On January 23, 2009 the United States Court of Appeals for the District of Columbia Circuit (“DC Circuit”) upheld FERC’s decision denying Connecticut’s challenge to the current “hybrid” electricity market. The DC Circuit decided the current hybrid market is just and reasonable as an interim solution whereas the alternative proposed by Connecticut was not adequately supported.

In 1998, FERC approved a New England Power Pool proposal to transfer control of the region’s bulk power transmission system to ISO New England Inc. (“ISO New England”), a private, non-profit entity in order to phase out the cost-based rate structure that had been in place and promote competitive wholesale electric markets. The new markets faced early infrastructure problems, including old generating units, and insufficient supply, particularly in Connecticut. The combination of transmission constraints and the inability for high-cost units remain profitable exacerbated reliability issues within the region.

In order to address system reliability and generator cost, ISO New England developed, and FERC approved several interim solutions. These included Market Rule 1, which implements locational marginal pricing, and “Reliability-Must-Run” (“RMR”) agreements. These RMR agreements permit a high-cost generator whose power is needed for system reliability to recover cost-of-service rates in exchange for an agreement to offer all its capacity into the market at actual marginal cost. Recognizing the imperfections of these plans, stakeholders agreed to, and FERC approved plans for a new Forward Capacity Market, as a long-term solution.

Unfortunately, the new market requires a three-year lead time. In the interim, the Commission has put into place several proposals that are aimed at ensuring system reliability. In Connecticut, FERC approved more RMR agreements, and authorized so-called “Peaking Unit Safe Harbor” bidding, though this last plan has since been eliminated.

On September 12, 2005 the Attorney General for Connecticut, Richard Blumenthal, led several interested parties in filing a complaint against ISO New England at FERC. The complaint accused the Commission of violating the Federal Power Act’s (“FPA”) requirement that FERC-approved rates must be “just and reasonable.” Blumenthal claimed that compelling RMR generators to sell power into markets at high cost drives prices up to unjust and unreasonable levels. He claimed that low-cost generators under the current arrangement receive windfall profits from the inflated prices—in some cases, the high prices enabled generators to achieve 44%-257% rates of return.

Connecticut argued that the electricity market should be either “fully competitive or fully regulated,” claiming that the hybrid system currently in place costs more than either a fully competitive or a fully regulated market, making it inherently unjust and unreasonable. Connecticut asked for a return to the pre-ISO New England fully regulated model by requesting that all Connecticut generators be placed under RMR agreements. FERC denied the original complaint, and later Blumenthal’s request for rehearing.

To prevail on the petition for review at the DC Circuit, Blumenthal had to show the existing rate to be unjust and unreasonable, and propose another rate that is just and reasonable. The DC Circuit held that Blumenthal failed on both counts. The DC Circuit first addressed whether FERC acted unreasonably by defending the existing rates and rules as just and reasonable. Judge Griffith (writing for a unanimous Court) noted that there is no single reasonable rate, but rather a “zone of reasonableness.” The DC Circuit held that the plans FERC approved were a reasonable interim plan until the Forward Capacity Market could be implemented. Further, the DC Circuit noted that it has never required FERC to establish the competitiveness of an entire market before allowing a member to move to market-based rates. In addition, the DC Circuit found that Connecticut failed to show how the state’s proposed alternative of re-regulating the market is just and reasonable.

The opinion is available at: http://pacer.cadc.uscourts.gov/docs/common/opinions/