Connecticut Dept. of Public Utility v. F.E.R.C.

• Decision Date: 23 June 2009
• Docket Number: No. 07-1375.,No. 08-1175.,No. 07-1460.,07-1375.,07-1460.,08-1175.
• Citation: 569 F.3d 477
• Parties: CONNECTICUT DEPARTMENT OF PUBLIC UTILITY CONTROL, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent New England Power Pool Participants Committee, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

569 F.3d 477

CONNECTICUT DEPARTMENT OF PUBLIC UTILITY CONTROL, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent

New England Power Pool Participants Committee, et al., Intervenors.

No. 07-1375.

No. 07-1460.

No. 08-1175.

United States Court of Appeals, District of Columbia Circuit.

Argued May 12, 2009.

Decided June 23, 2009.

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

Randall L. Speck argued the cause and filed the briefs for petitioner.

John S. Wright and Michael C. Wertheimer, Assistant Attorneys General, Attorney General's Office of State of Connecticut, Jesse S. Reyes, Assistant Attorney General, Attorney General's Office of Commonwealth of Massachusetts, and Lisa C. Fink were on the briefs for intervenors Richard Blumenthal, Attorney General for the State of Connecticut, Maine Public Utilities Commission, and Massachusetts Department of Public Utilities in support of petitioner. Lisa S. Gast entered an appearance.

James Bradford Ramsay, William H. Smith, Jr., Frank R. Lindh, Mary F. McKenzie, Christopher E. Clay, Michael A. Cox, Attorney General, Attorney General's Office of State of Michigan, Steven D. Hughey, Michael A. Nickerson, and Patricia S. Barone, Assistant Attorneys General, David D'Alessandro, Harvey L. Reiter, Anne Milgram, Attorney General, Attorney General's Office of State of New Jersey, Margaret Comes, Deputy Attorney General, Jonathan D. Feinberg, Gisele L. Rankin, John A. Levin, and Florence P. Belser were on the brief of amici curiae National Association of Regulatory Utility Commissioners et al. in support of petitioner. Grace D. Reyes and Caroline Vachier, Assistant Attorney General, Attorney General's Office of State of New Jersey, entered appearances.

Nancy H. Rogers, Attorney General, Attorney General's Office of State of Ohio, and Duane W. Luckey and Thomas W. McNamee, Assistant Attorneys General, were on the brief for amicus curiae State of Ohio in support of petitioner.

Samuel Soopper, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were Cynthia A. Marlette, General Counsel, and Robert H. Solomon, Solicitor.

John N. Estes III argued the cause for intervenors New England Power Pool Participants Committee, et al. With him on the brief were Scott Phillip Myers, Paul Franklin Wight, James C. Beh, Shay Dvoretzky, Larry F. Eisenstat, George E. Johnson, and Christopher C. O'Hara.

Sherry A. Quirk and Montina M. Cole were on the brief for intervenor ISO New England, Inc. in support of respondent.

Barry S. Spector and Paul M. Flynn were on the brief of amicus curiae PJM Interconnection, L.L.C. in support of respondent.

Ashley C. Parrish and David G. Tewksbury were on the brief for amicus curiae The Electric Power Supply Association in support of respondent.

Before TATEL, GARLAND, and GRIFFITH, Circuit Judges.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge:

Today we address a question we have twice deferred: whether the Federal Energy Regulatory Commission has jurisdiction to review something called the Installed Capacity Requirement (ICR), a key input into the market-based mechanism that determines transmission tariffs and end-user costs in the New England bulk power system. The question is presented here by the Connecticut Department of Public Utility Control and allied intervenors, all petitioning for review of various instances where the Commission has approved or modified the amount of the ICR. Although the details of this market mechanism are somewhat opaque and surely complicated, the ultimate legal issue before us reduces to a clear and simple one: does the Commission's review of the ICR constitute direct regulation of electrical generation facilities? If so, it exceeds the Commission's authority under the Federal Power Act; if not, it falls within the Commission's jurisdiction over practices affecting wholesale rates. Finding no direct regulation of electrical generation facilities in the Commission's review of the ICR, we deny the petitions for review.

I.

"Capacity" is not electricity itself but the ability to produce it when necessary. It amounts to a kind of call option that electricity transmitters purchase from parties—generally, generators—who can either produce more or consume less when required. The penultimate and most proximate buyers of capacity (before the consumers who ultimately shoulder the costs in their utility bills) are called "load serving entities" or LSEs—the public utilities that deliver electricity to end users. The goal is for LSEs to purchase sufficient capacity to easily meet expected peaks in electricity demand on their transmission systems.

Because local LSEs will experience demand peaks at different times, and because interconnected LSEs can easily share excess capacity when necessary, these utilities can capture considerable efficiencies through cooperative decision making about how much capacity to buy as a whole and at what cost. See generally Gainesville Utils. Dep't v. Fla. Power Corp., 402 U.S. 515, 518-20 & n. 3, 91 S.Ct. 1592, 29 L.Ed.2d 74 (1971) (explaining reserve capacity efficiencies from interconnection). Indeed, cooperation may be necessary to avoid a free rider problem, where some utilities count on the capacity they expect others to buy in order to support their own reliability. Accordingly New England has a history of cooperative decision making about capacity, dating back to the 1971 creation of the New England Power Pool (NEPOOL), the voluntary association of all New England public utilities that, subject to Commission review, set capacity requirements for each individual utility and administered "deficiency charges" for those that failed to obtain their share. See Municipalities of Groton v. FERC, 587 F.2d 1296, 1300-03 (D.C.Cir. 1978). That role has since shifted to ISO New England, Inc. (ISO-NE), a regional transmission organization that administers open access to transmission facilities in the New England bulk power system pursuant to the Commission's deregulatory mandate. See Me. Pub. Utils. Comm'n v. FERC, 520 F.3d 464, 467-68 & n. 2 (D.C.Cir.2008) (describing ISO-NE); see generally Transmission Access Policy Study Group v. FERC, 225 F.3d 667 (D.C.Cir.2000) (affirming Commission's open access transmission approach to fostering competition). Despite this cooperation, however, inefficiencies remained.

Lacking open market mechanisms for setting capacity prices and quantities, ISO-NE struggled to incentivize innovation and investment in the capacity market while simultaneously suppressing costs. In an initial effort to respond to concerns over short supply, ISO-NE entered into "Reliability Must-Run" agreements with older and less efficient generators, pursuant to which ISO-NE paid for their inefficiencies so as to keep them on line and ensure system reliability. But the Commission disfavors such agreements because they "`suppress market-clearing prices ... and make it difficult for new generators to profitably enter the market.'" Me. Pub. Utils. Comm'n, 520 F.3d at 468 (quoting Devon Power LLC, 103 F.E.R.C. ¶ 61,082, at 61,270 (2003)). Responding to these concerns, ISO-NE endeavored to create a different system with an "administratively-determined demand curve that would establish the price and quantity of capacity that must be procured" in the various sub-regions of the New England grid. Id. (internal quotation marks omitted). But this too ran into problems: it produced enormous controversy over the shape of the hypothetical curve. Id. at 468 & n. 3 (criticizing the very concept of a "demand curve" constructed by a central decision maker). In short, these efforts failed to harness the power of competitive markets in determining the appropriate price of capacity, leading to inaccurate or inefficient levels of investment in or compensation for capacity providers.

Enter the Forward Capacity Market, which the Commission approved as part of a settlement agreement among New England power system stakeholders on June 16, 2006. See id. at 469. In the Forward Market—the details of which are at issue here—capacity providers bid for contracts three years in the future as part of a "descending clock auction." Here's how it works. ISO-NE determines the Installed Capacity Requirement, or ICR, which represents the estimated amount of capacity the system as a whole will require for reliability three years hence. It then announces the starting price—by agreement, twice the estimated cost of new entry— and capacity providers state an amount of capacity they would be willing to offer at that price. If these offerings exceed the ICR, ISO-NE lowers the offering price, which in turn lowers the quantity offered in response. This descending price clock "stops" when the quantity offered equals the ICR, and that price point becomes the market clearing price. The capacity charge for each utility in the system is thus its share of the ICR multiplied by the clearing price.

Bidders in the Forward Market include existing generators, new entrants who believe they can obtain the necessary state and municipal permits to construct new generation, and demand-side resources, including users who can produce their own power or reduce their demand during shortages. Their bids commit them to supply the amount they offer at the clearing price. By using competitive bidding for future capacity contracts, this system both incentivizes and accounts for new entry by more efficient generators, while ensuring a price both adequate to support reliability and fair to consumers.

In Maine Public Utilities Commission v. FERC, we reviewed a broad settlement among the many parties involved in New England's bulk power system and rejected a challenge to the Commission's authority to create and review the operation of the Forward Market. 520 F.3d at 479-80. In so doing, however, we expressly reserved the question whether the...