United States Court of Appeals, District of Columbia Circuit
October 27, 2017
Petitions for Review of Orders of the Federal Energy
E. Tysse argued the cause for petitioner. On the briefs were
Suedeen G. Kelly, John M. White, and Bruce F. Anderson.
J. Banta, Senior Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on the
brief was Robert H. Solomon, Solicitor.
R. Marshall and Phyllis G. Kimmel were on the brief for
intervenor New England States Committee on Electricity, Inc.
in support of respondent.
Before: Griffith, Circuit Judge, and Sentelle and Randolph,
Senior Circuit Judges.
RANDOLPH, SENIOR CIRCUIT JUDGE
England Power Generators Association petitions for review of
two sets of orders of the Federal Energy Regulatory
Commission concerning a scarcity pricing mechanism in the New
England power market. ISO New Eng. Inc., 147 FERC
¶ 61, 172 (2014) ("Tariff Order"),
reh'g denied, 153 FERC ¶ 61, 223 (2015)
("Tariff Rehearing Order"); New Eng.
Power Generators Ass'n v. ISO New Eng. Inc., 150
FERC ¶ 61, 053 ("Complaint Order"),
reh'g denied, 153 FERC ¶ 61, 222 (2015)
("Complaint Rehearing Order"). The
exhaustion requirements of the Federal Power Act
("FPA") deprive us of jurisdiction over the
Association's petition to review the Tariff Order.
Accordingly, we dismiss the petition in Case No. 16-1023
seeking review of the Tariff Order. We reach the merits in
the Association's challenge to the Complaint Order and
hold that the Commission was not arbitrary or capricious in
denying the Association's complaint. We therefore deny
the petition in Case No. 16-1024 seeking review of the
England Inc. is a private, non-profit entity that administers
wholesale electricity and capacity markets in New England.
See Blumenthal v. FERC, 552 F.3d 875, 878 (D.C. Cir.
2009). In this role, ISO New England must submit its tariff
to the Commission for approval under FPA § 205, 16
U.S.C. § 824d. See Braintree Elec. Light Dep't
v. FERC, 550 F.3d 6, 9 (D.C. Cir. 2008). The tariff
establishes rates for the electricity and capacity markets,
and FPA § 205 requires that these rates be "just
and reasonable." See id.
England operates two distinct markets for wholesale
electricity under its tariff: a day-ahead market and a
real-time market. In the day-ahead market, participants offer
to sell one-hour blocks of electricity to be delivered the
next day. In the real-time market, electricity is offered in
five-minute increments for immediate delivery, which corrects
for imbalances between electricity scheduled in the day-ahead
market and real-time demand. Our opinion in Black Oak
Energy, LLC v. FERC, 725 F.3d 230, 233 (D.C. Cir. 2013),
discusses the history and purpose of these markets.
ensure that generators produce enough energy in real time,
ISO New England's tariff includes a special pricing
mechanism triggered when energy in the real-time market is
scarce. When insufficient energy is being produced or energy
prices become excessive, the price in the real-time market is
set based upon Reserve Constraint Penalty Factors. See
Complaint Order, at P 6. We will refer to these as
"Scarcity Rates" to reflect their function. The
Scarcity Rates are a set of fixed values, preestablished in
ISO New England's tariff, that correspond to different
categories of energy generation. The Scarcity Rates serve as
inputs to ISO New England's pricing algorithm during
scarcity conditions, as well as price caps representing
maximum allowable prices in the real-time market. For our
purposes, it is enough to say that higher Scarcity Rates
produce higher real-time energy prices under stressed market
England also administers an auction market for capacity.
Capacity is "a kind of options contract" to ensure
availability of electricity in the future. Advanced
Energy Mgmt. All. v. FERC, 860 F.3d 656, 659 (D.C. Cir.
2017) (per curiam). Under ISO New England's tariff,
capacity is allocated in a forward capacity market in which
capacity is bought and sold in annual blocks three years in
advance. See Complaint Order, at P 2. For example, a
capacity auction was held in February 2014 covering the
capacity commitment year of June 1, 2017, through May 31,
2018. Payments for capacity purchased in these annual
auctions are delivered to capacity suppliers monthly during
the capacity commitment year. See id. In return,
capacity suppliers must offer capacity in the day-ahead and
real-time electricity markets over the course of that year.
the Scarcity Rates in the real-time energy market, ISO New
England uses special pricing mechanisms in the capacity
market to correct perceived market failures. At issue here is
the Peak Energy Rent Adjustment (the "Adjustment"),
which attempts to claw back some revenues earned by capacity
suppliers when prices in the real-time energy market are very
high. The Adjustment has two intended purposes. See
Complaint Order, at P 3 (citing Devon Power
LLC, 115 FERC ¶ 61, 340, at PP 24, 29 (2006)).
First, it is intended to mitigate the costs of price spikes
to electricity purchasers. Second, it is intended to reduce
the incentive for electricity suppliers to generate price
spikes intentionally by withholding electricity. To put it
simply, the Adjustment removes a rolling average of
"peak energy rents" from suppliers' monthly
capacity payments and rebates this revenue back to load.
See Complaint Order, at P 4. Each day, ISO New
England calculates a "strike price, " a price just
above the marginal cost of running the most expensive power
generator in New England. See id. It next calculates
hourly peak energy rents--roughly the excess of the real-time
electricity price over the strike price--for any hour in
which the real-time price exceeds this strike price, time
periods we will refer to as "Adjustment Events."
See id. ISO New England then derives a monthly value
of peak energy rents, averages it over the past twelve
months, and subtracts this quantity from suppliers'
monthly capacity payments as the total Adjustment. See
this value is deducted from every capacity supplier's
monthly capacity payments, without regard to whether a
particular supplier actually sold energy in the realtime
market at the high price. See id. However, according
to the Association, the vast majority of capacity suppliers
clear their electricity offers in the day-ahead market. They
therefore receive the day-ahead market price, rather than the
real-time price on which the Adjustment is based. The
Commission has acknowledged that this is a "potential
inefficiency, " Tariff Rehearing Order, at P
105, and, in light of other changes to New England power
markets, has ...