Court Vacates Erratic FERC Orders on Congestion Pricing

A federal appeals court recently reversed a FERC order on pricing arrangements in a congested area of ISO-NE region because of the agency's failure to respond to reasonable objections to its mercurial policies on pricing. The opinion demonstrates that the agency's abrupt policy changes will not withstand appellate scrutiny where FERC fails to resolve reasonable objections by appellants.

FERC's order concerned the ongoing attempts to devise an appropriate mechanism for compensating generators in a congested area of southwest Connecticut in which there is a risk of generator market power. As evidenced by FERC's recent decision to delay implementation of a contentious locational installed capacity requirement in New England, the agency has yet to settle on a long-term, commonly accepted mechanism. The order on appeal involved two previous attempts to come up with a pricing scheme.

In 2002, FERC addressed NEPOOL's proposal to create a standard market design in New England, and as part of that market design, approved the use of Reliability-Must-Run ("RMR") agreements that provide for monthly payments of costs and a return to generators that run seldom but are needed for reliability. Not long afterwards, however, when two generators, including an affiliate of PPL, sought approval of RMR agreements with the system operator, FERC reversed course and devised a new compensation scheme, although it signaled that RMR agreements could serve as a last-resort compensation mechanism. The new methodology was termed Peaking Unit Safe Harbor ("PUSH") bidding, and was intended to give a generator that ran seldom a bid price based on the sum of its units' variable-cost and fixed-cost components.

The PPL affiliate appealed FERC's order to the D.C. Circuit, where the agency has met with not infrequent reversals in recent years. The gas-fired generator challenged FERC's assumption that the PUSH methodology would provide it with adequate compensation, as this would occur only if the generator operated as frequently from one year to the next, which was unlikely given rising gas prices and the availability of non-gas generators. The generator further pointed out that FERC relied on an incorrect assumption about whether PUSH-eligible units could set the locational marginal price (LMP). In addition, the generator argued that it met the last-resort standard FERC has established for RMR eligibility. The Court agreed with the PPL affiliate that FERC failed to respond directly to any of these objections. That failure, the court ruled, demonstrated a lack of reasoned decisionmaking and rendered the orders arbitrary and capricious. [PPL Wallingford Energy, LLC v. Federal Energy Regulatory Commission, 419 3d 1194 (D.C. Cir.) (2005)]