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New England Power Generators Association, Inc. v. Federal Energy Regulatory Commission

United States Court of Appeals, District of Columbia Circuit

January 19, 2018

New England Power Generators Association, Inc., Petitioner
v.
Federal Energy Regulatory Commission, Respondent Dynegy Marketing and Trade, LLC, et al., Intervenors

          Argued October 27, 2017

         On Petitions for Review of Orders of the Federal Energy Regulatory Commission

          James E. Tysse argued the cause for petitioner. On the briefs were Suedeen G. Kelly, John M. White, and Bruce F. Anderson.

          Carol J. Banta, Senior Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief was Robert H. Solomon, Solicitor.

          Jason 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.

          OPINION

          RANDOLPH, SENIOR CIRCUIT JUDGE

         The New 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 Complaint Order.

         I.

         A.

         ISO New 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.

         ISO New 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.

         To 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 conditions.

         ISO New 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. See id.

         Like 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 id.

         Importantly, 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 ...


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