Belmont Mun. Light Dep't v. Fed. Energy Regulatory Comm'n

• Decision Date: 17 June 2022
• Docket Number: 19-1224,C/w 19-1247, 19-1252, 19-1253
• Parties: BELMONT MUNICIPAL LIGHT DEPARTMENT, et al., Petitioners v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Maine Public Utilities Commission, et al., Intervenors
• Court: U.S. Court of Appeals — District of Columbia Circuit

38 F.4th 173

BELMONT MUNICIPAL LIGHT DEPARTMENT, et al., Petitioners

v.FEDERAL ENERGY REGULATORY COMMISSION, Respondent

Maine Public Utilities Commission, et al., Intervenors

No. 19-1224

C/w 19-1247, 19-1252, 19-1253

United States Court of Appeals, District of Columbia Circuit.

Argued October 21, 2021

Decided June 17, 2022

John P. Coyle argued the cause for petitioners New England Consumer-Owned Systems. With him on the briefs was Ashley M. Bond.

Christopher G. Aslin, Senior Assistant Attorney General, Office of the Attorney General for the State of New Hampshire, argued the cause for State petitioners. On the briefs were John M. Formella, Attorney General, Daniel E. Will, Solicitor General, Maura Healey, Attorney General, Office of the Attorney General for the Commonwealth of Massachusetts, and Timothy J. Reppucci, Assistant Attorney General at the time the briefs were filed. Christina Belew, Assistant Attorney General, entered an appearance.

Casey A. Roberts argued the cause for petitioners Sierra Club and Union of Concerned Scientists. With her on the briefs was Charles Carter Hall at the time the briefs were filed. Devin McDougall entered an appearance.

Robert M. Kennedy, Senior Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were Matthew R. Christiansen, General Counsel, and Robert H. Solomon, Solicitor.

Paul W. Hughes argued the cause for intervenor New England Power Generators Association, Inc. in support of respondent. With him on the brief were David G. Tewksbury and Andrew A. Lyons-Berg.

Michael J. Thompson and Maria Gulluni were on the brief for intervenor ISO New England Inc. in support of respondent.

Before: Wilkins, Katsas and Jackson^* , Circuit Judges.

Wilkins, Circuit Judge:

The Northeast region of the United States will likely face fuel energy security risks in upcoming winters because of the stress the winter places on its electricity grid. When the system is stressed, power plants struggle to secure the fuel they need to produce energy. As a result, emergency actions, such as rolling blackouts, become necessary to protect the power grid. To mitigate these impending risks, the Independent System Operator for New England ("ISO-NE") took action.

I.

In May 2018, pursuant to Section 205(d) of the Federal Power Act ("FPA"), 16 U.S.C. § 824d(d), ISO-NE filed tariff revisions with the Federal Energy Regulatory Commission ("FERC" or "the Commission") to compensate generators for maintaining an inventory of energy during the winter months of 2023–24 and 2024–25. The revisions implemented the Inventoried Energy Program ("IEP"), under which ISO-NE will provide additional payments to generators to maintain up to three days’ worth of fuel on-site and convert it into electricity. ISO-NE's objective is to incent market participants to acquire more inventoried energy than they otherwise would and compensate these resources for improving winter energy reliability.

On June 18, 2020, the Commission issued an order accepting ISO-NE's proposed tariff revisions. ISO New Eng. Inc. , 171 FERC ¶ 61,235 (2020) (" Order Accepting Tariff Revisions"). FERC concluded that IEP is a just and reasonable interim solution to address the Northeast region's fuel security risk while ISO-NE continues working on a long-term market design solution. Order Accepting Tariff Revisions ¶¶ 2, 34. The Secretary of the Commission issued notices denying requests for rehearing by operation of law. ISO New Eng. Inc. , 172 FERC ¶ 62,095 (2020) (" August 2020 Notice").

We consider four timely Petitions for Review challenging FERC's Order accepting ISO-NE's proposed tariff revisions. Petitioners include New England Consumer-Owned Systems ("NECOS"), a group of municipally-owned electric utilities and a municipal light plant cooperative owned by five municipal electric utilities; the New Hampshire Office of the Consumer Advocate, the New Hampshire Public Utilities Commission, and the Attorney General of the Commonwealth of Massachusetts (collectively, "State Petitioners"); and Sierra Club and Union of Concerned Scientists (collectively, "Environmental Petitioners"). Petitioners contend that FERC's decision to approve IEP imposes unjust and unreasonable, discriminatory, and preferential rates.

Importantly, many market participants that ISO-NE has proposed to compensate under IEP—namely nuclear, hydroelectric, coal, and biomass generators—already maintain "inventoried energy," meaning that their standard operating practice is to store more than three days’ worth of fuel on-site. J.A. 12–13, 19, 356, 539. As such, IEP is designed to compensate these market participants for maintaining the status quo, not incent them to change their behavior to further improve cold weather fuel security in New England. J.A. 11.

Furthermore, IEP's compensation scheme is similar to that of a previous winter energy security program proposed by ISO-NE: the Winter Reliability Program. See ISO New Eng., Inc. , 154 FERC ¶ 61,133 (2016) (" Order Denying Rehearing"). In July 2015, ISO-NE and New England Power Pool Participants Committee ("NEPOOL") submitted two alternative proposals to increase energy reliability during the winters between 2015 and 2018. Id. ¶ 5. In 2016, the Commission issued an order accepting NEPOOL's proposal and rejecting ISO-NE's proposal to include coal, nuclear, and hydroelectric resources in the Winter Reliability Program because "substantial expert testimony" supporting NEPOOL's proposal reflected that coal, nuclear, and hydroelectric "resources are not likely to change their behavior in response to the particular payments outlined in the ISO-NE Proposal." Id. ¶ 13. The Commission reasoned that "the purpose of the Program is to incentivize additional reliability services to ensure reliability during the winter months." Id. ¶ 11. "We are not persuaded by [the] argument that nuclear, coal, and hydro

resources are similarly situated with respect to the Winter Reliability Program merely because they are capable of storing on-site fuel." Id. ¶ 13. "Because the purpose of the Program is to ensure reliability during the winter, we do not find it necessary to include resources that do not provide any additional benefit to winter reliability for the sake of fuel neutrality alone." Id. All in all, FERC determined that ISO-NE's proposed compensation scheme was inappropriate because it would award windfall payments to nuclear, coal, and hydroelectric generators.

The Commission's precedent regarding the Winter Reliability Program is instructive to the resolution of the petitions before us now. Like ISO-NE's Winter Reliability Program, IEP is "fuel neutral"; it is designed to compensate all eligible market participants, including nuclear, coal, biomass, and hydroelectric generators, without any assurance that this group of generators will improve winter energy reliability. Despite evidence in the administrative record indicating that IEP's payment framework would award a windfall to nuclear, coal, biomass, and hydroelectric generators, FERC approved their inclusion in IEP and abandoned the position it previously took in the Order Denying Rehearing.

For the reasons discussed below, we find that pursuant to the Administrative Procedure Act, 5 U.S.C. § 706(2)(A), the Commission's approval of IEP was arbitrary and capricious in only one respect—its inclusion of coal, hydroelectric, biomass, and nuclear generators. FERC's acceptance of ISO-NE's proposal to compensate these market participants—despite record evidence that they would not change their behavior in response to payments—was not reasoned decisionmaking. The Commission's decision also conflicts with its past precedent on ISO-NE's Winter Reliability Program proposal. Accordingly, we partially vacate the Commission's June 18, 2020 order. We will sever the portion of the Inventoried Energy Program that is arbitrary and capricious: the program's inclusion of nuclear, biomass, coal, and hydroelectric generators.

This Court has jurisdiction under 16 U.S.C. § 825l (b). For the reasons explained below, the Petitions for Review are granted in part and denied in part.

II.

FERC is an independent regulatory commission within the Department of Energy. Pursuant to the FPA, the Commission has exclusive jurisdiction to "regulate[ ] the sale of electricity at wholesale in interstate commerce." Entergy La., Inc. v. La. Pub. Serv. Comm'n , 539 U.S. 39, 41, 123 S.Ct. 2050, 156 L.Ed.2d 34 (2003) (citing 16 U.S.C. § 824(b) ). The FPA "empowers FERC to regulate the sale and transmission of electricity to ensure that electricity is provided at a ‘just and reasonable’ rate." New England Power Generators Ass'n v. FERC , 881 F.3d 202, 205 (D.C. Cir. 2018) (" NEPGA ") (quoting 16 U.S.C. § 824d(a) ). FERC retains jurisdiction over "[a]ll rates and charges made, demanded, or received by any public utility for or in connection with the transmission or sale of electric energy." 16 U.S.C. § 824d(a). Under Section 205 of the FPA, a negatively affected party can challenge a rate by filing a complaint with FERC. If the challenging party establishes that the existing rate has become unjust or unreasonable and FERC agrees, then Section 206 of the FPA authorizes FERC to establish a new rate. NEPGA , 881 F.3d at 205 (citing 16 U.S.C. §§ 824e(a), (b) ).

A.

As indicated, ISO-NE, a non-profit entity, operates the Northeast's transmission services by running auction markets for energy. We assume familiarity with ISO-NE's administration of New England's wholesale electric markets. See, e.g. , NextEra Energy Res., LLC v. FERC , 898 F.3d 14, 17 (D.C. Cir. 2018) ("The features of ISO New England's complex forward capacity market have been the subject of multiple petitions for review."); NEPGA v. FERC , 881 F.3d 202 (D.C. Cir. 2018) ; Emera Maine v. FERC , 854 F.3d 9 (D.C. Cir. 2017) ; TransCanada Power Marketing Ltd. v. FERC , 811 F.3d 1 (D.C. Cir. 2015) ; PSEG Energy Res. & Trade LLC v. FERC , 665 F.3d 203 (D.C. Cir. 201...