Central Maine Power Co v. Federal Energy Commission

• Decision Date: 08 May 2001
• Docket Number: HYDRO-ELECTRIC,No. 01-1541,No. 01-1376,N,01-1376,01-1541
• Citation: 252 F.3d 34
• Parties: (1st Cir. 2001) CENTRAL MAINE POWER COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. BANGORCOMPANY, ET AL., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. NSTAR SERVICES COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. ALTERNATE POWER SOURCE, INC., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. o. 01-1377,o. 01-1551 Heard
• Court: U.S. Court of Appeals — First Circuit

Page 34

252 F.3d 34 (1st Cir. 2001)

CENTRAL MAINE POWER COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

BANGOR HYDRO-ELECTRIC COMPANY, ET AL., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

NSTAR SERVICES COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

ALTERNATE POWER SOURCE, INC., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

No. 01-1376, No. 01-1377, No. 01-1541, No. 01-1551

United States Court of Appeals For the First Circuit

Heard May 8, 2001

Decided June 8, 2001

ON PETITION FOR REVIEW OF ORDERS OF THE FEDERAL ENERGY REGULATORY COMMISSION

[Copyrighted Material Omitted] Michael E. Small and Harvey Reiter with whom Wendy N. Reed, Wright & Talisman, P.C., David D'Alessandro, Morrison & Hecker, LLP, Lisa Fink, State of Maine, Public Utilities Commission, Kenneth G. Jaffe, Swidler Berlin Shereff Huber Friedman LLP, Richard M. Lorenzo, Heidi Marie Werntz, Huber Lawrence & Abell, Stephen L. Teichler, Duane, Morris & Heckscher LLP, and Joseph W. Rogers, Assistant Attorney General, Office of Attorney General, were on consolidated brief for petitioners Bangor Hydro-Electric Company, Maine Public Utilities Commission, Vermont Department of Public Service, National Grid USA, NSTAR Services Company, Central Maine Power Company, and intervenors Attorney General for the Commonwealth of Massachusetts and Alternate Power Source, Inc.

Stephen G. Ward, Public Advocate, Office of Public Advocate, and Wayne R. Jortner, Senior Counsel, Office of Public Advocate, on consolidated brief for Maine Public Advocate, Amicus Curiae.

Beth G. Pacella with whom Kevin P. Madden, General Counsel, and Dennis Lane, Solicitor, were on consolidated brief for respondent.

John N. Estes, III with whom Paul Franklin Wight, John S. Moot, Skadden, Arps, Slate, Meagher & Flom LLP, Richard P. Bress, Minh N. Vu, Michael J. Gergen, Latham & Watkins, David B. Raskin, Joseph E. Stubbs, Steptoe & Johnson LLP, Joseph DeVito, NRG Energy, Inc., James Bertrand, Leonard, Street and Deinard, P.A., Daniel J. Mitchell, Bernstein, Shur, Sawyer & Nelson, P.A., Larry F. Eisenstat, George E. Johnson, Michael R. Engleman, Dickstein Shapiro Morin & Oshinsky, LLP, Jay T. Ryan, Van Ness Feldman, P.C., James C. Beh, Jeffrey M. Jakubiak, Donald F. Santa, Jr., Dionne E. Thompson, Troutman Sanders LLP and Neil H. Butterklee, Consolidated Edison Company of New York, were on consolidated brief for intervenors PG&E National Energy Group, Inc., PG&E Generating Company, LLC, USGen New England, Inc., PG&E Energy Trading-Power, L.P., Sithe New England Holdings, LLC, PEC Energy Marketing, Inc., Consolidated Edison Energy, Inc., American National Power, Inc., Power Development Company, LLC, NRG Power Marketing, Inc., Connecticut Jet Power LLC, Devon Power LLC, Middletown Power LLC, Montville Power LLC, Norwalk Power LLC, Somerset Power LLC, Northeast Utilities Service Company on behalf of the Northeast Utilities Operating Companies and Select Energy, Inc., Mirant New England, LLC, Mirant Canal, LLC, Mirant Kendall, LLC, FPL Energy, LLC and Duke Energy North America, LLC.

Before Boudin, Circuit Judge, Bownes, Senior Circuit Judge, and Schwarzer,^* Senior District Judge.

BOUDIN, Circuit Judge.

The petitions for review in this case challenge orders of the Federal Energy Regulatory Commission ("FERC") that have the effect of reinstituting an earlier charge--the so-called installed capability ("ICAP") deficiency charge--paid by electric utilities in New England who fail to meet certain reserve capacity requirements. This court stayed implementation of all but a small portion of the charge pending judicial review. The background is complicated but can be summarized as follows.

In New England, as in other regions of the country, electrical power is furnished through a grid of interconnected intercity transmission lines and local distribution lines within each city or town. Power is generated within the region, or purchased from outside (e.g., from Canada). Some utilities engage in all three functions (generation, intercity transmission, local distribution) but many are local "retailers" who own only the local distribution facilities within a town and purchase all of their needs from generating utilities that have surplus power.¹

Regulation is divided between FERC and state regulatory commissions, but generally speaking, FERC regulates wholesale transactions (e.g., between a power-supplying utility with a surplus and a local municipal utility that retails power). 16 U.S.C. § 824(b)(1) (1994); FPC v. Conway Corp., 426 U.S. 271, 276-77 (1976). In the past, power was provided largely on a non-competitive basis with regulated rates based upon costs; but, as in other industries like telecommunications, some power regulators, including FERC, have been moving in recent years toward more reliance upon competition. Town of Norwood v. FERC, 202 F.3d 392, 396 (1st Cir.), cert. denied, 121 S. Ct. 57 (2000).

An abiding concern in regulating electricity supply is the need for adequate reserve capacity. The demand for electricity varies, depending on weather, economic growth, and other factors; supply is constrained by the time needed to build new generating plants and by unexpected breakdowns in generation or transmission facilities; and electricity cannot economically be stored for future use in large quantities. To avoid the extraordinary disruption of blackouts, regulators and utilities calculate reserve requirements based on estimates of how much generating capacity will be needed at the highest point of the peak load.

Our case concerns the mechanism for assuring that utilities will have the reserve power needed to satisfy peak demand. Because the system as a whole must be built to satisfy peak demand, a good deal of generating capacity is destined to lie idle at least some of the time. A prudent utility that retails power to local customers will purchase from a generating utility a certain amount of reserve capacity--in effect, capacity that is reserved for that retailer but may be used only rarely. But it is not certain that under present industry conditions the retailer has adequate economic incentive to purchase all the reserve capacity that it needs. And if reserve capacity is not purchased in sufficient amounts, generating utilities may lack the incentive to build as much capacity as is needed to supply peak demand.

The incentive structure in the industry is immensely complicated and economists take different views on how best (i.e., cheaply and reliably) to secure adequate reserves. But, for a number of years prior to 1998, FERC and the New England utilities under its supervision used the so-called ICAP deficiency charge as a device to assure that purchasing utilities would buy adequate reserve capacity to cover projected peak load plus a reserve margin. ISO New Eng., Inc., 91 FERC ¶ 61,311, at 62,080 (2000); see also Municipalities of Groton v. FERC, 587 F.2d 1296, 1302 (D.C. Cir. 1978).

In New England, beginning some time before 1990, wholesale tariffs specified that load serving entities ("LSE's")--crudely, electricity retailers--had to pay a charge if they did not purchase enough reserve capacity. From 1990 onward, the charge was $8.75 per kilowatt-month; thus, if during a particular period the reserves purchased by an LSE fell below its allocated share of all needed reserves, the LSE paid the specified charge times the amount of its deficiency. Through a complicated arrangement, most of the money went as extra compensation to power-supplying utilities, supplementing the amounts they earned by selling electrical power and committing reserve capacity.

The theory underlying the $8.75 figure, which prevailed in New England from 1990 to 1998, was that it approximated the cost (appropriately amortized) to construct a kilowatt-month of new generating capacity available for peak demand conditions, plus an additional "penalty."² The penalty's theoretical basis is not crystal clear, but the existence and value of the penalty are not issues in this case. The key issue is whether FERC, after allowing the $8.75 charge to be abandoned in New England in 1998 and 1999, could reinstate it in 2000 in the way that it did.

In 1998, New England utilities obtained FERC's approval to abandon the flat ICAP deficiency charge in favor of a so-called auction market for buying additional reserve capacity, that is, required capacity over and above that acquired through bilateral contracts (which are common and often long-term). However, the auction market appears not to have been successful--among other things, the prices were thought to have been subject to manipulation. In March 2000, ISO New England, Inc. ("ISO-NE")--the "independent system operator" that manages power transactions on behalf of the utilities in the New England Power Pool--sought FERC's consent to an end to the auction regime.

On June 28, 2000, FERC released a lengthy order ("the June 28 order") that largely addressed other ISO-NE issues but which toward its end addressed the ICAP issue in a few paragraphs, ISO New Eng., 91 FERC ¶ 61,311, at 62,080-81. In the order, FERC agreed with ISO-NE that the auction did not work, but, because ISO-NE had not proposed an alternative means to ensure that LSE's would purchase adequate reserve capacity, FERC said that although it would permit an end to the auction as of August 1, 2000, it would "also require the ISO to revert to administratively-determined sanctions for failure [of LSE'S] to meet the existing ICAP requirement," i.e., the projected reserve capacity requirement. Id. at 62,081. ISO-NE was directed to file tariffs "proposing an appropriate ICAP deficiency charge within 30 days." Id.

ISO-NE responded with a filing that proposed a charge of $0.17--a fraction (less than 2 percent) of the charge that had prevailed from 1990 to 1998; this figure was proffered as an average price paid for...