Con Edison Co NY Inc v. FERC , 510 F.3d 333 ( 2007 )

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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 16, 2007 Decided December 18, 2007
No. 06-1025
CONSOLIDATED EDISON COMPANY
OF NEW YORK, INC., ET AL.,
PETITIONERS
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
KEYSPAN-RAVENSWOOD, LLC, ET AL.,
INTERVENORS
Consolidated with
No. 06-1027
On Petitions for Review of Orders of the
Federal Energy Regulatory Commission
2
Elias G. Farrah and William F. Young argued the cause for
petitioners. With them on the briefs were Rebecca J. Michael,
Neil H. Butterklee, and James J. Dixon.
Jeffery S. Dennis, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on the
brief were John S. Moot, General Counsel, and Robert H.
Solomon, Solicitor.
Kenneth M. Simon argued the cause for intervenors
KeySpan-Ravenswood, LLC, Long Island Power Authority, and
NRG Power Marketing, Inc. With him on the brief were Mark
L. Perlis, David P. Yaffe, Howard E. Shapiro, Steven A. Weiler,
Robert C. Fallon, and Christopher C. O'Hara. James J.
Bertrand entered an appearance.
Before: ROGERS and GARLAND, Circuit Judges, and
SILBERMAN, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge ROGERS.
ROGERS, Circuit Judge: In these consolidated cases, the
Petitioners challenge two orders of the Federal Energy
Regulatory Commission (“FERC”) following our decision in
Consolidated Edison Co. of New York v. FERC, 347 F.3d 964(D.C. Cir. 2003). In Con Edison, the court remanded two issues
to FERC for further explanation in connection with the remedies
available for electric service providers that experienced
substantial price increases in January-March 2000 as a result of
failures in a deregulated energy market. Id. at 966-67; 972-73.
In the challenged orders, FERC explained its reasoning for not
invoking temporary emergency procedures (“TEP”) of the New
York Independent System Operator, Inc. (“NYISO”) that
allowed rebilling, and for not ordering refunds despite the
NYISO’s violation of its tariff when pricing different types of
3
power reserves. N.Y. Indep. Sys. Operator, Inc., 110 F.E.R.C.
¶ 61,244, 62,005-11 (2005) (“Remand Order”); N.Y. Indep. Sys.
Operator, Inc., 113 F.E.R.C. ¶ 61,155, 61,609-16 (2005)
(“Rehearing Order”). In view of the deference due to FERC’s
determinations that the NYISO had acted reasonably in not
implementing TEP because problems in the reserves market did
not rise to the level of a market design flaw, and that retroactive
refunds were not an appropriate remedy for NYISO’s tariff
violation because its pricing system protected system reliability,
we conclude that FERC’s denial of a remedy was not arbitrary
and capricious or contrary to law, and we deny the petitions.
I.
The issues before the court arise out of events occurring
approximately two months after the NYISO began operations.
Con Edison, 347 F.3d at 966-68. Between January and March
2000, transmission facility owners — i.e., load-serving entities
(“LSEs”) — experienced dramatic price increases for non-
spinning reserve (“NSR”) in markets administered by the
NYISO. NSR is a power reserve that can be synchronized
within ten minutes and is of lower quality than spinning reserve
(“SR”), which is available almost immediately. In response to
these price increases, NYISO presented a number of requests to
FERC, including immediately suspending market-based bids
and authorizing a cap for NSR bids. The LSEs complained to
FERC that the NYISO had violated its tariff and “operated under
several market design flaws” by failing to accept bids from other
qualified suppliers, and sought correction of these practices and
refunds; they also sought to compel the NYISO to invoke TEP’s
remedial measures. FERC found no withholding of capacity by
any supplier, but inasmuch as the market was not operating
properly, approved the NSR bid cap while concluding that it
lacked authority to grant retroactive relief, that the NYISO had
not violated its tariff, and that it would not require the NYISO
4
to implement TEP. Upon the LSEs’ petitions for review, this
court agreed that FERC lacked authority to revise rates
retroactively under the Federal Power Act (“FPA”), § 205(d), 16
U.S.C. § 824d(d), but held that FERC had not adequately
explained why TEP was unavailable and had incorrectly
concluded that the NYISO had not violated its tariff by linking
the prices of SR and NSR reserves. The court remanded to
FERC, requiring additional explanation concerning why the
NYISO’s TEP tariff mechanism should not be implemented, and
whether refunds should be provided for the NYISO’s violations
of its tariff when pricing operating reserves. Id. at 972-73.
A.
The TEP process was established, and approved by FERC,
in order to “address market design flaws, transitional
abnormalities and severe operational difficulties . . . .” N.Y.
Indep. Sys. Operator, Inc., 88 F.E.R.C. ¶ 61,228, 61,752 (1999)
(“TEP Order”). In instances where the NYISO declares that a
market design flaw or transitional abnormality is occurring,
extraordinary corrective actions can be taken on an interim
basis, such as recalculation “of clearing prices to the level that
would have been reached if a market design flaw or transitional
abnormality had not arisen . . . .” Id. at 61,752-755. A possible
indicator of a “market design flaw” is excluding a lower-cost
resource for no “valid reason.” Remand Order, 110 F.E.R.C. at
62,006. TEP requires, where possible, prior notice of any such
actions by the NYISO. TEP Order, 88 F.E.R.C. at 61,753.
On remand, in response to the court’s holding in Con
Edison that FERC’s view of TEP’s scope was excessively
narrow, 347 F.3d at 971, FERC offered that TEP was
inapplicable to address the price increases of early 2000 in the
NYISO market because “the NYISO did not abuse its discretion
by refraining from exercising its TEP authority to recalculate
prices,” Remand Order, 110 F.E.R.C. at 62,005; in any event,
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FERC concluded that refunds could not be recalculated with
“reasonable certainty” as TEP required. Id. at 62,007.
Specifically, FERC explained that “TEP provides [the] NYISO
with discretion as to when, or whether, it may take
[extraordinary corrective actions],” id. at 62,005, as well as
“what measures to take,” id. at 62,006; “abuse of discretion”
turns on what was “reasonable under the circumstances faced by
[the] NYISO at the time,” Rehearing Order, 113 F.E.R.C. at
61,612. FERC concluded “that [the] NYISO made a reasonable
determination that problems in its market were primarily due to
[the concentration of] market power [and related bidding
behavior], not market design flaws, and that invocation of TEP
was not the best and most efficient procedure to remedy such
flaws.” Remand Order, 110 F.E.R.C. at 62,006. Under TEP,
FERC noted, “‘possible indications of Market Design Flaws
include the dispatch of higher priced resources . . . when . . .
lower-priced bids are available and not selected . . . and there is
no valid reason for not operating the lower-priced resource.’”
Id. (citing TEP, NYISO Services Tariff, Attachment E, at
Section A). Here, three entities controlled ninety-seven percent
of the NSR market in New York. Id. n.62. Although certain
lower priced resources were available, namely the “western
generators” and the Blenheim-Gilboa facility (“B-G”), FERC
explained that there were valid reasons for these sources’
exclusion from bidding into reserves. The NYISO had noted
that western generators faced serious transmission constraints
eighty percent of the time, making them unreliable reserves for
eastern areas of the system, while the owners of B-G, the only
other source of potential reserves, wished to use its output for
energy rather than reserves. Id. at 62,006-07; Rehearing Order,
113 F.E.R.C. at 61,612-13. According to FERC, the NYISO’s
market is not designed to provide it with “unconstrained
authority” to compel sources like B-G to sell reserves if the
owners choose not to do so. Rehearing Order, 113 F.E.R.C. at
61,613. Further, FERC noted, the NYISO did not attribute the
6
reserve market’s problems to the western generators’ and B-G’s
non-participation. Id. at 61,612.
FERC further emphasized that under TEP, even if market
design flaws had been found, tariffs could be recalculated only
“‘[i]f [it is] possible [to do so] with reasonable certainty.’”
Remand Order, 110 F.E.R.C. at 62,007 n.65 (quoting NYISO’s
Services Tariff, Attachment E, § C.2.c.). This would not be
possible, in FERC’s view, given that the NYISO had only
recently commenced operations and historical price information
was thus limited. FERC possessed no evidence regarding the
effect that inclusion of the western generators could have had on
NSR prices. Id. at 62,007. Although the NYISO had attempted
to create proxy prices through modeling the effect of including
B-G in the reserve market, FERC found that the proxy prices’
use of future rather than contemporary prices did not yield
sufficient certainty. “[B-G had] not bid in the NSR market at
the time, and there is no evidence as to what its bid would have
been or what factors would have influenced its bid.” Id. In
addition “numerous other parties [had] raise[d] significant
objections to the [NYISO methodology] . . . .” Id.
B.
The court held in Con Edison that the NYISO’s setting of
SR prices to be no lower than NSR prices violated its tariff and
that on remand FERC should either “follow its ‘general policy’
of providing refunds, or [] explain . . . its divergence from this
policy.” 347 F.3d at 973 (citations omitted). On remand, FERC
determined, upon balancing the equities, considering what was
just and reasonable, and exploring whether an alternate remedy
was more appropriate, that it would not order refunds. Remand
Order, 110 F.E.R.C. at 62,008. FERC explained that the
“NYISO’s [pricing] policy did not provide an improper windfall
for SR providers because it was the proper and appropriate
pricing method that provided efficient prices for the least cost
7
dispatch.” Id. In particular, FERC found that the NYISO’s
pricing method served consumers’ “short-run [and] long-run”
interests and protected the reliability of the system, id. at 62,009,
assuring the availability of higher quality SR, which the
NYISO’s tariff required to represent fifty percent of available
reserves, id. at 62,002; Con Edison, 347 F.3d at 973, by
preventing SR reserves’ diversion into NSR markets when the
latter were expected to be higher priced. Remand Order, 110
F.E.R.C. at 62,009. FERC also found that the NYISO’s pricing
approach “provides, in the long run, the lowest costs to
customers and the correct market incentives to generators to bid
into the appropriate reserve market.” Id. Because the NYISO’s
pricing mechanism provided the lowest possible prices
consistent with avoiding the “perverse incentive[]” of diverting
SR into NSR, FERC concluded that the resulting profits for SR
providers did not constitute “unjust enrichment for which
refunds are appropriate.” Id. at 62,010.
In addition to analyzing bidding incentives and consumers’
interests, FERC concluded that refunds would be unjust to the
SR producers, who had bid competitively and complied with the
tariff rules. The “NYISO . . . should not be able to adopt a
pricing regime when necessary to preserve system reliability,
and then, after reliability is preserved, require the generators that
provided that reliability to pay refunds based on an alternative
pricing regime that would not have preserved system
reliability.” Rehearing Order, 113 F.E.R.C. at 61,616. Further,
it would be unjust to force SR producers to return their gains
while the NSR producers who had allegedly been involved in
any market manipulation that did occur retained their profits. Id.
FERC also noted that customers had at least some notice that a
“cost pricing methodology” would be employed. Although the
NYISO’s approach violated its tariff by not pricing SR and NSR
independently, it complied with the tariff provision in “section
4.9 requiring least cost dispatch,” Remand Order, 110 F.E.R.C.
8
at 62,010, which was consistent with Central Hudson Gas &
Electric Corp., 86 F.E.R.C. ¶ 61,062, 61,227 (1999), where
FERC had indicated that the tariff should allow additional
purchases of higher quality reserves when this resulted in lowest
cost, Remand Order, 110 F.E.R.C. at 62,009.
II.
Petitioners seek an order from the court directing FERC to
“abide by its general policy of providing refunds for
overcharges, when faced with tariff violations and market design
flaws that create[] or exacerbate[] supplier market power.”
Petrs. Br. at 3. Noting an increase of $71,000,000 in the total
cost of NSR and SR from January 29 through March 27, 2000,
Petitioners maintain that FERC’s original orders found that the
NYISO operating reserves market was “plagued with market
design flaws, including software flaws, and that the market did
not match the circumstances under which original market-based
rate authority for operating reserves was granted.” Id. at 4.
They further note that FERC ordered prospective corrections to
the market, allowing incorporation of reserves from B-G “as
quickly as possible,” N.Y. Indep. Sys. Operator, Inc., 91
F.E.R.C. ¶ 61,218, 61,800 (“Waiver Order”), and that FERC
instituted a prospective bid cap on NSR rates, id. at 61,802.
A.
As an initial matter, Petitioners appear to contend that
where market conditions are disrupted, FERC has an
“obligation” to grant remedial relief, and thus TEP should be
implemented and refunds ordered for SR charges. Petrs. Br. at
12-13; Reply Br. at 7. For support they rely on California ex
rel. Lockyer v. FERC, 383 F.3d 1006 (9th Cir. 2004), where the
Ninth Circuit observed that FERC had “abdicat[ed] its
regulatory responsibility” when California consumers were
subject to “a variety of [artificial] market machinations,” and
9
“improperly concluded that retroactive refunds were not legally
available.” Id. at 1015, 1018. Inasmuch as the tariff violations
and market conditions in the NYISO operating reserves market
“are far more egregious than in the Lockyer case,” Petrs. Br. at
12, Petitioners maintain that FERC’s refusal to order TEP
implementation or refunds for SR charges cannot be squared
with the predicates for its approval of the market-based rate
tariff or the severity of the harm to customers who paid rates
“far above any ‘just and reasonable’ standard,” id. However,
Lockyer acknowledges that “FERC may elect not to exercise its
remedial discretion by requiring refunds,” 383 F.3d at 1016, and
contrary to Petitioners’ assertion, its holding was not to order
FERC to grant refunds but was limited to the conclusion that
under the circumstances FERC "unquestionably ha[d] the power
[to order refunds]," id. FERC’s authority to order refunds is not
at issue in the instant case and, consequently, Lockyer is
unhelpful to Petitioners, particularly because the Ninth Circuit,
like this court in Con Edison, remanded for FERC to consider its
remedial options. Lockyer, 383 F.3d at 1018.
More broadly, Petitioners incorrectly imply that this court
should enforce some absolute requirement of action on the part
of FERC. “[FERC] ordinarily has remedial discretion, even in
the face of an undoubted statutory violation, unless the statute
itself mandates a particular remedy.” Conn. Valley Elec. Co. v.
FERC, 208 F.3d 1037, 1044 (D.C. Cir. 2000). Under the FPA,
the court has authority “to affirm, modify, or set aside” a FERC
order. § 313(b), 16 U.S.C. § 825l(b). However, where FERC
possesses but is not required to use certain powers, see, e.g.,
Rehearing Order, 113 F.E.R.C. at 61,611, our review is limited
to ensuring that in explaining its decisions, FERC “examine[s]
the relevant data and articulat[es] a . . . rational connection
between the facts found and the choice made.” Midwest ISO
Transmission Owners v. FERC, 373 F.3d 1361, 1368 (D.C. Cir.
2004) (citations omitted). Our review is particularly deferential
10
when a challenge “relates to the fashioning of remedies” where
“[a]gency discretion is often at its zenith . . . .” Towns of
Concord, Norwood, & Wellesley Mass. v. FERC, 955 F.2d 67,
76 (D.C. Cir. 1992) (citations omitted).
B.
Petitioners’ specific contention that FERC abused its
discretion in not ordering rebilling under TEP fails for both
procedural and substantive reasons. Petitioners dispute FERC’s
framing of the NYISO’s initial decision not to invoke TEP.
They also maintain that FERC’s refusal to invoke TEP
conflicted with policies enunciated in prior FERC orders. Thus,
according to Petitioners, FERC did not “enforce the TEP
provisions consistent with their intended purpose,” Petrs. Br. at
23, and “FERC’s failure to enforce the TEP provisions is
directly at odds with its own findings.” Id. at 24. Relatedly,
Petitioners contend that the court in Con Edison held that “the
failure to include [B-G] as a facility to provide operating
reserves” was a market design flaw. Id. at 26. They suggest,
then, that the exclusion of B-G meets FERC’s definition of a
market design flaw, maintain that any software flaw excluding
B-G was equivalent to a market design flaw, and conclude that
B-G’s exclusion from the market created an “independent
obligation” for FERC to invoke the TEP mechanism, id. at 27.
Based on their assertion that a market design flaw was present,
Petitioners conclude that FERC was obligated to invoke TEP to
order refunds whether or not the NYISO chose to do so, and that
these refunds can be calculated with reasonable certainty, noting
that a just and reasonable rate encompasses a range of options
and that FERC did not explain why the prospective bid cap it
had established in March 2000 was not a suitable rate.
Petitioners’ challenges to FERC’s framing of the NYISO’s
initial decision not to invoke TEP are not appropriately
developed in their brief and thus not properly before the court.
11
Their suggestion that the NYISO did not recognize that TEP
could be applied is limited to a single sentence in their opening
brief. Petrs. Br. at 23. “It is not enough merely to mention a
possible argument in the most skeletal way, leaving the court to
do counsel’s work, create the ossature for the argument, and put
flesh on its bones.” Schneider v. Kissinger, 412 F.3d 190, 200
n.1 (D.C. Cir. 2005). Moreover, Petitioners’ contention that the
NYISO did not make an initial decision against deploying TEP,
contrary to FERC’s finding, see, e.g., Remand Order, 110
F.E.R.C. at 62,006, is raised only in their Reply Brief, compare
Petrs. Br. at 23 with Reply Br. at 8-10, and is thus waived. “We
require petitioners and appellants to raise all of their arguments
in the opening brief . . . .” Corson & Gruman Co. v. NLRB, 899
F.2d 47, 50 n.4 (D.C. Cir. 1990).
As regards Petitioners’ contention that FERC acted
inconsistently with its precedent in not invoking TEP, it is true
that FERC had previously noted the availability of TEP and its
potential utility in addressing market problems. See, e.g., TEP
Order, 88 FERC at 61,754. However, acknowledging the
existence and utility of a remedial tool is not equivalent to
requiring its use in a specific circumstance. On remand FERC
explained that under its tariff, the NYISO has discretion to
choose whether or not to invoke TEP. Remand Order, 110
F.E.R.C. at 62,005-06. Although, as Petitioners note, FERC had
acknowledged market failures in early 2000, see, e.g., Waiver
Order, 91 F.E.R.C. at 61,798, Petitioners are not able to show
why this acknowledgment requires FERC to invoke TEP.
Additionally, the fact that FERC approved prospective filings by
the NYISO to change aspects of the reserves market in response
to the market irregularities of early 2000 does not mean that it
is also required to order retroactive relief through TEP.
Concluding otherwise would, as the NYISO has previously
noted, open the gates to retroactive changes in tariffs any time
the power markets’ rules were adjusted. See Remand Order,
12
110 F.E.R.C. at 62,006 (quoting Motion of the NYISO to
Reopen Record, June 25, 2004 at 12); Conn. Valley Elec. Co.,
208 F.3d at 1044.
Petitioners fail to show that FERC’s explanation concerning
B-G is arbitrary and capricious. First, Petitioners
mischaracterize Con Edison’s holding regarding B-G’s
exclusion from the reserves market. The court rejected FERC’s
narrow interpretation of TEP’s scope, but it did not hold that B-
G’s exclusion was a “market design flaw,” as Petitioners
inaccurately claim. Compare Petrs. Br. at 26, with Con Edison,
347 F.3d at 971-72. To the extent Petitioners suggest that the
exclusion of B-G from the reserve market was similar to the
“possible indication[] of Market Design Flaws” discussed in
FERC’s orders – “the dispatch of higher priced resources . . .
when . . . lower-priced bids are available and not selected . . .
and there is no valid reason for not operating the lower-priced
resource,” Remand Order, 110 F.E.R.C. at 62,006 (emphasis
omitted); see also Petrs. Br. at 25-26 – FERC explained that
software controlling the reserves market was deliberately
modeled to exclude B-G because its owners did not wish to
participate in the reserve market, Remand Order, 110 F.E.R.C.
at 62,007; Rehearing Order, 113 F.E.R.C. at 61,613. Although
Petitioners dismiss this choice as “irrelevant,” Petrs. Br. at 26,
B-G owners’ preferences are a rational reason for not modeling
reserve market software to purchase this potentially lower-
priced resource. Petitioners’ reference in their Reply Brief to
another indicator of market design flaws, Petrs. Reply Br. at 12-
13, is not properly before the court, Corson & Gruman Co., 899
F.2d at 50 n.4, and therefore we do not address it.
Second, although FERC’s ultimate decision that B-G should
be added to the reserve pool used phrases such as “software
flaws” and “other market flaws” to describe the state of affairs
in early 2000, N.Y. Indep. Sys. Operator, Inc., 97 F.E.R.C. ¶
13
61,155, 61,680-81, this does not indicate that the initial
exclusion of B-G from the software controlling reserve market
bids was invalid and rose to the level of a market design flaw.
Similarly, the NYISO’s assertion in 2000 that it “does not
disagree that [B-G’s exclusion from the reserves market] could
be characterized as a market design flaw,” Answer of New York
Independent System Operator, Inc. at 6, to Complaint, Motion
to Consolidate and Request for Fast Track Complaint
Procedures of Rochester Gas and Electric Corporation, Docket
No. EL00-04-000, et al. (Apr. 20, 2000), lacks both the authority
and conclusiveness necessary to render FERC’s explanation
regarding B-G arbitrary or capricious. The exclusion of B-G
from the reserves market may have been unwise in retrospect,
but FERC’s explanation for why it was not a market design flaw
is due deference.
Because FERC on remand provided reasoned explanations,
that were consistent with its precedent and the early 2000 market
conditions, for not invoking TEP and for why the exclusion of
B-G was not a market design flaw, we need not reach the
question of whether TEP refunds could be calculated with
“reasonable certainty.”
C.
Petitioners’ challenge to FERC’s decision on remand not to
order refunds for high SR prices also fails. Petitioners contend
that FERC did not consider all necessary factors and incorrectly
balanced the need to provide both fair prices and consistent
service by allowing SR producers to receive a “windfall,” Petrs.
Br. at 20, as a result of uncompetitive market conditions, id. at
17-18, and thus acted in a way that conflicted with the FPA’s
“core purpose of protecting customers from excessive rates,” id.
at 14. Rejecting FERC’s determination that penalizing SR
producers for alleged wrongdoing by NSR producers would be
unfair, they maintain that it is unreasonable to protect
14
“enormous windfall” profits, id. at 20, enjoyed by SR producers
given the harm to consumers from paying higher prices.
On remand, FERC considered the relevant factors,
balancing the several interests at stake, including the tariff
violation, market context, high NSR prices paid, expectations of
affected entities, various tariff provisions, and the need to
balance fair prices and system reliability, before concluding that
refunds were not appropriate. See Remand Order, 110 F.E.R.C.
at 62,008-010; Rehearing Order, 113 F.E.R.C. at 61,616.
Further, FERC’s decision not to order refunds for the NYISO’s
tariff violation was not inconsistent with the FPA’s “core
purpose” for, as Petitioners acknowledge, see Petrs. Br. at 14
n.33, the FPA has multiple purposes in addition to preventing
“excessive rates,” including protecting against “inadequate
service,” Cities of Anaheim, Riverside, Banning, Colton &
Azusa, Cal. v. FERC, 723 F.2d 656, 663 (9th Cir. 1984), and
promoting the “orderly development of plentiful supplies of
electricity,” Pub. Utils. Comm’n of Cal. v. FERC, 367 F.3d 925,
929 (D.C. Cir. 2004) (citations omitted). FERC reasonably
explained that the NYISO's linking of the SR and NSR pricing
was most advantageous to consumers precisely because that
linking protected the availability of higher quality SR reserves
and thus system reliability. Remand Order, 110 F.E.R.C. at
62,009-010; Rehearing Order, 113 F.E.R.C. at 61,616. Because
FERC’s explanation of the need to protect the availability of
high quality SR reserves provides a reasoned basis for its
decision not to order refunds, see Towns of Concord, 955 F.2d
at 76, we need not address Petitioners’ other contentions
regarding refunds.
Accordingly, we deny the petitions.