On June 23, 2009, the U.S. Court of Appeals for the District of Columbia Circuit (“DC Circuit”) upheld the Federal Energy Regulatory Commission’s (“FERC” or “Commission”) ruling that it had the authority to approve installed capacity requirements for ISO New England, Inc. (“ISO New England”). The unanimous decision by the three-judge panel rejected arguments made by the Connecticut Department of Public Utility Control and other state officials (“Petitioners”) that FERC could not regulate the amount of generating capacity auctioned off in the ISO New England markets.

The question of FERC’s authority to approve installed capacity requirements began in June 2006 when FERC approved a settlement agreement among New England power system stakeholders. The settlement created the Forward Capacity Market, where capacity is secured three years in advance of when it would be needed to meet an installed capacity requirement. FERC ruled that it had authority to review the installed capacity requirement because of its significant effect on rates and service. Meanwhile, the Petitioners argued that FERC did not have that authority because the Federal Power Act only allows states to oversee generation facilities and resource adequacy decisions. After the DC Circuit twice decided to defer the issue, it concluded that FERC had such authority.

Circuit Judge Tatel, who wrote the DC Circuit’s opinion, stated that while the issues were complex, the real question was whether or not FERC has jurisdiction to review the installed capacity requirement. The DC Circuit found that FERC had such authority primarily because of a key concession made by the Petitioners. The Petitioners admitted that FERC can determine just and reasonable capacity charges and then set those charges in order to create incentives for additional capacity for reliability purposes. Since FERC can set the price of capacity, it could choose the same price established by the Forward Capacity Market, which does not directly regulate generation facilities.

The DC Circuit went on to state that the term “installed capacity requirement” is misleading because it does not require entities to install new capacity at all. Instead, it acts as a peak demand estimate, which helps set the price at which there will be sufficient incentives to meet future demand. Meanwhile, the state still has the authority to forbid new entities from providing capacity. As such, the state, and not FERC, will still have jurisdiction over generation facilities.

A copy of the DC Circuit’s decision can be found at: http://pacer.cadc.uscourts.gov/