On July 8, 2014, the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) issued an order denying petitions for review of FERC’s January 19, 2012 order requiring certain market mitigation measures in ISO New England Inc.’s (“ISO-NE”) Forward Capacity Market (“FCM”).  The D.C. Circuit instead deferred to FERC’s reasoning, holding that FERC based its buyer-side and supplier-side mitigation measures on substantial evidence and undertook its balancing responsibilities with appropriate consideration.  Notably, the D.C. Circuit upheld FERC’s prior decision that the FCM must have an offer-floor mechanism to keep “out of market” capacity from bidding as a price-taker and depressing market-clearing prices.

ISO-NE’s FCM sets capacity prices three years out via auction.  In its January 2012 order, FERC rejected ISO-NE’s proposal that the FCM utilize a two-tiered pricing system – the Alternative Price Rule (“APR”) mitigation mechanism – which would have addressed new entry pricing by paying one market price to new capacity and a separate clearing price to existing capacity.  In its order FERC determined that the APR proposal failed to provide sufficient regulation of uneconomic entry (see January 23, 2012 edition of the WER).  Instead, FERC ordered ISO-NE to develop a minimum-offer price rule based on “benchmark pricing” specific to resources’ asset class.  FERC also lowered the price of a dynamic de-list bid, which occurs when a capacity resource exits during the auction without being subject to Internal Market Monitor review, to $1/kilowatt-month.  In response, groups on both sides of the issue petitioned the D.C. Circuit for review.

In their petitions, certain public load-serving entities challenged that FERC lacks jurisdiction to impose mitigation requirements upon uneconomic entrants to the FCM and the buyer-side mitigation measures, such as the offer-floor mechanism, go too far.  Meanwhile, certain incumbent electricity generators argued that the buyer-side mitigation measures are too lenient and that the supplier-side mitigation measure regarding the dynamic de-list bid price was arbitrary and capricious.

In its order denying the petitions, the D.C. Circuit first held that FERC has jurisdiction to regulate the parameters comprising the FCM and that applying offer-floor mitigation fits within FERC’s statutory ratemaking power.  Second, the D.C. Circuit upheld FERC’s buyer-side mitigation measures, holding that (1) FERC sufficiently explained how the APR does not adequately adjust prices or prevent out-of-market resources from distorting prices, (2) FERC’s conclusion that certain resources depress capacity prices falls within its duty of ensuring that rates are just and reasonable, (3) FERC is best equipped to manage policy rationales when declining to subject certain uneconomic entrants to further mitigation, and (4) FERC sufficiently balanced the effects that declining to distinguish between existing and new imports where possible would have on capacity prices.  Third, the D.C. Circuit held FERC’s determination of the dynamic de-list threshold reflected a price at which supplier-side market power is unlikely to be exercised, thus not requiring Internal Market Monitor review, and was neither arbitrary nor capricious. 

A copy of the opinion is available here.