On July 8, 2014, the United States Court of Appeals for the District of Columbia Circuit denied the petition for review filed by New England Power Generators Association, Inc. and other market participants’ over four Federal Energy Regulatory Commission orders related to the Independent System Operator-New England Forward Capacity Market.1  The D.C. Circuit held that the orders on review fell within FERC’s statutory ratemaking authority conferred by the Federal Power Act because FERC’s ratemaking authority extends to parameters of capacity markets related to the price of capacity.2  Additionally, the court deferred to the Commission to craft mitigation measures responsive to the needs of the ISO-NE FCM because the Commission properly balanced competing interests and based its decision on substantial evidence.3

Petitioners’ Claims

Petitioners challenged the FERC orders related to buyer- and supplier-side mitigation measures to prevent the exercise of market power with the following claims: (1) FERC lacks jurisdiction under the FPA to impose mitigation requirements upon uneconomic entrants to the FCM; (2) FERC’s orders imposing mitigation requirements in order to produce just and reasonable rates were not based on substantial evidence; (3) the Commission acted arbitrarily and capriciously in determining mitigation requirements; and (4) FERC acted arbitrarily and capriciously in determining whether to regulate uneconomic entrants.4

FERC’s Jurisdiction

With respect to whether FERC has jurisdiction to regulate capacity where its regulation touches on which generation facilities may be used to fulfill capacity obligations, the D.C. Circuit upheld FERC’s exercise of jurisdiction in maintaining just and reasonable rates.The court acknowledged that “states regulate facilities, while FERC regulates sale and transmission.”6  It also relied on prior precedent and stated:  “Out-of-market resources – whether self-supplied, state-sponsored, or otherwise – directly impact the price at which the [FCM] auction clears.  As the price of capacity is indisputably a matter within the Commission’s exclusive jurisdiction, FERC likewise has jurisdiction to mitigate buyer-side market power as to out-of market entrants.”7  Therefore, given FERC’s broad rate-making authority “to act in the public interest,” the court held that FERC has jurisdiction, under Sections 201 and 206, of the FPA to regulate the parameters comprising the FCM, and that applying offer-floor mitigation fits within the Commissions’ statutory rate-making power.8

This decision, alongside the D.C. Circuit’s May 2014 decision striking down FERC’s regulation of demand response due to a lack of jurisdiction, lay bare the continuing consternation confronting market participants over FERC’s jurisdiction.  Indeed, FERC recently petitioned for rehearing of the divided EPSA v. FERC decision to vacate Order No. 745 , arguing that the majority addressed “the wrong jurisdictional inquiry” and  “vacated a vital rule of national importance.’  Moreover, the Supreme Court recently granted certiorari to review FERC’s enforcement authority as compared to that of the states’ with regards to the Natural Gas Act.  Plainly, reconciliation of FERC and state jurisdiction faces a lot of upheaval as energy markets and technology evolve, which market participants should track.

Buyer- and Supplier-Side Mitigation

With respect to whether FERC’s mitigation measures against buyer-side market power were undertaken in the establishment of just and reasonable rates, the court held that FERC reasonably mitigated buyer-side market power.9  Having evaluated the relative importance of several parameters, FERC reasonably determined that it was more important to prevent price distortion and excess capacity purchase than it was to allow out-of-market resources to clear auction.10

Furthermore, the court held that FERC was neither arbitrary nor capricious in crafting its supplier-side mitigation measures.  FERC reasonably determined that the zonal modeling system would affect the FCM and incentivize suppliers to exercise market power.  Therefore, FERC determined that preemptively providing for Internal Market Monitor review of most bids was necessary.11

This decision affirms FERC’s statutory rate-making authority under the FPA and highlights the level of deference that the court affords regulatory agencies.  The D.C. Circuit clearly defers to the Commission’s judgment in determining what price related measures are responsive and necessary to the capacity market, so long as it acts with appropriate consideration and grounds its decision upon substantial evidence.  This decision stands for the proposition that FERC’s authority to regulate capacity market parameters remains broad, and challenges to that authority must meet a high threshold to show FERC has committed reversible error.