Cent. Hudson Gas & Elec. Corp. v. Fed. Energy Regulatory Comm'n

• Decision Date: 02 April 2015
• Docket Number: 14–2248Con.,Docket Nos. 14–1786 L,14–2130Con,14–1830Con
• Citation: 783 F.3d 92
• Parties: CENTRAL HUDSON GAS & ELECTRIC CORP., People of the State of New York, Public Service Commission of the State of New York, New York Power Authority, New York State Electric and Gas Corporation, Rochester Gas and Electric Corporation, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Entergy Nuclear Power Marketing, LLC, NRG Power Marketing LLC, Genon Energy Management, LLC, Arthur Kill Power LLC, Astoria Gas Turbine Power LLC, Dunkirk Power LLC, NRG Bowline LLC, Huntley Power LLC, Oswego Harbor Power LLC, Independent Power Producers of New York, Inc. (IPPNY), Intervenors.
• Court: U.S. Court of Appeals — Second Circuit

783 F.3d 92

CENTRAL HUDSON GAS & ELECTRIC CORP., People of the State of New York, Public Service Commission of the State of New York, New York Power Authority, New York State Electric and Gas Corporation, Rochester Gas and Electric Corporation, Petitioners

v.FEDERAL ENERGY REGULATORY COMMISSION, Respondent

Entergy Nuclear Power Marketing, LLC, NRG Power Marketing LLC, Genon Energy Management, LLC, Arthur Kill Power LLC, Astoria Gas Turbine Power LLC, Dunkirk Power LLC, NRG Bowline LLC, Huntley Power LLC, Oswego Harbor Power LLC, Independent Power Producers of New York, Inc. (IPPNY), Intervenors.

Docket Nos. 14–1786 L

14–1830Con

14–2130Con

14–2248Con.

United States Court of Appeals, Second Circuit.

Argued: Sept. 12, 2014.

Decided: April 2, 2015.

Raymond B. Wuslich, Winston & Strawn LLP, Washington, DC, for Petitioners Central Hudson Gas & Electric Corp., New York Power Authority, New York State Electric and Gas Corporation, and Rochester Gas and Electric Corporation.

Paul Colbert, Associate General Counsel–Regulatory Affairs, Central Hudson Gas & Electric Corp., Poughkeepsie, N.Y., for Petitioner Central Hudson Gas & Electric Corp.

Glenn D. Haake, Principal Attorney, New York Power Authority, Albany, N.Y., for Petitioner New York Power Authority.

R. Scott Mahoney, General Counsel, Iberdrola USA, Inc., Binghamton, N.Y., for Petitioners New York State Electric and Gas Corporation, and Rochester Gas and Electric Corporation.

Jonathan D. Feinberg, Solicitor, Public Service Commission of the State of New York (Kimberly A. Harriman, General Counsel, John C. Graham, Assistant Counsel, and Nelli Doroshkin, Assistant Counsel, on the brief), for Petitioners Public Service Commission of the State of New York and People of the State of New York.

Robert H. Solomon, Solicitor, Federal Energy Regulatory Commission, Washington DC (David L. Morenoff, Acting General Counsel, Lisa B. Luftig and Karin L. Larson, Attorneys, on the brief), for Respondent Federal Energy Regulatory Commission.

John S. Moot, Skadden, Arps, Slate, Meagher & Flom LLP, Washington, DC (Karis Anne Gong, on the brief), for Intervenor Entergy Nuclear Power Marketing, LLC.

David B. Johnson, Read and Laniado, LLP, Albany, N.Y., for Intervenor Independent Power Producers of New York, Inc.

Victoria L. Smith, Stinson Leonard Street LLP, Kansas City, MO (Abraham Silverman and Cortney Madea, NRG Energy, Inc., Princeton, NJ, on the brief), for Intervenors NRG Power Marketing LLC, GenOn Energy Management, LLC, Arthur Kill Power LLC, Astoria Gas Turbine Power LLC, Dunkirk Power LLC, NRG Bowline LLC, Huntley Power LLC, and Oswego Harbor Power LLC.

Before: LIVINGSTON and DRONEY, Circuit Judges; NATHAN, District Judge.^*

Opinion

DEBRA ANN LIVINGSTON, Circuit Judge:

In this appeal, two groups of Petitioners challenge four orders issued in 2013 and 2014 by the Federal Energy Regulatory Commission (“FERC”). The challenged orders approved a proposal by the New York Independent System Operator (“NYISO”) to create a new wholesale electric power “capacity zone” comprising certain areas of Southeastern New York, including the lower Hudson Valley (the “Lower Hudson Valley Zone”). The orders represent the culmination of a multiyear process during which NYISO, at FERC's direction, sought to identify areas of New York in which customers received power from suppliers located on the other side of a “transmission constraint” in the electrical grid. Because of the way New York's capacity markets work (as we explain later in this opinion), NYISO concluded that the financial incentives for capacity resources in the transmission-constrained area that became the Lower Hudson Valley Zone were inadequate, jeopardizing the reliability of the grid for customers there. FERC's approval of the Lower Hudson Valley Zone, along with a new “demand curve” that NYISO uses to set capacity prices for the zone, was designed to address this potential reliability problem by providing more accurate price signals to in-zone resources. For customers in the new zone, however, the creation of the new zone was expected to result in higher prices.

The first group of Petitioners in this case comprises Central Hudson Gas & Electric Corp., New York Power Authority, New York State Electric and Gas Corporation, and Rochester Gas and Electric Corporation (“Utility Petitioners”). The second group comprises the People of the State of New York and the New York Public Service Commission (“NYPSC”) (“New York Petitioners”). The essence of Petitioners' claims is that FERC failed adequately to justify the new, higher prices expected to result from the creation of the Lower Hudson Valley Zone, particularly without a “phase-in” of the new zone and its demand curve to soften the impact. Accordingly, Petitioners claim that the challenged orders are arbitrary and capricious, are unsupported by substantial evidence, and disregard FERC's statutory mandate to ensure that rates are “just and reasonable.” 16 U.S.C. § 824d(a). For the reasons set forth below, we disagree, and we therefore deny the petitions for review.

BACKGROUND

Due to the technical nature of the FERC orders that we are called on to review, we first discuss the characteristics of the capacity market in New York, as well as the history behind NYISO's proposal to create the new Lower Hudson Valley Zone, before describing the challenged orders.

A. New York's Capacity Market for Wholesale Electric Power

In some regions of the United States, including New York, certain functions involving the coordination, control, and operation of the wholesale electric transmission grid and markets for wholesale electric power are administered by organizations known as Regional Transmission Organizations (“RTOs”) or Independent System Operators (“ISOs”). Around the turn of this century, FERC formally encouraged the formation of these organizations through several orders that restructured wholesale transmission and energy markets. See Promoting Wholesale Competition Through Open Access Non–Discriminatory Transmission Servs. by Pub. Utils.; Recovery of Stranded Costs by Pub. Utils. & Transmitting Utils., Order No. 888, F.E.R.C. Stats & Regs. ¶ 31,036 (1996), order on reh'g, Order No. 888–A, F.E.R.C. Stats & Regs. ¶ 31,048 (1997), order on reh'g, Order 888–B, 81 F.E.R.C. ¶ 61,248 (1997), order on reh'g, Order No. 888–C, 82 F.E.R.C. ¶ 61,046 (1998), aff'd in relevant part, Transmission Access Policy Study Grp. v. FERC, 225 F.3d 667 (D.C.Cir.2000), aff'd sub nom. New York v. FERC, 535 U.S. 1, 122 S.Ct. 1012, 152 L.Ed.2d 47 (2002) ; Regional Transmission Orgs., Order No. 2000, F.E.R.C. Stats. & Regs. ¶ 31,089 (1999), on reh'g, Order No. 2000–A, F.E.R.C. Stats. & Regs. ¶ 31,092 (2000) (codified at 18 C.F.R. § 35.34 ). As part of their administration of these markets, RTOs and ISOs must, pursuant to the Federal Power Act (“FPA”), obtain FERC's approval of proposed rules and regulations affecting rates for the sale of electric energy, and FERC must ensure that these rules and regulations are “just and reasonable” and result in “just and reasonable” rates. 16 U.S.C. § 824d. While many RTOs and ISOs in the country have authority over areas whose boundaries cross state lines, New York has its own ISO (i.e., NYISO), which is responsible for the reliable operation of New York's high-voltage transmission grid and administers bulk power markets in New York.

One function that NYISO performs is administering a “capacity market” for wholesale electric power. Installed capacity is “the amount of electricity that [a] producer can supply at a given time.” Simon v. KeySpan Corp., 694 F.3d 196, 199 (2d Cir.2012) ; see also Conn. Dep't of Pub. Util. Control v. FERC, 569 F.3d 477, 479 (D.C.Cir.2009) (“ ‘Capacity’ is not electricity itself but the ability to produce it when necessary.”). Capacity markets are a tool that some RTOs and ISOs use to help ensure that there is a reliable and adequate supply of electric power. In a capacity market, suppliers sell a commitment to produce electric energy if called upon to do so during a specified future time period, rather than electric energy itself. NYISO's capacity market is implemented chiefly through monthly mandatory spot auctions, which are conducted a short time in advance of the month for which capacity is being supplied.See NYISO Market Administration and Control Area Services Tariff [hereinafter “NYISO Services Tariff”] §§ 5.13.3, 5.14.1.

NYISO's capacity market is divided into “capacity zones.” Prior to the orders at issue here, the capacity market was divided into three different capacity zones: the Long Island Capacity Zone (covering Nassau and Suffolk Counties), the New York City Capacity Zone (covering all of New York City), and the New York Control Area (covering the entire state, including both the Long Island Capacity Zone and the New York City Capacity Zone). While the amount of capacity supply in each zone is determined by market actors, the demand for capacity in each zone is administratively determined by NYISO. The administratively determined demand for a given region is known as that region's demand curve. The point at which the supply curve intersects with the administratively determined demand curve is the market clearing price. All suppliers whose bids “clear” the market are paid the clearing price, regardless of the price of each specific supply bid. Explaining the method by which NYISO sets the demand curve for each region requires some additional background on the way in which reliability is regulated in New York.

While NYISO administers New York's capacity market, reliability is also regulated by a separate entity, the New York State Reliability Council (“NYSRC”). NYSRC periodically calculates a figure called the installed reserve margin, which is an amount of power that must be procured for New York as a whole in addition to the amount needed for peak customer demand. It sets this margin at a level necessary to prevent a loss of load event—i.e., a system failure—from...