Nstar Elec. & Gas Corp. v. F.E.R.C.

• Decision Date: 09 March 2007
• Docket Number: No. 05-1363.,No. 05-1362.,05-1362.,05-1363.
• Citation: 481 F.3d 794
• Parties: NSTAR ELECTRIC & GAS CORPORATION, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent USGen New England, Inc., et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

481 F.3d 794

NSTAR ELECTRIC & GAS CORPORATION, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent USGen New England, Inc., et al., Intervenors.

No. 05-1362.

No. 05-1363.

United States Court of Appeals, District of Columbia Circuit.

Argued December 8, 2006.

Decided March 9, 2007.

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

Stephen L. Teichler argued the cause for petitioners. With him on the briefs were Harvey L. Reiter, John E. McCaffrey,

Lucy H. Plovnick, Linda M. Nagel, Mary E. Grover, and Lisa Fink.

Robert H. Solomon, Solicitor, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were John S. Moot, General Counsel, and Beth G. Pacella, Senior Attorney. Lona T. Perry, Attorney, entered an appearance.

Howard H. Shafferman argued the cause for intervenor ISO New England Inc. With him on the brief was Perry D. Robinson.

Allan B. Taylor, Michael P. Shea, Donald K. Dankner, Jeanne M. Dennis, and Margaret H. Claybour were on the brief for intervenors USGen New England, Inc. and New England Power Pool. Raymond B. Wuslich entered an appearance.

Before: ROGERS and TATEL, Circuit Judges, and WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge WILLIAMS.

WILLIAMS, Senior Circuit Judge.

This dispute involves agreements over the wholesale price of electricity in situations where local transmission shortages obstructed competitive market pricing in the New England power market. Petitioner NSTAR Electric & Gas Corporation seeks review of three orders of the Federal Energy Regulatory Commission: Mirant Americas Energy Marketing, L.P., 112 FERC ¶ 61,056 (2005) ("Rehearing Order"); Mirant Americas Energy Marketing, L.P., 106 FERC ¶ 61,243 (2004) ("Compliance Order"); and Mirant Americas Energy Marketing, L.P., 105 FERC ¶ 61,359 (2003) ("Remand Order").

NSTAR challenges the Commission's orders on what amount to four grounds: first, that the Commission erred in waiving a statutory 60-day notice requirement for changes to filed rates; second, that the Commission's orders violated the filed rate doctrine and its cousin, the rule against retroactive ratemaking, by allowing certain negotiated rate agreements to govern rates charged prior to their being filed with the agency; third, that the Commission did not satisfy its obligation under 16 U.S.C. § 824e(a) to determine whether the filed rates were just and reasonable; and fourth, that the Commission's refusal to order refunds for purchasers who were charged the negotiated rates was an abuse of discretion.

We find no merit in petitioners' first two claims. But we do not find in the record a clear basis for the Commission's finding that the rates were just and reasonable; this leaves open the possibility of a refund for unjust or unreasonable rates charged. We therefore remand the case for further consideration by the Commission.

* * *

The New England Power Pool (the "Power Pool") is a voluntary trade association of participants in the New England electric power business. In 1998 the Power Pool proposed, and FERC ultimately approved, comprehensive market reforms including a shift of the New England wholesale power market from cost-based regulated prices to market pricing, and the creation of ISO-New England ("ISO-NE"), a private, non-profit entity to administer New England energy markets and operate the region's bulk power transmission system. See New England Power Pool, 83 FERC ¶ 61,045 (1998) ("NEPOOL I"), 85 FERC ¶ 61,379 (1998) ("NEPOOL II"), reh'g denied 95 FERC ¶ 61,074 (2001) (approving reforms).

Prices in the restructured market are governed by rules developed by the Power Pool (the "Market Rules") and filed with the Commission under § 205 of the Federal Power Act, 16 U.S.C. § 824d(d). See also NEPOOL II, 85 FERC at 62,459. During normal system operation, ISO-NE uses an incremental pricing scheme: it sets a market-clearing price by working up the range of generators' bids to find the lowest bid available to supply an increment of power beyond the load demanded for the period in question. Id. at 62,459-60, 62,463. All suppliers receive the same price. Under this system generators are employed in order of "economic merit," beginning with least-cost units.

During periods of transmission constraint, however, when the constraint makes it impossible to deliver enough conventionally priced energy to a so-called "load pocket," generators whose bids exceed the market-clearing price are called into service to ensure system reliability. See NEPOOL II, 85 FERC at 62,461; Rehearing Order, 112 FERC at 61,491-92 P 2 & n. 5 (noting "voltage collapse" and other constraint-induced system instabilities). Under Market Rule 17 (in effect during the period in dispute—the mitigation procedures have now been amended), bids offered by these "reliability must run" units did not affect the market-clearing price paid to in-merit generators, and any excess over market was charged to transmission customers as a "congestion uplift" charge. NEPOOL II, 85 FERC at 62,463; see also Rehearing Order, 112 FERC at 61,491 P 2 n. 3.

Initially, FERC anticipated that these uplift charges would be "small and predictable." NEPOOL I, 83 FERC at 61,237. But it later acknowledged that congestion costs had become "substantial and rapidly increasing," totaling by one measure some $20 million in March 2000 alone. ISO New England, Inc., 91 FERC ¶ 61,227 at 61,829 n.7 (2000).

Generators called on to operate in constrained conditions will commonly have localized market power; the transmission constraint both justifies use of an out-of-merit resource and accounts for the resource's market power. Accordingly, Market Rule 17 contained procedures for monitoring and "mitigating" (i.e., capping) such bids either according to a predetermined formula or at a higher alternative price agreed on by ISO-NE and the resource owner. NEPOOL II, 85 FERC at 62,481. Absent an agreement between the generator and the ISO, bids from resources that regularly compete in the unconstrained market were capped at a 30-day weighted average of that generator's prior in-merit bids. Where a generator seldom ran in merit order (and thus did not have a history of competitive bids), its out-of-merit bids were capped at a default price that could range from 105% to 500% of the market clearing price. NSTAR Electric & Gas Corp., 101 FERC ¶ 61,064 at 61,230 P 24 n. 15 (2002). But Market Rule 17.3.3(b) explicitly allowed agreed-on prices above these caps, saying:

The ISO may enter into negotiation with a resource owner for any reasonable payment terms if the ISO reasonably expects the markets will function more reliably, competitively, or efficiently as a result.

Market Rule 17.3.3(b), Joint Appendix ("J.A.") 6; see also Compliance Order, 106 FERC at 61,861 P 21 (quoting Rule 17.3.3(b)). In the Remand Order, FERC paraphrased the above formula about the ISO's expectations in terms of "ensur[ing] that the generator remains available during transmission constraints." 105 FERC at 62,616 P 2.

Rule 17.3 sets out the rationale and expected operation of the scheme as applied to seldom-run generators, especially in reference to the parties' incentives:

The price screen for Resources that seldom run in economic merit order is designed to create a powerful incentive for such generators to come forward and negotiate an appropriate contract with the ISO. The price screen itself is a default case designed to ensure that the ISO has sufficient bargaining leverage in such negotiations. Until the Resource owner and the ISO reach agreement, the default price screen will enable the Resource to be paid for running in the short term, while providing a strong incentive to negotiate an appropriate arrangement with the ISO . . . as the screen price rapidly and progressively drops to just 5% above the higher of the same-hour [clearing price] or applicable Reference [clearing price] in the unconstrained market.

Market Rule 17.3.2.2(b), J.A. 4-5.

In earlier proceedings FERC granted power customers' request for a ruling that the mitigation agreements negotiated under Market Rules 17.3.2.2(b) and 17.3.3(b) were subject to § 205's filing requirement. Mirant Americas Energy Marketing, L.P., 97 FERC ¶ 61,108 at 61,556/2 (2001). At the same time, however, the Commission exercised its authority under § 205 to grant ISO-NE a waiver of that section's requirement of 60 days notice prior to the effective dates of the agreements. Id.

On appeal, we granted review of the Mirant orders and remanded for additional explanation of FERC's waiver of the 60-day notice requirement. NSTAR Electric & Gas Corp. v. FERC, 64 Fed.Appx. 786 (D.C.Cir.2003) (unpublished decision). On remand, FERC conceded that its precedents contemplated waiver of the 60-day notice requirement only in "extraordinary circumstances," but held that such circumstances existed: the agreements were necessary to ensure the continued availability of generators critical to system stability while mitigating those units' potential exercise of market power; and, because such generators were typically called into service on short notice, the agreements "by their very nature" could not be negotiated and filed 60 days in advance. Remand Order, 105 FERC at 62,617-18 PP 13-15.

In a separate set of orders, FERC approved ISO-NE's filing of the mitigation agreements and concluded that the agreements' provisions were "just and reasonable" as required by § 205(a), 16 U.S.C. § 824d(a). See Mirant Americas Energy Marketing, L.P., 99 FERC ¶ 61,003 at 61,019 P 16 (2002); Compliance Order, 106 FERC at 61,860 P 14.

On requests for rehearing of the Remand and Compliance orders, FERC affirmed its waiver of the 60-day statutory notice requirement, denial of refunds to purchasers charged the mitigation rates, and determination that the agreements' provisions were just and reasonable. Rehearing Order, 112 FERC at 61,493-96...