On February 2, 2018, the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) remanded FERC’s decision denying complaints that the ISO New England, Inc.’s (“ISO-NE”) rules locking in prices for new entrants to ISO-NE’s Forward Capacity Market (“FCM”) result in price suppression and discriminatory rates for existing suppliers.  In doing so, the D.C. Circuit held that FERC did not adequately explain why its prior decision to reject a similar proposal did not apply to ISO-NE’s rules.

As explained in the D.C. Circuit’s opinion, ISO-NE holds a Forward Capacity Auction (“FCA”) each year to procure capacity for its FCM.  To encourage new suppliers to enter the FCM, ISO-NE adopted a price “lock-in” rule and a “capacity carry forward” rule for new entrants.  The lock-in rule allows new entrants to “lock in” the market clearing price for their first year in the FCM for up to an additional six years.  The capacity carry forward rule requires that new suppliers offer their capacity into future FCAs for the additional six years as a price-taker, i.e., requiring the new entrants to bid their capacity at lower prices in future auctions, potentially all the way down to $0.  Despite these lower bids, the new suppliers are still guaranteed their locked-in initial market clearing price.

The New England Power Generators Association, Inc. (“NEPGA”) and Exelon Corp. (“Exelon”) filed complaints with FERC challenging ISO-NE’s lock-in and capacity carry forward rules.  NEPGA argued that the lock-in and capacity carry forward rules are unduly discriminatory because of improper price discrimination against existing suppliers.  NEPGA and Exelon also cited a prior decision in which FERC rejected similar rules for PJM Interconnection, L.L.C. (“PJM”), finding that PJM’s proposal would result in price suppression and discriminatory rates.  Further, NEPGA argued that ISO-NE’s rules exacerbated the price suppression and discrimination found in PJM because (1) the PJM lock-in period was only for an additional two years, as opposed to six years; and (2) the PJM lock-in was rarely triggered, whereas ISO-NE’s was available to all new entrants.  In denying NEPGA’s complaint, FERC stated that the rules would “mitigate the price suppressing effects of over-procurement in subsequent years.”  In response to arguments regarding the PJM precedent, FERC reasoned that ISO-NE’s rules were permitted in this case because of the “different clearing mechanics” between ISO-NE and PJM.  NEPGA petitioned the D.C. Circuit for review of FERC’s orders denying the complaints.

In its opinion, the D.C. Circuit held that FERC failed to adequately explain why its prior decision to reject lock-in and capacity carry forward rules in PJM did not apply to its approval of ISO-NE’s rules.  In particular, the D.C. Circuit noted that FERC’s response to arguments regarding PJM reasoned that ISO-NE utilized a vertical demand curve, whereas PJM used a sloped demand curve.  The D.C. Circuit continued, however, that FERC used this explanation despite approving ISO-NE’s proposal to switch to a sloped demand curve the same day.  Moreover, the D.C. Circuit stated that FERC failed to explain how the different clearing mechanics in PJM made PJM’s proposal unjust and unreasonable, while ISO-NE’s nearly identical proposal was permissible.  Lastly, the D.C. Circuit noted that both FERC’s and intervenors’ briefs in response to NEPGA’s petitions raised potential reasons why ISO-NE’s proposal was just and reasonable, but FERC failed to provide this analysis in response to the complaints.  Accordingly, the D.C. Circuit held that FERC did not engage in reasoned decisionmaking and remanded the case to FERC.

A copy of the D.C. Circuit’s opinion is available here.