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PSEG Energy Resources & Trade LLC v. Federal Energy Regulatory Commission

March 16, 2004

PSEG ENERGY RESOURCES & TRADE LLC, PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT NEW YORK INDEPENDENT SYSTEM OPERATOR, INC., ET AL., INTERVENORS



On Petition for Review of Orders of the Federal Energy Regulatory Commission

Before: Sentelle, Rogers, and Tatel, Circuit Judges.

The opinion of the court was delivered by: Tatel, Circuit Judge

Argued February 19, 2004

After concluding that unusually high prices in New York electricity markets resulted from a structural flaw in those markets, the operator of the state's power transmission system invoked its authority to lower the prices retroactively. A company that lost money because of these price reductions filed a complaint with the Federal Energy Regulatory Commission, arguing among other things that no structural flaw actually existed. The Commission rejected the company's challenge, but because it did so without adequately addressing the argument that in fact there was no market flaw, we grant the company's petition for review.

I.

As we explained not long ago, the New York Independent System Operator (NYISO) -- a non-profit corporation and an intervenor in this case -- oversees New York state's bulkpower transmission system. See Consol. Edison Co. v. FERC, 347 F.3d 964, 966 (D.C. Cir. 2003). Operating under tariffs filed with FERC, NYISO administers several bidbased electricity markets, including the "Day-Ahead Market" and the "Real-Time Market." See Cent. Hudson Gas & Elec. Corp., 86 F.E.R.C. ¶ 61,062, 61,222-23 (1999). At the time of the events at issue in this case, NYISO's tariff empowered it to exercise what are known as "Temporary Extraordinary Procedures" (TEP) to correct "Market Design Flaws" in these two markets. See N.Y. Indep. Sys. Operator, Inc., 90 F.E.R.C. ¶ 61,320, 62,065 (2000). The tariff authorized NYISO to invoke its TEP if prices deviated significantly from what they would have been in a working competitive market.

The tariff also stated, however, that "Market Design Flaws TTT do not include situations in which prices rise to levels based on demand and supply levels determined by efficient competition in periods of relative scarcity, or fall to levels based on demand and supply levels determined by efficient competition in periods of relative surplus." Market Admin. & Control Area Serv. Tariff (Services Tariff), Attach. E at 2, reprinted in J.A. 71.

On May 8 and 9, 2000, a confluence of circumstances -- including unexpectedly warm weather and pre-planned outages of several electricity generators -- produced a strain in the Real-Time Market, with relatively high demand for electricity and a relatively low supply of it. NYISO responded by dispatching (i.e., purchasing and using to satisfy consumer demand) electricity from the last available generator in the state, the Blenheim-Gilboa hydroelectric facility. Blenheim's operator, the New York Power Authority (NYPA), had offered to sell Blenheim's electricity for $3,487 per megawatthour, and because that was the highest bid that NYISO accepted, it set the price for all electricity dispatched in the Real-Time Market during parts of the two days. See H.Q. Energy Serv., Inc. v. N.Y. Indep. Sys. Operator, 100 F.E.R.C. ¶ 61,028, 61,071 (2002).

On May 12, NYISO invoked its TEP to reduce the Real-Time Market clearing price for May 8 from $3,487 per megawatt-hour to $331 per megawatt-hour, and for May 9 from roughly $3,000 per megawatt-hour to approximately $350 per megawatt-hour. According to NYISO, it took this "Extraordinary Corrective Action" (the term used to refer to exercises of TEP) because NYPA's bid, and thus the clearing price, resulted from a Market Design Flaw. The Blenheim facility, NYISO explained, had relatively little electricity available -- so little that it qualified as an "energy limited resource," or ELR -- and NYPA preferred not to sell that electricity on May 8 and 9 unless NYISO needed it in an emergency to guarantee system reliability. A senior NYPA official explained that NYPA wanted "to refill the reservoirs of its pump-storage facilities TTT by avoiding energy production and engaging those units in pumping mode." Aff. of Robert J. Deasy, ¶ 4, reprinted in J.A. 140. If NYISO did need Blenheim's electricity to ensure system reliability, however, then NYPA, a state-owned, non-profit utility, was willing to sell the electricity at a relatively low price, "consistent with [its] historic practice" of "mak[ing] its resources available when they are needed to maintain the reliability of the TTT grid, and to do so at a reasonable cost to New York energy consumers." Id. ¶ 3. The market flaw, NYISO found, was that the bidding system prevented NYPA from submitting two bids to reflect these "complex preferences": a lower bid for emergency situations and a higher bid for non-emergency situations. According to NYISO, NYPA thus had to submit a single bid, one with a selling price much higher than what NYPA would have accepted if Blenheim's electricity was needed to maintain system reliability. Because NYPA's accepted bid, which set the market clearing price, was consequently much higher than it otherwise would have been, NYISO found it appropriate to invoke its TEP. In addition to lowering the clearing price for May 8 and 9, NYISO announced structural changes intended to prevent a repeat of the situation. See H.Q. Energy Serv., Inc. v. N.Y. Indep. Sys. Operator, 97 F.E.R.C. ¶ 61,218, 61,961 (2001) (explaining the changes).

Two electricity suppliers filed complaints with FERC, challenging NYISO's actions as beyond its TEP power. The first complaint focused on the May 8 price recalculation, while the second, from petitioner PSEG Energy Resources and Trade, focused on the May 9 recalculation -- a recalculation that, according to the company, cost it $668,000. PSEG argued, among other things, that the market flaw that NYISO identified did not actually exist, that the May 9 market price may have reflected NYPA's opportunity costs or resulted from simple scarcity, and that even if the high price stemmed from a flaw, NYISO's choice of the proper clearing price was unjustified.

The Commission denied both complaints in a single order, rejecting the companies' various arguments and agreeing with NYISO that the high clearing price resulted from a flaw in the bidding system. "[T]he bidding rules' inability to allow [ELR] units to reflect their operational constraints, and instead force such [entities] to guess at a bid level that would be high enough to avoid dispatch, is a market design flaw." H.Q. Energy Serv., 97 F.E.R.C. at 61,964. FERC denied the companies' rehearing request. See H.Q. Energy Serv., 100 F.E.R.C. at 61,076.

PSEG now petitions for review. "We review FERC orders under the Administrative Procedure Act's TTT arbitrary and capricious standard," Sithe/Independence Power Partners, L.P. v. FERC, 165 F.3d 944, 948 (D.C. Cir. 1999), and give "substantial deference" to FERC's interpretation of ambiguous tariff language, e.g., Koch Gateway Pipeline Co. v. FERC, 136 F.3d 810, 814 (D.C. Cir. 1998). If the tariff language is unambiguous, however, "this court need not defer to FERC's interpretation." Idaho Power Co. v. FERC, 312 F.3d 454, 461 (D.C. Cir. 2002). Moreover, although our "review of ratemaking decisions is highly deferential, FERC still must provide a coherent and adequate explanation of its decisions." E. Tex. Elec. Coop., Inc. v. FERC, 331 F.3d 131, 136 (D.C. Cir. 2003) (citation omitted).

II.

We begin with PSEG's contention that there was no market flaw that could have justified NYISO's use of TEP authority. Although NYISO thought NYPA was unable to express its preferences under the existing bidding rules -- a Market Design Flaw, as NYISO saw it -- PSEG argues that while "[t]he NYPA unit was required to submit a bid into the Day-Ahead Market TTT the ELR was not obligated, under any ISO rule or procedure existing on May 8, 2000 or May 9, 2000, to submit [a] real-time bid." Pet'r's Br. at 30-31. By not bidding in the Real-Time Market -- or, more precisely, by withdrawing its Day-Ahead bid so that bid did not also serve as its Real-Time bid -- NYPA, PSEG insists, could have ensured that NYISO would use Blenheim's electricity only to guarantee system reliability, exactly what NYPA wanted. Blenheim's electricity would have remained available to maintain system reliability because NYISO's tariff allowed it to call on ELRs during emergencies even if they had not submitted a Real-Time Market bid. See Services Tariff, ยง 5.12.8(c) ("[T]he ISO may call on Energy Limited Resources at any time during emergencies."). Moreover, if after declining to submit a bid Blenheim had been called on in an emergency, then the price it ...


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