United States: DC Circuit Remands FERC Decision On ISO New England's Capacity Auction Proration Rule

On December 23, 2011, the U.S. Court of Appeals for the District of Columbia remanded a FERC order interpreting ISO New England's proration rule in a heavily debated PSEG case that was initially filed at the Commission in 2008. The case involved ISO New England's tariff rule providing that if the ISO determines a supplier's resources are needed for local reliability, it can force the supplier to accept price proration without allowing proration of capacity. The supplier then receives a per-unit price for its capacity that is lower than the floor price. In its reliability review for the 2008 capacity auction, ISO New England had barred PSEG's attempt to prorate the capacity of PSEG's Connecticut resources – a decision that, according to PSEG, cost it $2.8 million.

In its Initial Order, FERC sided with ISO New England's interpretation that the rule allows the ISO to bar resources from reducing their capacity obligation, yet still requires the resources to accept a prorated price. PSEG raised a host of arguments challenging this interpretation, and on rehearing, FERC held that "when reliability review precludes quantity proration, the tariff still requires ISO New England to impose price proration to avoid violating the total payment." However, less than a month later, FERC approved a revision to ISO New England's proration rule that adopted PSEG's position prospectively. FERC "agree[d] that this proposed solution is an improvement and addresses an inconsistency between the compensation provided to resources that are denied the ability to prorate megawatts at the price floor and other cleared capacity."

The Court pointed out that in its Initial Order on this issue, FERC stated that "the rules are clear" that resources prevented from prorating quantity must still receive a prorated price; on Appeal however, FERC's counsel conceded that the relevant provision of the Proration Rule is ambiguous. The Court determined that this was an appropriate case for remand because FERC denied PSEG the relief it sought, yet subsequently described PSEG's position as an improvement that addresses an inconsistency and revised the tariff language prospectively. In addition, FERC failed to address the following two arguments made by PSEG on rehearing: (1) FERC's interpretation would result in undue discrimination because resources will involuntarily be paid less than other resources on a per unit basis; and (2) FERC's interpretation was inconsistent with the policy goals of the forward capacity market, which are to provide incentives for existing resources to remain in constrained areas and for new entry resources to be constructed in those areas.

Footnotes

1 ISO New England Inc., 130 FERC ¶ 61,235 (2008).

2 ISO New England Inc., 131 FERC ¶ 61, 065, 61,345 (2010).

3 ISO NewEngland Inc., 123 FERC ¶ 61,290, 62,925 (2008).

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