On January 19, 2018, the United States Court of Appeals for the District of Columbia (the “D.C. Circuit”) rejected the New England Power Generators Association’s (the “Association”) challenge to two FERC orders on ISO New England Inc.’s (“ISO-NE”) scarcity pricing mechanisms in ISO-NE’s real-time and capacity markets. The D.C. Circuit rejected the challenge both on procedural grounds and on the merits.

When energy in ISO-NE’s real-time market is scarce, ISO-NE’s Tariff includes a special scarcity pricing mechanism that is automatically triggered to ensure that generators produce enough energy in real time (the “Scarcity Rates”). Similarly, in ISO-NE’s capacity market, ISO-NE’s Tariff includes a special pricing mechanism called the Peak Energy Rent Adjustment (the “Adjustment”) that is designed, according to the D.C. Circuit, to recover some revenues earned by capacity suppliers when prices in the real-time energy market are very high. Although the triggers for implementing the Scarcity Rates and the Adjustment are not identical, the magnitude of the Adjustment is based on the price of real-time energy, which in turn is based on the Scarcity Rates under certain market conditions. Accordingly, a change in the Scarcity Rates can have a corresponding impact on the Adjustment.

In May 2014, FERC issued an order directing ISO-NE to, among other things, increase the size of a subset of the Scarcity Rates to incentivize better performance (the “Tariff Order”). The Commission dismissed as “beyond the scope of this proceeding” arguments that increases to the Scarcity Rates would exacerbate existing inefficiencies associated with the Adjustment. While the Association sought clarification of the Tariff Order on a separate issue, it did not request rehearing. However, several other parties, including members of the Association, did request rehearing, and argued that ISO-NE’s Tariff should exclude the increases to the Scarcity Rates, or alter the Adjustment in light of the increased Scarcity Rates. The Commission denied rehearing on November 19, 2015. On that same day, the Association filed a complaint with the Commission arguing that the increased Scarcity Rates exacerbated the adverse impact of the Adjustment, that capacity suppliers could not adjust their prices to adapt because the relevant capacity auctions––which take place three years in advance––had already occurred, and that the Adjustment was therefore unjust and unreasonable. FERC denied the complaint (the “Complaint Order”) and subsequent rehearing, and the Association filed a petition for review of both the Tariff Order and the Complaint Order.

In its January 19, 2018 decision, the D.C. Circuit held that the Association lacked standing to challenge the Tariff Order, because it did not request rehearing, but only sought clarification. The court noted that while members of the Association separately requested rehearing, the text of the Federal Power Act mandates that “[n]o proceeding to review any order of the Commission shall be brought by any entity unless such entity shall have made application to the Commission for a rehearing thereon,” and accordingly the court could not grant standing to the Association itself. With respect to the Complaint Order, the court stated that “because we are dealing here with technical and policy-base determinations, the Commission’s determination is entitled to judicial respect.” The court concluded that FERC’s rejection of the Complaint Order was not arbitrary and capricious, because FERC had “fulfilled its obligation to examine the relevant data and articulate a satisfactory explanation for its action.”

A copy of the D.C. Circuit’s opinion can be found here.