Consolidated Edison Co. of New York v. F.E.R.C.

• Decision Date: 07 November 2003
• Docket Number: No. 02-1004.,No. 02-1187.,No. 01-1503.,No. 02-1010.,01-1503.,02-1004.,02-1010.,02-1187.
• Citation: 347 F.3d 964
• Parties: CONSOLIDATED EDISON COMPANY OF NEW YORK, INC., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. NRG Power Marketing, Inc., et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

347 F.3d 964

CONSOLIDATED EDISON COMPANY OF NEW YORK, INC., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent NRG Power Marketing, Inc., et al., Intervenors.

No. 01-1503.

No. 02-1004.

No. 02-1010.

No. 02-1187.

United States Court of Appeals, District of Columbia Circuit.

Argued September 16, 2003.

Decided November 7, 2003.

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

William F. Young and Elias G. Farrah argued the cause for petitioners and intervenors in support of petitioners. With them on the briefs were Neil H. Butterklee, Elizabeth Ward Whittle, and J. Cathy Fogel. Arnold H. Quint entered an appearance.

Larry D. Gasteiger, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were Cynthia A. Marlette, General Counsel, and Dennis Lane, Solicitor.

Howard E. Shapiro argued the cause for intervenors. With him on the brief were Kenneth M. Simon, Woody N. Peterson, David P. Yaffe, Jonathan D. Simon, and Steven A. Weiler.

Before: SENTELLE, ROGERS, and TATEL, Circuit Judges.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge:

In these consolidated cases, we consider what remedies, particularly monetary ones with retroactive effect, are available for electric service providers and ultimately electricity consumers who experience substantial price increases when a deregulated energy market fails to operate properly. Here, the Federal Energy Regulatory Commission — though finding serious problems in the market for operating reserves, imposing a prospective rate cap, and requiring other corrective actions — held that it lacked authority under the Federal Power Act to revise rates retroactively. Although we agree with that holding, we find that FERC (1) failed to explain adequately why certain emergency procedures for rebilling were unavailable, (2) erred in concluding that the independent operator had not violated its tariff for pricing different types of reserves, and (3) failed to consider other alleged tariff violations. We therefore grant the petitions in part and remand for further proceedings consistent with this opinion.

I.

The New York Independent Service Operator (NYISO), a non-profit corporation, operates the bulk power transmission system in New York. NYISO provides open access transmission service and maintains system reliability. Cent. Hudson Gas & Elec. Corp., 83 F.E.R.C. ¶ 61,352, 62,406 (1998), order on reh'g, 87 F.E.R.C. ¶ 61,135 (1999). It also administers competitive, bid-based electricity markets and monitors them for exercises of market power. N.Y. Indep. Sys. Operator, Inc., 89 F.E.R.C. ¶ 61,196 (1999) (Market Monitoring Plan or Order). NYISO operates under tariffs filed with FERC, including the tariff involved in this case, the Market Administration and Control Area Services Tariff (Services Tariff). Unlike tariffs for traditional cost-of-service rates, the filed tariffs at issue here contain no precise prices; instead, they set standards for NYISO's administration of competitive electric power markets.

Under the Services Tariff, NYISO maintains a market for ancillary services, including operating reserves. See Services Tariff, J.A. at 594-751. Operating reserves allow utilities to produce electricity on short notice to meet load (the total demand for service on a utility system). Ten-minute spinning reserve (SR) is synchronized to the system and available almost immediately. Ten-minute non-spinning reserve (NSR), though not loaded, can be synchronized within ten minutes. Certain amounts of ten-minute operating reserves must be available every hour to maintain system reliability. Power suppliers offer "bids" to sell SR and NSR at certain prices in the NYISO market. Load-serving entities (LSEs) — transmission facility owners that provide electric load — then purchase reserves from NYISO.

NYISO also operates under its Market Monitoring Plan (MMP) and Temporary Extraordinary Procedures (TEP), two measures filed with and approved by FERC that give NYISO authority to remedy specified problems that may arise in the deregulated market. While the precise scope of these measures is in some dispute, they allow NYISO to take certain actions, such as issuing letters under the MMP to request that a participant cease behavior that suggests the exercise of market power and recalculating the prices under TEP to the level that would have cleared the market absent a software malfunction.

The Federal Energy Regulatory Commission oversees this market-based system pursuant to the Federal Power Act (FPA), 16 U.S.C. § 791a et seq., several provisions of which are at issue in this case. Under sections 205 and 206, FERC has both the authority and duty to regulate rates for wholesale electric power and to prohibit utilities from charging unreasonable rates. Id. §§ 824d, 824e (2000). Section 205(d) requires public utilities to file new rates or proposed changes with FERC, which typically take effect in sixty days. Id. § 824d(d). For "good cause shown," however, FERC may waive the sixty-day notice requirement, thus allowing rate changes to take effect immediately. Id. Under section 206(a), FERC may investigate whether a particular rate or charge is "just and reasonable." Id. § 824e(a). If FERC finds a rate unreasonable, it must order imposition of a just and reasonable rate. Id. FERC may then order refunds for any period subsequent to the "refund effective date," a date FERC establishes that must be at least sixty days after the filing of the complaint. Id. § 824e(b). Under section 206, however, FERC may not order refunds for any period prior to the filing of the complaint. Id. In contrast, FPA section 309 gives FERC authority to order refunds if it finds violations of the filed tariff. See id. § 825h (vesting FERC with authority to "perform any and all acts ... it may find necessary or appropriate to carry out the provisions of [the Act]"); Towns of Concord, Norwood, & Wellesley, Mass. v. FERC, 955 F.2d 67, 73 (D.C.Cir.1992) (explaining that authority to give refunds derives from FPA section 309).

This case arises out of events that occurred approximately two months after NYISO began operations. Between January 29, 2000, and late March the LSEs experienced a dramatic increase in prices in the bid-based market for NSR. Prices spiked from averages of $1.04 per megawatt per hour in November 1999 and $1.06 the following month to an average of $65.57 in February 2000, reaching a high of $302 that month. At the same time, the quantity of NSR that suppliers offered dropped dramatically. For example, NSR offered at less than $30 declined approximately seventy-five percent, from over 1200 megawatts prior to January 29 to a low of just over 300 megawatts during that period. According to NYISO, during the six weeks from January 29 to March 10, the total cost to LSEs purchasing ten-minute reserves rose by approximately $65 million. During that same period, NYISO reported that the market for NSR was also highly concentrated — just three generators controlled ninety-seven percent of NSR capacity. See N.Y. Indep. Sys. Operator, Inc., 91 F.E.R.C. ¶ 61,218, 61,794 (2000) (Initial Order).

On March 27, 2000, NYISO responded to this substantial price increase by filing a request with FERC pursuant to FPA section 205 to suspend immediately market-based bids for ten-minute reserves. It also asked for authority to (1) revise its Services Tariff to subject NSR bids to a $2.52 cap, the highest market clearing price for NSR prior to January 29, the last day on which the market appeared to function normally, and (2) rebill for March "pending the outcome of [an alternative dispute resolution (ADR)] process" that NYISO requested FERC to initiate. Request of NYISO for Suspension of Market-Based Pricing for 10-Minute Reserves and To Shorten Notice Period, J.A. at 54. Around the same time, the LSEs filed complaints with FERC pursuant to FPA section 206. According to the LSEs, NYISO violated its Services Tariff and operated under several market design flaws — such as failing to accept bids from other qualified suppliers — that compounded the problems in the reserves market. The LSEs asked FERC to direct NYISO to correct the practices that allegedly violated the Tariff and to order refunds for the alleged overcharges resulting from the violations. They also sought to compel NYISO to invoke its Temporary Extraordinary Procedures, a set of remedial measures that FERC had previously approved. See N.Y. Indep. Sys. Operator, Inc., 88 F.E.R.C. ¶ 61,228 (1999) (First TEP Order), reh'g denied, 89 F.E.R.C. ¶ 61,168 (1999).

In the first of three orders, FERC found that NYISO had "presented sufficient evidence to call into question continued reliance on market-based pricing for non-spinning reserves." Initial Order, 91 F.E.R.C. at 61,798. It found that the markets were "even more concentrated than indicated in the original analysis," and that the "conditions under which market-based rate authority for ancillary services was granted do not match the current operational realities of the New York ISO's reserve markets." Id. at 61,799. That said, FERC stated that it "ma[d]e no finding here that any supplier engaged in the withholding of capacity." Id.

Based on its conclusion that the market was not operating properly, FERC granted NYISO's request for a $2.52 bid cap and waived the sixty-day notice requirement so that the cap could take effect the day after the filing. Id. at 61,793. Explaining that it had no authority to grant retroactive relief, however, FERC rejected NYISO's requests to rebill for reserves in March and to initiate ADR procedures. Id. FERC affirmed this decision in two subsequent orders. See 97 F.E.R.C. ¶ 61,155 (2001) (First Rehearing Order); 99 F.E.R.C. ¶ 61,125 (2002) (Second Rehearing Order). With respect to the LSE complaints alleging NYISO tariff violations and market design flaws, FERC denied the...