FERC Issues Order Affirming Its Findings on Remand from the U.S. Court of Appeals

On October 20, 2011, the Federal Energy Regulatory Commission (“FERC” or “Commission”) issued an order on rehearing¹ (“Rehearing Order”) affirming its determinations on remand from the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”). This proceeding arose from a comprehensive settlement agreement (“FCM Settlement”) concerning the structure of the market for electric capacity in New England. In response to a petition for review of the Commission’s earlier orders concerning the settlement, and a remand to the D.C. Circuit from the United States Supreme Court, the D.C. Circuit issued an order remanding the matter in part to the Commission for further proceedings^.2

At issue on remand was whether the auction results and transition payments arising from the FCM Settlement constitute “contract rates” where challenges can only be reviewed by the Commission under a more rigorous application of the statutory “just and reasonable” standard of review (i.e., the Mobile-Sierra “public interest” standard).³ Also at issue was whether, if the auction results and transition payments are not “contract rates,” the Commission may act within its discretion in nevertheless approving a settlement provision imposing the Mobile-Sierra standard on certain future challenges to the auction results and transition payments. In the remand order, the Commission determined that the auction results and transition payments arising from the FCM Settlement were tariff rates, not contract rates and that, nevertheless, the Commission had discretion to approve the settlement provision imposing a more stringent application of the statutory just and reasonable standard of review (i.e., the Mobile Sierra “public interest” standard of review).⁴ The Commission affirmed these determinations in the Rehearing Order.

First, the Commission on rehearing reaffirmed its finding that the rates set by the forward capacity auctions represent tariff, not contract, rates. The Commission underscored that although conventional auctions can result in a contract between buyers and sellers, the rates produced by the forward capacity auction are determined unilaterally by ISO New England Inc.’s (“ISO-NE”) tariff. FERC pointed out that the “demand” or “load” side of each auction is set not by the load-serving entities that ultimately pay for the capacity, but by ISO-NE, which determines the estimated amount of capacity (i.e., installed capacity requirement) that the system will require three years in the future. The “buyers” are not really buying capacity but rather are merely paying the rate that ISO-NE charges to recover ISO-NE’s costs of buying capacity. Thus, the standard capacity charge paid by each “buying” utility in the system for its share of the installed capacity requirement more closely resembles a tariff rate paid to ISO-NE. FERC added that non-settling parties are equally obligated to pay the rates derived from the rate methodology resulting from the FCM Settlement, not because they are subject to any contractual obligations under the settlement, but because they choose to purchase capacity through the forward capacity auctions, which obligate non-settling parties to make payments under ISO-NE’s tariff. Accordingly, the Commission affirmed that the auction results and transition payments are tariff rates.⁵

Second, the Commission affirmed that it has discretion to accept application of a Mobile-Sierra “public interest” standard of review. According to FERC, the Supreme Court made clear in Morgan Stanley Capital Group, Inc. v. Pub. Util. Dist. No. 1 of Snohomish County, Washington that the Mobile-Sierra “public interest” presumption applies only to contract rates, and Morgan Stanley does not address the Commission’s discretion to accept different applications of the statutory “just and reasonable” standard for non-contract rates. However, the Supreme Court has explained that the “just and reasonable” standard is the only statutory standard under the Federal Power Act for assessing wholesale rates, whether set by contract or tariff, and the Commission has the discretion to interpret how this statutory standard is to be implemented.

In this case, the Commission found that it is appropriate to accept the Mobile-Sierra “public interest” language, in part because of the similarities between the Settlement rates and contract rates. Further, the Commission reiterated that the “public interest” standard of review would promote consumer welfare by balancing the need for rate stability and the interests of the diverse entities who participate in the Forward Capacity Market. Finally, FERC noted that the Settlement might not have been reached without the inclusion of the “public interest” standard of review.

On October 31, 2011, the New England Power Generators Association, Inc. filed at the D.C. Circuit a petition for review of the Commission’s order on remand and Rehearing Order. The proceeding is pending at the D.C. Circuit in case no. 11-1422.

1 Devon Power LLC, 137 FERC ¶ 61,073 (2011).

2 Me. Pub. Utils. Comm’n v. FERC, 625 F.3d 754 (D.C. Cir. 2010).

3 United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332 (1956) (Mobile); FPC v. Sierra Pac. Power Co., 350 U.S. 348 (1956) (Sierra).

4 Devon Power LLC, 134 FERC ¶ 61,208, at P 9 (2011).

5 The Commission noted that because the last transition payment was made over a year ago, the controversy as to whether these payments represent contract or tariff rates is now moot.