On April 2, 2015, the United States Court of Appeals for the Second Circuit (“Second Circuit”) upheld the Commission’s approval of a new capacity zone and demand curve for the New York Independent System Operator, Inc. (“NYISO”).  Previously, on June 4, 2014, the Second Circuit denied an emergency motion requesting a stay of the implementation of the new zone (see June 9, 2014 edition of the WER).

Historically, the NYISO capacity market was divided into three distinct capacity zones: the Long Island Capacity Zone (covering Nassau and Suffolk Counties), the New York City Capacity Zone (covering all of New York City), and the New York Control Area (covering the entire state, including both the Long Island Capacity Zone and the New York City Capacity Zone).  In two separate 2013 filings, NYISO proposed a new capacity zone, called the Lower Hudson Valley Zone (“LHVZ”), and a corresponding demand curve for the new zone.  The new zone was proposed in part as a means of addressing transmission constraints within the NYISO region.  In response, FERC issued two orders approving the creation of the new LHVZ, and the new demand curve for the LHVZ, respectively.  Various parties (“Petitioners”) sought review of these orders from the Second Circuit.

On appeal, the Petitioners argued that the Commission’s orders approving the LHVZ and demand curve were not supported by reasoned decision-making and substantial evidence.  Among other arguments, the Petitioners claimed that FERC did not adequately justify its conclusion that consumers would benefit from the creation of the new LHVZ, and that FERC failed to adequately support its conclusion that implementing the new zone without a phase-in of its demand curve would result in just and reasonable rates.  Additionally Petitioners argued that FERC did not demonstrate that the increases in rates arising from the new zone would “reflect to some degree the costs actually caused by the customer who must pay them,” as judicial precedent requires.

In its order upholding FERC’s decisions, the Second Circuit rejected each of Petitioners’ arguments.  The Second Circuit concluded that FERC adequately supported its decision by relying on economic theory—namely, the relationship between transmission constraints and capacity market price signals.  The Second Circuit also determined that the evidence before FERC, which included the effects of immediately implementing the LHVZ and its demand curve, and evidence that a phase-in of the demand curve would inhibit efforts to incentivize needed short-term supply responses, was sufficient to justify FERC’s rejection of any phase-in.  With regard to planned transmission upgrades in New York that could help alleviate certain constraints, the Second Circuit ruled that FERC reasonably concluded that such evidence was speculative (in that the upgrades may not be built), and rationally explained its decision to act according to existing market conditions, rather than speculative future conditions.  Finally, the Second Circuit found that Petitioners failed to raise the issue of cost-causation in the appropriate proceeding (the proceeding approving the demand curve, as opposed to the proceeding approving the LHVZ) before the Commission, and they were therefore precluded from raising it on appeal.

A copy of the court’s opinion may be found here.