory Commission, argued the cause for respondent.
With her on the brief was Robert H. Solomon, Solicitor.
2
Paul M. Flynn argued the cause for intervenors. With him
on the brief were Ryan J. Collins, Jennifer H. Tribulski, Gary
J. Newell, Larry F. Eisenstat, Richard Lehfeldt, Delia D.
Patterson, Randolph Elliott, Paul M. Breakman, Scott H.
Strauss, Jeffrey A. Schwarz, Stefanie Brand, Stuart A. Caplan,
Richard M. Zuckerman, Christopher S. Porrino, Attorney
General, Office of the Attorney General for the State of New
Jersey, Carolyn McIntosh, Deputy Attorney General, Robert A.
Weishaar, Jr., and Adrienne E. Clair. Dennis Lane entered an
appearance.
Before: BROWN and KAVANAUGH, Circuit Judges, and
SENTELLE, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge KAVANAUGH.
KAVANAUGH, Circuit Judge: Regional Transmission
Organizations are non-profit entities that oversee the
transmission of electricity from generators to utilities. Under
Section 205 of the Federal Power Act and FERC’s regulations,
Regional Transmission Organizations file their proposed rate
schemes with FERC. 16 U.S.C. § 824d(c); 18 C.F.R.
§ 35.34(j)(1)(iii). Section 205 allows FERC to suggest
“minor” modifications to a proposal made by a Regional
Transmission Organization. Western Resources, Inc. v. FERC,
9 F.3d 1568, 1579 (D.C. Cir. 1993). Here, we must determine
whether Section 205 allows FERC to suggest modifications
that are more than “minor” and, if not, whether FERC violated
that limitation on its authority.
PJM Interconnection is a Regional Transmission
Organization. In this case, acting under Section 205, PJM filed
with FERC a package of proposed changes to PJM’s rate
structure. But FERC did not accept PJM’s proposal because
FERC concluded that the proposal as it stood was not just and
3
reasonable. See 16 U.S.C. § 824d(a). FERC then suggested
modifications to the proposal that would, in FERC’s view,
make the proposal just and reasonable. FERC’s modifications
created a new rate scheme that was significantly different from
PJM’s proposal and from PJM’s prior rate design. PJM
nonetheless accepted FERC’s modifications.
Several electricity generators – NRG Power Marketing,
GenOn Energy Management, and PJM Power Providers – have
petitioned for review of FERC’s decision. They argue that
FERC’s proposed modifications exceeded the agency’s
authority under Section 205 of the Federal Power Act.
We agree. Section 205 does not allow FERC to make
modifications to a proposal that transform the proposal into an
entirely new rate of FERC’s own making. Here, FERC
contravened that limitation on its Section 205 authority. We
therefore grant the petitions for review and vacate FERC’s
Orders with respect to several aspects of PJM’s proposed rate
structure – the self-supply exemption, the competitive entry
exemption, unit-specific review, and the mitigation period. We
remand the matter to FERC.
I
A
There are three key players in modern wholesale
electricity markets: (i) the electricity generators that produce
electricity; (ii) the companies and utilities, known as Load
Serving Entities, that deliver electricity to retail customers; and
(iii) the non-profit organizations, known as Regional
Transmission Organizations, that manage the transmission of
electricity from generators to Load Serving Entities. In modern
wholesale electricity markets, generators sell electricity, and
4
Load Serving Entities buy that electricity. Regional
Transmission Organizations often set the rates that generators
charge and that Load Serving Entities pay.
There are seven Regional Transmission Organizations
across the country. The largest of the seven is PJM
Interconnection. PJM administers the power grid in parts of 13
Mid-Atlantic and Midwestern states and the District of
Columbia.
PJM helps set the price of wholesale electricity by
conducting competitive auctions. As relevant here, PJM runs
“capacity auctions” to set the price of wholesale electricity
three years into the future. The goal of the capacity auctions is
to ensure an adequate long-term supply of electricity.
Here is how PJM’s capacity auctions work: PJM estimates
the demand for electricity three years into the future, and
electricity generators estimate their capacity for producing
electricity three years into the future. Generators then make
bids to sell their future capacity to PJM. Starting with the
lowest bid, PJM accepts bids until it has purchased enough
capacity to meet its estimate of future demand. The highest
accepted bid sets the “clearing price” in the capacity market.
The clearing price is the price that generators receive from PJM
when their bids are accepted by PJM. Generators are paid the
clearing price regardless of the rates listed in their initial bids.
The clearing price is also the price that Load Serving Entities
must pay in order to purchase electricity from PJM.
For example, imagine that four electricity generators each
bid to sell 10 units of capacity to PJM. The four generators
respectively bid at $100 per unit, $110 per unit, $120 per unit,
and $130 per unit. If PJM projects that it will need 25 units of
electricity three years from now, it will purchase 10 units of
5
capacity at $100 per unit, 10 units at $110 per unit, and 5 units
at $120 per unit. The “clearing price” in the market is set by
the highest accepted bid – $120 per unit. The three electricity
generators that had their bids accepted in the auction will all
receive $120 per unit from PJM. Load Serving Entities will
pay PJM $120 per unit to purchase electricity.
The clearing price plays an important role in ensuring that
there will be an adequate supply of electricity in the future.
When the clearing price is high, new generators have an
incentive to enter the market because they will be paid more to
generate electricity. As a result, the supply of electricity will
increase in the long run. However, when the clearing price is
low, new generators are less likely to enter the market. That is
because the clearing price may not fully cover the cost of
generating electricity. For that same reason, a low clearing
price also may cause existing high-cost generators to shut
down. That means that the supply of electricity will decrease
in the long run. See Hughes v. Talen Energy Marketing, LLC,
136 S. Ct. 1288, 1293, slip op. at 4 (2016).
As FERC has explained, if every generator’s bid reflected
the actual cost of generating electricity, the capacity auction
would be expected to set the clearing price at the appropriate
level to encourage the entry of new generators into the market.
See PJM Interconnection, L.L.C., 137 FERC ¶ 61,145, at ¶ 25
(2011). The problem is that some generators have incentives
to bid below the actual cost of generating electricity. For
example, generators that receive state subsidies do not bear the
entire cost of generation. As a result, they may bid into the
capacity auction at a rate that reflects only a portion of the
actual cost of generating electricity. In other words, the
generator is able to make a below-cost bid. That below-cost
bid may lower the clearing price in the capacity auction. As
noted above, a lower clearing price may reduce the supply of
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electricity in the long run. To put the problem in more concrete
terms: Over the long run, below-cost bidding in capacity
auctions could lead to brownouts or blackouts during periods
of peak demand.
Recognizing the harms of below-cost bidding, PJM has
established what it calls the Minimum Offer Price Rule. The
Rule requires new generators to bid at or above a certain price
floor set by PJM. The Rule is designed to prevent new market
entrants from artificially depressing the clearing price in
capacity auctions.
Before 2012, the Minimum Offer Price Rule had two key
features that are relevant here.
First, not every new market entrant was subject to the
Minimum Offer Price Rule. Before 2012, PJM had a “unit-
specific review” exemption from the Rule. If a new generator
could demonstrate to PJM that its actual costs were below the
price floor set by PJM, the generator would be permitted to bid
below the price floor.
Second, the Minimum Offer Price Rule was time-limited
in its application. For new generators subject to the Rule, the
Rule applied only until the generator had its bid accepted by
PJM at the price floor for one year. After that one-year
“mitigation period,” the generator would be permitted to bid
into subsequent auctions below the price floor.
B
In July 2012, an ad hoc group of generators and Load
Serving Entities that participate in PJM’s capacity market
began to explore possible changes to the Minimum Offer Price
Rule. The participants in that ad hoc group were unsatisfied
7
with the existing unit-specific review exemption. Many
believed that unit-specific review lacked transparency and had
allowed new market entrants to submit below-cost bids that had
depressed clearing prices in PJM’s capacity auctions.
After several months of negotiations, the ad hoc group
reached agreement on a proposal to reform the Minimum Offer
Price Rule. PJM put the proposal to a vote by the entire body
of PJM’s stakeholders. The proposal received overwhelming
support from PJM’s stakeholders. According to PJM, the
proposal represented the first time in PJM’s history as a
Regional Transmission Organization (which goes back to
2001) that a significant revision to the Minimum Offer Price
Rule had received the endorsement of more than two-thirds of
PJM’s stakeholders.
As relevant here, the proposal had two key components.1
First, the proposal sought to eliminate the unit-specific
review exemption from the Minimum Offer Price Rule and
replace it with two categorical exemptions from the Rule: a
“competitive entry exemption” and a “self-supply exemption.”
Generally speaking, the competitive entry exemption would
apply to generators that are unsubsidized or that are subsidized
through a non-discriminatory, state-sponsored procurement
process. The self-supply exemption would apply to certain
Load Serving Entities that meet a portion of their electricity
needs by generating their own electricity. Based on economic
projections, PJM asserted that generators that qualify for the
competitive entry exemption or the self-supply exemption
1
PJM’s proposal also included a number of other changes to the
Minimum Offer Price Rule – for example, changes to the resources
subject to the Rule, the price floor level, and the geographic scope of
the Rule – that were approved by FERC. FERC’s decision with
respect to those changes is not challenged here.
8
would be unlikely to depress the clearing prices in capacity
auctions and therefore should not be subject to the Minimum
Offer Price Rule’s price floor. Generators that qualify for
either exemption would be permitted to bid into capacity
auctions below the price floor.
Replacing the unit-specific review exemption with the two
categorical exemptions was a compromise between generators
and Load Serving Entities. Generators opposed unit-specific
review because they believed that the discretionary nature of
unit-specific review had allowed some state-subsidized
resources to enter capacity auctions with below-cost bids that
would depress the clearing price in capacity auctions.
Meanwhile, many Load Serving Entities that generate some
electricity on their own favored the two new exemptions
because those exemptions would provide more certainty about
which generators would be subject to the price floor.
According to PJM, the resulting compromise would ensure that
generators that “present a high risk of price suppression” would
not receive exemptions. Letter from Paul M. Flynn et al., PJM
Interconnection, L.L.C., to Kimberly D. Bose, Secretary,
Federal Energy Regulatory Commission 25 (Dec. 7, 2012),
J.A. 52. The compromise would also substitute “clarity and
transparency” for the “non-transparent, discretionary
decisions” made under the prior approach. Id. at 15, J.A. 42.
Second, PJM’s proposal sought to extend the “mitigation
period” – that is, the period during which the Minimum Offer
Price Rule’s price floor applies – from one year to three years.
Under the proposal, each new generator that is not otherwise
exempt from the price floor would have to clear the capacity
auction at the price floor for three years before it could bid
below the price floor. Extending the mitigation period was part
of the compromise regarding unit-specific review and the two
new exemptions. In light of the proposed substitution of two
9
new exemptions for unit-specific review, PJM asserted that the
price floor would “be much more targeted at the resources that
are most likely to present legitimate price suppression
concerns.” Id. at 16, J.A. 43. Because the price floor would
apply to the new generators that pose the highest risk of
depressing clearing prices, PJM’s stakeholders wanted the
price floor to “apply for a longer period.” Id. at 29, J.A. 56.
In December 2012, PJM filed the proposal with FERC.
Although PJM’s proposal had multiple components, PJM
asked the Commission “to view this filing not as a list of
discrete Tariff changes, but as a hard-fought compromise
package, and to approve it as such.” Id. at 15, J.A. 42.
PJM filed the proposal pursuant to Section 205 of the
Federal Power Act. Section 205 requires utilities to file
proposed rate changes with FERC. 16 U.S.C. § 824d(c).
Under FERC’s regulations, although Regional Transmission
Organizations such as PJM are not utilities, Regional
Transmission Organizations file proposed rate changes with
FERC in accordance with the procedures ordinarily followed
by utilities under Section 205. See 18 C.F.R. § 35.34(j)(1)(iii).
FERC must accept proposed rate changes filed under Section
205 so long as the changes are just and reasonable. 16 U.S.C.
§ 824d(a).
In May 2013, FERC concluded that parts of PJM’s
proposal were not just and reasonable. PJM Interconnection,
L.L.C., 143 FERC ¶ 61,090, at ¶ 26 (2013). As relevant here,
FERC asserted that the proposal would unreasonably narrow
the exemptions from the Minimum Offer Price Rule’s price
floor. According to FERC, some generators that may be able
to demonstrate that their costs fall below the price floor – that
is, some generators that would have been exempt under unit-
specific review – would no longer qualify for an exemption
10
from the price floor. Id. ¶ 141. FERC also asserted that the
proposed three-year mitigation period would subject
generators to the price floor for too long, thereby discouraging
the entry of new generators into the wholesale electricity
market. Id. ¶ 211.
At the same time, FERC proposed several modifications
to PJM’s filing that would, in FERC’s view, make PJM’s filing
just and reasonable. As relevant here, FERC stated that it
would accept the proposed competitive entry and self-supply
exemptions, but only on the condition that PJM retain the unit-
specific review process. Id. ¶¶ 141-143. FERC also stated that
it would not allow PJM to extend the mitigation period to three
years. Id. ¶ 210.
PJM agreed to FERC’s proposed modifications. As a
result, PJM now uses unit-specific review, the competitive
entry exemption, the self-supply exemption, and the one-year
mitigation period for new generators.
Several electricity generators disagreed with FERC’s
decision. They requested rehearing. In October 2015, FERC
denied the request for rehearing.
A number of generators – NRG Power Marketing, GenOn
Energy Management, and PJM Power Providers – then filed
petitions for review of FERC’s May 2013 and October 2015
Orders. Among other things, they argue that FERC violated
Section 205 of the Federal Power Act by making a new rate
instead of accepting or rejecting PJM’s proposal as it stood.
We now turn to that argument.
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II
In this case, FERC determined that the new rate scheme
proposed by PJM was not just and reasonable under Section
205 of the Federal Power Act. PJM Interconnection, L.L.C.,
143 FERC ¶ 61,090, at ¶ 26 (2013); see 16 U.S.C. § 824d(a).
FERC then suggested a number of modifications to PJM’s
proposal that would, in FERC’s view, make PJM’s proposal
just and reasonable. PJM Interconnection, L.L.C., 143 FERC
at ¶¶ 141-143. The question in this case is whether FERC
exceeded its authority under Section 205 when it suggested
those modifications to PJM’s proposal. The answer is yes.
Section 205 puts FERC in a “passive and reactive role.”
Advanced Energy Management Alliance v. FERC, No. 16-
1234, at 10 (D.C. Cir. June 20, 2017) (internal quotation mark
omitted). Under Section 205, FERC reviews the proposed rate
scheme filed by a utility or Regional Transmission
Organization and determines whether the proposal is just and
reasonable. See 16 U.S.C. § 824d(a); 18 C.F.R.
§ 35.34(j)(1)(iii). FERC may accept or reject the proposal. But
as this Court has held, Section 205 does not authorize FERC to
impose a new rate scheme of its own making without the
consent of the utility or Regional Transmission Organization
that made the original proposal. See Atlantic City Electric Co.
v. FERC, 295 F.3d 1, 10 (D.C. Cir. 2002).2
2
FERC may unilaterally impose a new rate scheme on a utility
or Regional Transmission Organization only under a different
provision of the Act: Section 206. 16 U.S.C. § 824e(a). Section 206
requires FERC to demonstrate that the existing rates are “entirely
outside the zone of reasonableness” before FERC imposes a new rate
without the consent of the utility or Regional Transmission
Organization that filed the proposal. City of Winnfield v. FERC, 744
F.2d 871, 875 (D.C. Cir. 1984). All parties agree that FERC did not
rely on Section 206 as the basis for its decision in this case.
12
Although FERC may not unilaterally impose a new rate
scheme under Section 205, this Court has held that FERC has
some authority to propose modifications to a utility’s proposal
if the utility consents to the modifications. In City of Winnfield
v. FERC, this Court – speaking through Judge Scalia –
concluded that FERC does not violate Section 205 when it
suggests “a system of rates similar to that previously in effect,
and the utility acquiesces.” 744 F.2d 871, 876 (D.C. Cir. 1984).
In those circumstances, we noted that it would be “empty
formalism” to require the utility to make a new filing in order
to implement minor changes proposed by FERC. Id.
Nonetheless, there are limits on FERC’s authority to
propose modifications under Section 205 even when the utility
consents to those modifications. In City of Winnfield, we
indicated that FERC would violate Section 205 if “the
Commission proposal accepted by the utility involved the
Commission’s own original notion of a new form of rate” or an
“entirely new rate scheme.” Id. at 875, 876. As we noted, “it
might be argued” in those circumstances “that the power to
initiate change through such rejection-plus-proposal removes
the Commission from an essentially passive and reactive role
envisioned by § 205.” Id. at 876. Importantly, we also stated
that FERC’s proposal of a new rate scheme could deprive the
utility’s customers of “early notice – in the rate proposal itself –
of the sort of rate increase that is sought.” Id. However, we
did not definitively decide whether FERC violates Section 205
when it suggests modifications to the utility’s proposal that
result in an “entirely new rate scheme.” Id.
We decisively answered that question nine years later in
Western Resources, Inc. v. FERC, 9 F.3d 1568 (D.C. Cir.
1993). Western Resources arose in the context of Section 4 of
the Natural Gas Act, which is “identical in substance” to
13
Section 205 of the Federal Power Act. City of Winnfield, 744
F.2d at 875.3 Our analysis in Western Resources turned on the
nature of FERC’s suggested modifications in that case. We
concluded that FERC may not go “beyond approval or
rejection” of a proposal to “adoption of an entirely different
rate design” than the proposal. Western Resources, 9 F.3d at
1578. We explained that FERC may not employ a rate design
that follows “a completely different strategy” than, or is
“methodologically distinct” from, a proposed rate. Id. at 1578,
1579. We also noted that, although “minor deviations” from a
proposal are permissible, “the imposition by the Commission
of only half of a proposed rate” is not permissible. Id. at 1579.
Our decisions in City of Winnfield and Western Resources
indicate that Section 205 does not allow FERC to suggest
modifications that result in an “entirely different rate design”
than the utility’s original proposal or the utility’s prior rate
scheme. Western Resources, 9 F.3d at 1578.
Applying that principle here, we conclude that FERC
violated Section 205. FERC’s modifications resulted in an
“entirely different rate design” than both PJM’s proposal and
PJM’s prior rate scheme. Id.
First, FERC’s proposed modifications resulted in an
“entirely different rate design” than PJM’s proposal. Id. PJM’s
proposal sought to change how PJM determines which
generators are exempt from the Minimum Offer Price Rule’s
price floor. PJM wanted to replace its case-by-case approach
to granting exemptions under unit-specific review with two
3
As in prior cases, we “follow here the familiar practice of
applying interchangeably judicial interpretations of provisions from
the Natural Gas Act to their substantially identical counterparts in the
Federal Power Act.” City of Anaheim v. FERC, 558 F.3d 521, 523
n.2 (D.C. Cir. 2009) (internal quotation marks omitted).
14
narrow, categorical exemptions from the price floor. PJM also
wanted to apply the price floor to new generators for three years
instead of one year. PJM’s proposal would have narrowed the
availability of exemptions to the price floor for some
generators that, in the view of some of PJM’s stakeholders,
posed a high risk of price suppression. But FERC’s proposed
modifications went in the opposite direction. FERC’s
modifications expanded the exemptions by layering the two
new exemptions on top of unit-specific review, and by
exempting certain new generators from the price floor after one
year instead of after three years. Indeed, FERC’s modifications
expanded the scope of the exemptions not just beyond PJM’s
original filing, but beyond the scope of the exemptions as they
had stood before PJM’s filing. FERC’s modifications therefore
followed a “completely different strategy” than PJM’s
proposal. Id. at 1579.
Second, FERC’s modifications also resulted in an “entirely
different rate design” than the rate design that was “previously
in effect.” Id. at 1578; City of Winnfield, 744 F.2d at 876.
Under PJM’s prior approach, unit-specific review was the main
route to an exemption. As a result, generators had to
demonstrate on a case-by-case basis that their costs fell below
the price floor. Because of FERC’s modifications, some
generators can now claim exemptions from the price floor even
if they cannot demonstrate that their costs fall below the price
floor. In other words, due to FERC’s modifications, PJM’s
previous case-by-case methodology no longer controls.
Ultimately, as in Western Resources, FERC in essence
approved “only half of a proposed rate.” Western Resources,
9 F.3d at 1579. FERC’s modifications undid the compromise
that had been the basis for PJM’s proposal. Load Serving
Entities had favored the two new categorical exemptions, and
generators had opposed unit-specific review. Because of
15
FERC’s modifications, many Load Serving Entities got what
they wanted, but many generators did not. By proposing that
PJM adopt the two new exemptions alongside unit-specific
review, FERC largely eviscerated the terms of the bargain
between generators and Load Serving Entities. As a result,
PJM ended up with an “entirely new rate scheme.” City of
Winnfield, 744 F.2d at 876. That is not permissible.
FERC says that it did not violate Section 205 because PJM
consented to FERC’s proposed modifications. A utility’s
consent is relevant when FERC proposes “minor”
modifications to the utility’s proposal. Western Resources, 9
F.3d at 1579. But when FERC proposes its “own original
notion of a new form of rate,” the utility’s consent does not
excuse a Section 205 violation. City of Winnfield, 744 F.2d at
875.
In those circumstances, the utility’s consent is inadequate
because consent does not cure the harms to the utility’s
customers. Section 205 protects the utility’s customers by
ensuring “early notice – in the rate proposal itself – of the sort
of rate increase that is sought.” Id. at 876. When FERC
“imposes an entirely new rate scheme” in response to a utility’s
proposal, the utility’s customers do not have adequate notice of
the proposed rate changes or an adequate opportunity to
comment on the proposed changes. Id. That was the case here.
Generators and Load Serving Entities had an opportunity to
comment on the original compromise proposal submitted by
PJM. But they did not have an opportunity to comment on
FERC’s modifications before FERC issued its decision. They
also did not have an adequate opportunity to comment in the
request for rehearing. As FERC has previously explained:
“Parties seeking rehearing of Commission orders are not
permitted to include additional evidence in support of their
position, particularly when such evidence is available at the
16
time of the initial filing.” PJM Interconnection, LLC, 108
FERC ¶ 61,187, at ¶ 49 (2004). PJM’s stakeholders therefore
could not fully contest FERC’s modifications with new
evidence on rehearing. As a result, PJM’s stakeholders lacked
the protections provided by Section 205. PJM’s consent did
not restore those protections.
* * *
In sum, FERC exceeded its authority under Section 205.
We grant the petitions for review and vacate FERC’s Orders
with respect to unit-specific review, the competitive entry
exemption, the self-supply exemption, and the mitigation
period. We remand the matter to FERC.
So ordered.