Keyspan-Ravenswood, LLC v. F.E.R.C., 05-1332.

Citation474 F.3d 804
Decision Date12 January 2007
Docket NumberNo. 05-1332.,05-1332.
PartiesKEYSPAN-RAVENSWOOD, LLC, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent New York Independent System Operator, Inc., et al., Intervenors.
CourtUnited States Courts of Appeals. United States Court of Appeals (District of Columbia)

Kenneth M. Simon argued the cause for petitioner. With him on the briefs was Robert C. Fallon.

Judith A. Albert, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief were John S. Moot, General Counsel, and Robert H. Solomon, Solicitor.

Neil H. Butterklee argued the cause for intervenors Consolidated Edison Company of New York, Inc., et al. With him on the brief were James J. Dixon, Elias G. Farrah, and Rebecca J. Michael in support of respondent.

William F. Young, Susan E. Dove, and Carl F. Patka were on the brief for intervenor New York Independent System Operator, Inc. in support of respondent.

Before: HENDERSON and TATEL, Circuit Judges, and SILBERMAN, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge.

Petitioner, an owner and operator of electric generation facilities in New York City, appeals an order of the Federal Energy Regulatory Commission, arguing that the Commission acted arbitrarily and capriciously in deciding that the New York Independent System Operator (N.Y.ISO) had not violated the filed rate doctrine in establishing a pair of formulae for translating "installed capacity" into "unforced capacity." Because we agree, we vacate and remand.

I.

The New York Independent System Operator is a not-for-profit organization charged with administering New York's electricity markets. Among other duties, NYISO enforces rules designed to ensure the reliability of the state's electricity grid. One way NYISO does this is by requiring electricity retailers (referred to as `load-serving entities' or LSEs) to purchase capacity—as opposed to actual electricity— from generators in regularly held auctions. The purchase of capacity differs from the purchase of electricity. Like an option contract, the LSE compensates the generator for the option of buying a specified quantity of power irrespective of whether it ultimately buys the electricity.

NYISO calculates the amount of capacity LSEs must purchase by multiplying each LSE's expected peak load by one plus a figure called the installed reserve margin, which is set by the New York State Reliability Council (N.Y.SRC), a non-profit corporation established by NYISO. During the summer of 2002, the period at issue here, NYSRC set the installed reserve margin at 18%. For instance, if an LSE expected that the most power it would need—its peak load—would be 1,000 MW, then that LSE would have to acquire access to 1,180 MW of capacity in order to maintain a cushion against shortfall. NYSRC sets the installed reserve margin at a level necessary to prevent system failure from occurring (probabilistically) more than once every ten years.

Until 2001, NYISO denominated the LSEs' capacity obligation in terms of "installed capacity," i.e., the amount of power a generating facility can produce under ideal conditions. This approach had a significant shortcoming: it gave generators little incentive to improve their reliability, leaving them free to sell their entire quantity of installed capacity regardless of how often their facilities underwent "forced" outages—that is, unplanned outages such as mechanical breakdowns and the like. NYISO sought to correct this problem by requiring LSEs to purchase "unforced capacity" instead of installed capacity. For those unfortunate souls not steeped in the vernacular of electricity regulation, a generator's unforced capacity (UCAP) is its installed capacity (ICAP) discounted or "de-rated" by its forced outage rate (or equivalent forced outage rate demand (EFORd)). The forced outage rate equals the historical percentage of the generator's maximum output lost to forced outages when such output is demanded. The translation of installed into unforced capacity can be represented mathematically as follows:

UCAP = ICAP × (1—EFORd)

For example, consider a generating facility with installed capacity of 1,000 MW that has historically lost 10% of its output to forced outages. That generator would have unforced capacity of 900 MW. If it could have sold 1,000 MW in the capacity auctions before the switch from installed to unforced capacity, then after the switch it could sell only 900 MW, giving it an incentive to reduce its forced outage rate.

Having reduced the quantity of capacity generators could sell, NYISO also reduced the quantity of capacity LSEs had to purchase in order to reflect that they were purchasing unforced rather than installed capacity. Critical to the issue in this case, NYISO used different methodologies for making the two translations. For translating generators' installed capacity into unforced capacity, NYISO directed—in revisions to its Services Tariff filed in July 2001—that the forced outage rate would be calculated from the past twelve months of outage data for each generator. Nothing in the tariffs, however, specified how the LSEs' capacity obligation would be translated, only that it would be done "in accordance with the ISO procedures." J.A. 487. NYISO later filled this gap in the "ICAP Manual," a document that specified various aspects of the new system and that had been prepared as part of a months-long stakeholder process. The ICAP Manual explained that for purposes of translating installed capacity into unforced capacity for LSEs the forced outage rate would be "based on the data used to determine the Installed Reserve Margin by the NYSRC," J.A. 485, a formulation understood to mean that NYISO would discount the LSEs' installed capacity requirement by the average forced outage rates generators had experienced over the past ten years.

Because forced outages had declined significantly over the ten years leading up to 2002, measuring forced outage rates over two different time periods produced substantially different results: the average generator's 12-month forced outage rate was roughly 5%, while the 10-year outage rate used by the LSEs was roughly 10%. Using a higher forced outage rate for LSEs than for generators effectively reduced the amount of capacity LSEs had to purchase, regardless of whether capacity is measured in terms of installed or unforced capacity. To see why, imagine a market that, for ease of illustration, has LSEs obligated collectively to buy 10,000 MW of installed capacity and generators collectively possessing 10,000 MW of installed capacity. In this simple scenario, supply and demand are in balance. If, however, installed capacity is translated into unforced capacity using a 10% outage rate for buyers and a 5% outage rate for sellers, the balance shifts. Under such a scenario, LSEs must purchase 9,000 MW of unforced capacity, but generators can sell 9,500 MW of unforced capacity, creating a capacity surplus of 500 MW or about 5% of total supply.

In other words, using a lower forced outage rate for generators than for LSEs decreases the quantity of capacity sold in the market. This decrease can be measured by translating the quantity of unforced capacity sold in the above hypothetical back into installed capacity. Rearranging the equation produced above yields a formula for doing so:

                (1) UCAP = ICAP × (1—EFORd)
                (2) ICAP =       UCAP
                           _______________
                           (1—EFORd)
                

The generators in this example sold 9,000 MW of unforced capacity and were derated using a 5% forced outage rate. Plugging those numbers into the above equation yields 9,474 MW of installed capacity sold, substantially less than the 10,000 MW sold before the application of differential forced outage rates.

Following the summer of 2002, the NYSRC and NYISO staffs produced calculations using the same logic as above showing that the use of different translation methodologies for generators and LSEs had reduced the quantity of installed capacity sold from 35,960 MW, the amount required by the NYSRC formula, to 34,189 MW, a 1,771 MW reduction. As a result, the NYSRC and NYISO staffs concluded, the actual statewide installed reserve margin had fallen from the NYSRC-specified level of 18% to 12.2%. NYISO's Business Issues Committee later wrote that "the unforeseen and unintended consequence of the current translation methodology is a shortfall of Installed Capacity and therefore an inability to comply fully with the New York State Reliability Council's Reliability Rules." J.A. 115. Accordingly, in the fall of 2002, NYISO switched to a system in which both generators and LSEs measure forced outage rates over 12-month periods.

Petitioner Keyspan-Ravenswood (Ravenswood) generates electric power and sells capacity in New York City. In 2004, Ravenswood filed a complaint with the Commission claiming that NYISO had violated Section 205 of the Federal Power Act (FPA), which requires public utilities to file with the Commission all "practices" and "regulations" affecting their "rates and charges" and mandates that public utilities may only depart from such filed rates "after sixty days' notice to the Commission and to the public." 16 U.S.C. § 824d(c), (d). Ravenswood argued that in three separate filings NYISO had obligated itself to enforce NYSRC's installed capacity requirements, yet by using a lower forced outage rate for generators than for LSEs in the summer of 2002, NYISO had fallen well short of NYSRC's installed capacity requirement, thus violating the FPA. Ravenswood presented economic evidence purporting to show that, by both reducing the quantity of capacity sold and, through the law of supply and demand, reducing the market price of capacity, NYISO had caused it to lose $23.3 million in sales, which it asked the Commission to order in refunds.

...

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