PSEG Energy Res. & Trade LLC v. Fed. Energy Regulatory Comm'n

• Decision Date: 23 December 2011
• Docket Number: No. 10–1103.,10–1103.
• Parties: PSEG ENERGY RESOURCES & TRADE LLC and PSEG Power Connecticut LLC, Petitioners v. FEDERAL ENERGY REGULATORY COMMISSION, RespondentISO New England Inc., et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

398 U.S.App.D.C. 423

665 F.3d 203

PSEG ENERGY RESOURCES & TRADE LLC and PSEG Power Connecticut LLC, Petitioners

v.FEDERAL ENERGY REGULATORY COMMISSION, RespondentISO New England Inc., et al., Intervenors.

No. 10–1103.

United States Court of Appeals, District of Columbia Circuit.

Argued Sept. 22, 2011.Decided Dec. 23, 2011.

On Petition for Review of Orders of the Federal Energy Regulatory Commission.John Lee Shepherd, Jr. argued the cause for petitioner. With him on the briefs were Kenneth R. Carretta and Sally Brown Richardson.

Jennifer S. Amerkhail, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief was Robert H. Solomon, Solicitor.

Kerim P. May and Sherry A. Quirk were on the brief for intervenor ISO New England Inc.John S. Wright and Michael C. Wertheimer, Assistant Attorneys General, Office of the Attorney General for the State of Connecticut, and Joseph A. Rosenthal and Randall L. Speck were on the brief for intervenors George C. Jepsen, Attorney General, et al.

Before: GARLAND and KAVANAUGH, Circuit Judges, and WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge GARLAND.

GARLAND, Circuit Judge:

In this petition for review, PSEG Energy Resources & Trade LLC and PSEG Power Connecticut LLC (collectively, PSEG) challenge orders of the Federal Energy Regulatory Commission (FERC) accepting the results of an auction for electric generation capacity conducted by ISO New England Inc. In those orders, FERC approved ISO New England's determination that, unlike other resources in the region, PSEG's resources in Connecticut could not reduce their capacity supply obligation because doing so would endanger the system's reliability. Importantly, it also held that ISO New England could reduce the per unit price paid to PSEG for that capacity. Because the latter holding was based on tariff provisions that the Commission thought were clear but now concedes are ambiguous, and because in the course of construing those provisions it failed to respond to PSEG's facially legitimate objections, we grant the petition and remand the orders for further consideration.

I

PSEG is one of many generators that participate in New England's “forward capacity market.” In this market, electricity providers purchase from generators options to buy quantities of energy three years in advance. NRG Power Mktg., LLC v. Me. Pub. Utils. Comm'n, ––– U.S. ––––, 130 S.Ct. 693, 697, 175 L.Ed.2d 642 (2010). In setting prices, the market eschews the traditional regulatory approach, which sets utility rates based on the cost of production, in favor of an auction. Managing the auction is the responsibility of ISO New England, which is a “ ‘private, non-profit entity [that] administer[s] New England energy markets and operate[s] the region's bulk power transmission system.’ ” Blumenthal v. FERC, 552 F.3d 875, 878 (D.C.Cir.2009) (quoting NSTAR Elec. & Gas Corp. v. FERC, 481 F.3d 794, 796 (D.C.Cir.2007)). ISO New England's tariff implements the market's auction mechanism, which originated in a FERC-approved settlement among more than 100 stakeholders. See Blumenthal, 552 F.3d at 879; ISO New England Inc., 119 FERC ¶ 61,045, 61,162 (2007).

Under the settlement and tariff, a descending auction sets the price that capacity suppliers like PSEG receive. The basic mechanism is straightforward. After the auctioneer, ISO New England, announces a starting price, suppliers respond with bids for how much capacity they are willing to provide at that price. The auctioneer gradually reduces the price, and suppliers reduce their capacity bids accordingly. The auction ends when the suppliers' bids just equal the amount of capacity that ISO New England has determined to be necessary to maintain the reliability of the regional system. This amount is known as the “installed capacity requirement,” or ICR. Each supplier is then committed to provide capacity equal to its bid. See Conn. Dep't of Pub. Util. Control v. FERC, 569 F.3d 477, 480 (D.C.Cir.2009).

But the forward capacity market has a twist: a price floor that halts the auction if the floor is reached. The problem is that the auction may reach the price floor at a point where the suppliers' capacity bids still exceed the ICR; hence, absent correction, purchasers would end up buying too much power. The capacity market's solution is proration. The basic idea is that each supplier has its capacity obligation, and the payment it receives, reduced proportionally. The Proration Rule of ISO New England's tariff implements this solution in a somewhat roundabout way. See Tariff § III. 13.2.7.3(b) (J.A. 178); infra note 1. Although the rule's full complexity need not detain us, the key mechanism is as follows: the rule calculates the “total payment cap” by multiplying the floor price by the ICR, then proportionately reduces the amount each supplier receives so that the total does not exceed the cap (“price proration”), and then gives each supplier the option to reduce its capacity obligation an equivalent amount (“quantity proration”). For example, if the ICR were 50 units, and two suppliers each bid 30 units at a floor price of $1, the total payment cap would be $50. Each supplier would receive a proportionate amount of $25 (price proration), and each could then reduce its capacity obligation to 25 units (quantity proration).

In 2007, without specific comment, FERC approved ISO New England's addition of the following caveat as a new last sentence of the Proration Rule: “Any proration shall be subject to reliability review.” Tariff § III.13.2.7.3(b); see New England Inc., 122 FERC ¶ 61,016, 61,049 (2008); see also ISO New England Inc., FERC No. ER07–1388, Various Revisions to FCM Rules, attach. 1 at 1st Rev. Sheet No. 7314Q (Aug. 31, 2007) (J.A. 239). This case is about the meaning of that caveat. In ISO New England's view, it means that when it determines that a supplier's resources are needed for local reliability, it can bar quantity proration but force the supplier to accept price proration. Thus, the supplier is effectively required to accept a per unit price lower than the floor price. In the example above, this would require a supplier to provide the full 30 units but still accept only $25, an effective price of $0.83 per unit rather than $1.00. PSEG—whose attempt to prorate the capacity of its Connecticut resources was barred as a consequence of the reliability review for the 2008 New England auction—believes that it should receive the full (unprorated) floor price for all its resources that it could not prorate. In the example above that would be $30, which PSEG says cashes out to an extra $2.8 million in this case.¹

PSEG filed its objections with FERC, which must review and approve ISO New England's auction results under the settlement and § 205 of the Federal Power Act (FPA), 16 U.S.C. § 824d(d). See Devon Power LLC, 115 FERC ¶ 61,340, 62,309 (2006). After FERC sided with ISO New England, see ISO New England Inc., 123 FERC ¶ 61,290, 62,925 (2008) [hereinafter Initial Order], PSEG sought rehearing. In its rehearing request, PSEG contended that FERC's interpretation, in addition to violating the tariff's express terms, resulted in “undue discrimination” against the resources most necessary for reliability, by paying them less per unit than resources that were permitted to prorate quantity. PSEG also argued that FERC's interpretation contradicted what PSEG contended were the forward capacity market's “basic policy goals”: to provide incentives for existing resources to remain in, and for new resources to be constructed in, areas subject to resource constraints. Request for Rehearing at 3, 9–11 (July 21, 2008) (J.A. 104, 110–12).

On rehearing, FERC again rejected PSEG's interpretation. ISO New England Inc., 130 FERC ¶ 61,235 (2010) [hereinafter Rehearing Order]. FERC held that when reliability review precludes quantity proration, the tariff still requires ISO New England to impose price proration to avoid violating the total payment cap, which it regarded as sacrosanct. Rehearing Order, 130 FERC at 62,147. FERC did note, however, that ISO New England and its stakeholders “have made a filing with the Commission that may result in revised market rules on this issue.” Id. And so it did: less than a month later, FERC approved a revision to the Proration Rule that adopted PSEG's position-for prospective application only. FERC “agree[d] that this proposed solution is an improvement and addresses an inconsistency between the compensation provided to resources that are denied the ability to prorate megawatts at the price floor and other cleared capacity.” ISO New England Inc., 131 FERC ¶ 61,065, 61,345 (2010). Meanwhile, PSEG petitioned for review of FERC's orders, which had denied PSEG's request for relief in the instant case.

II

Under § 313(b) of the FPA, 16 U.S.C. § 825 l (b), we have jurisdiction to review FERC's orders, which we assess to determine whether they are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A); see TNA Merchant Projects, Inc. v. FERC, 616 F.3d 588, 591 (D.C.Cir.2010). To survive this review, FERC “must ‘examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made.’ ” PPL Wallingford Energy LLC v. FERC, 419 F.3d 1194, 1198 (D.C.Cir.2005) (quoting Motor Vehicle Mfrs. Ass'n of the United States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983)). Among other things, “[a]n agency's ‘failure to respond meaningfully’ to objections raised by a party renders its decision arbitrary and capricious.” Id. (quoting Canadian Ass'n of Petroleum Producers v. FERC, 254 F.3d 289, 299 (D.C.Cir.2001)).

In reviewing FERC's tariff interpretation, we use “a two-step, Chevron-like analysis.” Colorado Interstate Gas Co. v. FERC, 599...