United States: D.C. Circuit Largely Upholds FERC's Approval Of ISO-NE Winter Reliability Program, Cost-Allocation To Load-Serving Entities

On December 22, 2015, the United States Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") largely upheld FERC's approval of ISO New England Inc.'s ("ISO-NE") Winter 2013-2014 Reliability Program (the "Program"). The Program was designed to compensate selected oil-fired and dual-fuel generators to maintain sufficient supplies of fuel oil when system conditions were stressed. The court upheld FERC's decision to allocate the Program's costs to Load-Serving Entities ("LSEs"), as opposed to ISO-NE Transmission Owners. Lastly, the court remanded to FERC the issue of whether the Program's rates were just and reasonable.

On June 28, 2013, ISO-NE filed proposed tariff revisions with FERC that were designed to implement the Program. According to ISO-NE, the Program was designed to maintain system reliability during the 2013-2014 cold-weather months by, among other things, permitting oil-fired and dual-fuel generators to submit bids consisting of the price at which the generators would agree to establish a specific quantity of fuel by December 1, 2013. ISO-NE would then select from the bid pool, using certain criteria, specific generators to provide up to 2.4 million MWh of energy. Obligations would lapse on February 28, 2014, or on the date on which a generator had fully depleted its offered fuel inventory, whichever was earlier. In its June 28, 2013 filing, ISO-NE estimated the cost of the Program would range from $16 to $43 million, and proposed to allocate the cost to ISO-NE Transmission Owners. Given the immediacy of the pending 2013-2014 Winter at the time of filing, ISO-NE requested that FERC approve the Program prior to receiving information regarding the accepted bids.

Several weeks later, on August 26, 2013, ISO-NE filed the bid results with FERC, along with other information about the bidding process. Of the 2.29 million MWh offered, ISO-NE proposed to accept 1.995 million MWh at a price of $78.8 million.

On September 16, 2013 FERC issued an order conditionally approving ISO-NE's original June 28, 2013 filing. FERC emphasized that its approval of the Program was tentative and subject to further review. However, FERC affirmatively rejected ISO-NE's proposal to allocate the cost of the Program to ISO-NE Transmission Owners because the Program "[did] not address . . . a transmission-related concern." Instead, FERC found that LSEs should bear the cost of the Program, because they were the primary beneficiaries of its enhanced reliability outcomes. On October 7, 2013, FERC issued an order approving, subject to a compliance filing, the Program's rates that were submitted in ISO-NE's August 26, 2013 filing. FERC denied rehearing of both its September 16, 2013 and October 7, 2013 orders. TransCanada subsequently petitioned the D.C. Circuit for review.

In its December 22, 2015 decision, the D.C. Circuit addressed TransCanada's arguments regarding both the September 16, 2013 order conditionally approving the Program, and the October 7, 2013 order approving the Program's rates.

With respect to the September 16, 2013 order conditionally approving the Program, TransCanada asserted that: (i) FERC had failed to adequately consider the costs of the Program before accepting it; and (ii) FERC had erred in ordering ISO-NE to allocate the Program's costs to LSEs. The court found TransCanada's first claim to be unripe for review, noting that FERC had conditionally approved the Program in its September 16, 2013 order, and made clear that its decision was tentative and subject to review of ISO-NE's bid results, among other things. Therefore, FERC's order was not "final"—a prerequisite for judicial review under court precedent. The court further found that TransCanada's second claim was without merit, because FERC had reasonably determined that ISO-NE's original proposal to allocate the Program's costs to ISO-NE Transmission Owners would violate cost-causation principles, and that the allocation of the Program's costs to LSEs adhered to these principles.

With respect to the October 7, 2013 order approving the Program's rates, TransCanada argued that, in approving the Program, FERC relied on a record that was devoid of any evidence regarding how much of the Program's cost ($78.8 million) was attributable to profit and risk mark-up, and that, without this information, FERC could not properly assess whether the Program's rates were just and reasonable. The court agreed with this contention, finding that FERC had not addressed this "valid concern" raised by TransCanada in its order, and remanded the issue back to FERC for further consideration.

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

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