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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 19, 2004 Decided March 16, 2004
No. 02-1276
PSEG ENERGY RESOURCES & TRADE LLC,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
NEW YORK INDEPENDENT SYSTEM OPERATOR, INC., ET AL.,
INTERVENORS
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
Kenneth R. Carretta argued the cause for petitioner. With
him on the briefs was Jason A. Lewis.
Robert H. Solomon, Deputy Solicitor, Federal Energy Reg-
ulatory Commission, argued the cause for respondent. With
Bills of costs must be filed within 14 days after entry of judgment.
The court looks with disfavor upon motions to file bills of costs out
of time.
2
him on the brief were Cynthia A. Marlette, General Counsel,
and Dennis Lane, Solicitor.
William F. Young argued the cause for intervenor New
York Independent System Operator. With him on the brief
were Neil H. Butterklee and Elizabeth A. Grisaro.
Before: SENTELLE, ROGERS, and TATEL, Circuit Judges.
Opinion for the Court filed by Circuit Judge TATEL.
TATEL, Circuit Judge: After concluding that unusually high
prices in New York electricity markets resulted from a
structural flaw in those markets, the operator of the state’s
power transmission system invoked its authority to lower the
prices retroactively. A company that lost money because of
these price reductions filed a complaint with the Federal
Energy Regulatory Commission, arguing among other things
that no structural flaw actually existed. The Commission
rejected the company’s challenge, but because it did so with-
out adequately addressing the argument that in fact there
was no market flaw, we grant the company’s petition for
review.
I.
As we explained not long ago, the New York Independent
System Operator (NYISO)—a non-profit corporation and an
intervenor in this case—oversees New York state’s bulk-
power transmission system. See Consol. Edison Co. v.
FERC, 347 F.3d 964, 966 (D.C. Cir. 2003). Operating under
tariffs filed with FERC, NYISO administers several bid-
based electricity markets, including the ‘‘Day–Ahead Market’’
and the ‘‘Real–Time Market.’’ See Cent. Hudson Gas & Elec.
Corp., 86 F.E.R.C. ¶ 61,062, 61,222–23 (1999). At the time of
the events at issue in this case, NYISO’s tariff empowered it
to exercise what are known as ‘‘Temporary Extraordinary
Procedures’’ (TEP) to correct ‘‘Market Design Flaws’’ in
these two markets. See N.Y. Indep. Sys. Operator, Inc., 90
F.E.R.C. ¶ 61,320, 62,065 (2000). The tariff authorized NYI-
SO to invoke its TEP if prices deviated significantly from
what they would have been in a working competitive market.
3
The tariff also stated, however, that ‘‘Market Design Flaws
TTT do not include situations in which prices rise to levels
based on demand and supply levels determined by efficient
competition in periods of relative scarcity, or fall to levels
based on demand and supply levels determined by efficient
competition in periods of relative surplus.’’ Market Admin. &
Control Area Servs. Tariff (Services Tariff), Attach. E at 2,
reprinted in J.A. 71.
On May 8 and 9, 2000, a confluence of circumstances—
including unexpectedly warm weather and pre-planned outag-
es of several electricity generators—produced a strain in the
Real–Time Market, with relatively high demand for electricity
and a relatively low supply of it. NYISO responded by
dispatching (i.e., purchasing and using to satisfy consumer
demand) electricity from the last available generator in the
state, the Blenheim–Gilboa hydroelectric facility. Blenheim’s
operator, the New York Power Authority (NYPA), had of-
fered to sell Blenheim’s electricity for $3,487 per megawatt-
hour, and because that was the highest bid that NYISO
accepted, it set the price for all electricity dispatched in the
Real–Time Market during parts of the two days. See H.Q.
Energy Servs., Inc. v. N.Y. Indep. Sys. Operator, 100
F.E.R.C. ¶ 61,028, 61,071 (2002).
On May 12, NYISO invoked its TEP to reduce the Real–
Time Market clearing price for May 8 from $3,487 per
megawatt-hour to $331 per megawatt-hour, and for May 9
from roughly $3,000 per megawatt-hour to approximately
$350 per megawatt-hour. According to NYISO, it took this
‘‘Extraordinary Corrective Action’’ (the term used to refer to
exercises of TEP) because NYPA’s bid, and thus the clearing
price, resulted from a Market Design Flaw. The Blenheim
facility, NYISO explained, had relatively little electricity
available—so little that it qualified as an ‘‘energy limited
resource,’’ or ELR—and NYPA preferred not to sell that
electricity on May 8 and 9 unless NYISO needed it in an
emergency to guarantee system reliability. A senior NYPA
official explained that NYPA wanted ‘‘to refill the reservoirs
of its pump-storage facilities TTT by avoiding energy produc-
tion and engaging those units in pumping mode.’’ Aff. of
4
Robert J. Deasy, ¶ 4, reprinted in J.A. 140. If NYISO did
need Blenheim’s electricity to ensure system reliability, how-
ever, then NYPA, a state-owned, non-profit utility, was will-
ing to sell the electricity at a relatively low price, ‘‘consistent
with [its] historic practice’’ of ‘‘mak[ing] its resources avail-
able when they are needed to maintain the reliability of the
TTT grid, and to do so at a reasonable cost to New York
energy consumers.’’ Id. ¶ 3. The market flaw, NYISO
found, was that the bidding system prevented NYPA from
submitting two bids to reflect these ‘‘complex preferences’’: a
lower bid for emergency situations and a higher bid for non-
emergency situations. According to NYISO, NYPA thus had
to submit a single bid, one with a selling price much higher
than what NYPA would have accepted if Blenheim’s electrici-
ty was needed to maintain system reliability. Because
NYPA’s accepted bid, which set the market clearing price,
was consequently much higher than it otherwise would have
been, NYISO found it appropriate to invoke its TEP. In
addition to lowering the clearing price for May 8 and 9,
NYISO announced structural changes intended to prevent a
repeat of the situation. See H.Q. Energy Servs., Inc. v. N.Y.
Indep. Sys. Operator, 97 F.E.R.C. ¶ 61,218, 61,961 (2001)
(explaining the changes).
Two electricity suppliers filed complaints with FERC, chal-
lenging NYISO’s actions as beyond its TEP power. The first
complaint focused on the May 8 price recalculation, while the
second, from petitioner PSEG Energy Resources and Trade,
focused on the May 9 recalculation—a recalculation that,
according to the company, cost it $668,000. PSEG argued,
among other things, that the market flaw that NYISO identi-
fied did not actually exist, that the May 9 market price may
have reflected NYPA’s opportunity costs or resulted from
simple scarcity, and that even if the high price stemmed from
a flaw, NYISO’s choice of the proper clearing price was
unjustified.
The Commission denied both complaints in a single order,
rejecting the companies’ various arguments and agreeing with
NYISO that the high clearing price resulted from a flaw in
the bidding system. ‘‘[T]he bidding rules’ inability to allow
5
[ELR] units to reflect their operational constraints, and in-
stead force such [entities] to guess at a bid level that would
be high enough to avoid dispatch, is a market design flaw.’’
H.Q. Energy Servs., 97 F.E.R.C. at 61,964. FERC denied
the companies’ rehearing request. See H.Q. Energy Servs.,
100 F.E.R.C. at 61,076.
PSEG now petitions for review. ‘‘We review FERC orders
under the Administrative Procedure Act’s TTT arbitrary and
capricious standard,’’ Sithe/Independence Power Partners,
L.P. v. FERC, 165 F.3d 944, 948 (D.C. Cir. 1999), and give
‘‘substantial deference’’ to FERC’s interpretation of ambigu-
ous tariff language, e.g., Koch Gateway Pipeline Co. v. FERC,
136 F.3d 810, 814 (D.C. Cir. 1998). If the tariff language is
unambiguous, however, ‘‘this court need not defer to FERC’s
interpretation.’’ Idaho Power Co. v. FERC, 312 F.3d 454, 461
(D.C. Cir. 2002). Moreover, although our ‘‘review of ratemak-
ing decisions is highly deferential, FERC still must provide a
coherent and adequate explanation of its decisions.’’ E. Tex.
Elec. Coop., Inc. v. FERC, 331 F.3d 131, 136 (D.C. Cir. 2003)
(citation omitted).
II.
We begin with PSEG’s contention that there was no mar-
ket flaw that could have justified NYISO’s use of TEP
authority. Although NYISO thought NYPA was unable to
express its preferences under the existing bidding rules—a
Market Design Flaw, as NYISO saw it—PSEG argues that
while ‘‘[t]he NYPA unit was required to submit a bid into the
Day–Ahead Market TTT the ELR was not obligated, under
any ISO rule or procedure existing on May 8, 2000 or May 9,
2000, to submit [a] real-time bid.’’ Pet’r’s Br. at 30–31. By
not bidding in the Real–Time Market—or, more precisely, by
withdrawing its Day–Ahead bid so that bid did not also serve
as its Real–Time bid—NYPA, PSEG insists, could have en-
sured that NYISO would use Blenheim’s electricity only to
guarantee system reliability, exactly what NYPA wanted.
Blenheim’s electricity would have remained available to main-
tain system reliability because NYISO’s tariff allowed it to
6
call on ELRs during emergencies even if they had not
submitted a Real–Time Market bid. See Services Tariff,
§ 5.12.8(c) (‘‘[T]he ISO may call on Energy Limited Re-
sources at any time during emergencies.’’). Moreover, if
after declining to submit a bid Blenheim had been called on in
an emergency, then the price it received for its electricity
would not have set the market clearing price. See Pet’r’s Br.
at 32 (explaining that under NYISO’s Open Access Tariff,
NYISO determines the clearing price ‘‘using Bids submitted
into the Real–Time Market’’). Because no flaw existed,
PSEG concludes, NYISO had no authority to use its TEP.
Although the Commission rejects PSEG’s argument, it
never denies—not in its initial order, not in its rehearing
order, not in its brief here, and not at oral argument—that
NYPA could have withheld a bid from the Real–Time Market.
Indeed, NYISO’s own expert concedes that NYPA could have
done so. See Aff. of Robert M. Thompson, ¶ 8, reprinted in
J.A. 134 (‘‘Under the bidding protocols in use on May 8, the
operator of an ELR unit that did not want to, or was not able
to, operate the unit at its full capacity during a given period
was forced either to withhold the unit entirely, or to submit
an offer calculated to be so high that the unit TTT would not
be called upon for production under normal system condi-
tions.’’ (emphasis added)). In its initial order, moreover,
FERC offered no answer at all to PSEG’s argument that
NYPA’s ability to withhold a bid from the Real–Time Market
meant that NYPA could have sent precisely the ‘‘complex
signal’’ it wished. FERC did acknowledge the argument in
its rehearing order, but said only this:
[T]he Commission is not quick to second guess
NYPA’s actionsTTTT NYPA’s bidding strategy, de-
veloped in consultation with NYISO, had been work-
ing well enough even under NYISO’s flawed bidding
rules until May 8 and 9TTTT And it is not easy to
safely change a complex bidding strategy on a mo-
ment’s notice to face entirely unforeseen circum-
stances.
100 F.E.R.C. at 61,074. The last sentence of this statement
addresses PSEG’s alternative argument that because Real–
7
Time Market bids can be changed until the last minute,
NYPA could have lowered its bid once it became clear that
NYISO might need Blenheim’s electricity to maintain system
reliability. Whether or not this sentence adequately answers
that alternative argument, it does nothing to answer PSEG’s
assertion that no market flaw existed given NYPA’s ability to
express its preferences by withholding any bid from the
Real–Time Market.
The first two sentences of FERC’s statement do address
PSEG’s primary argument, but we think them wholly inade-
quate. That NYPA may have developed its bidding strate-
gy—submitting very high bids when it did not want NYISO
to dispatch its electricity—in consultation with NYISO simply
suggests that NYPA was not alone in lacking awareness of its
bidding options. It does not address PSEG’s argument that
the flaw on which NYISO based its Extraordinary Corrective
Action was non-existent. And the fact that NYPA’s strategy
had been ‘‘working well enough’’ in normal circumstances
cannot excuse NYPA’s failure to prepare for abnormal condi-
tions, for a bidding strategy’s effectiveness during normal
times does not necessarily indicate that it will be effective
during unusual times. Just because people stay dry on sunny
days despite always leaving their umbrellas at home does not
mean they will stay dry the next time it rains.
FERC insists that ‘‘PSEG’s years-later opinion of NYPA’s
possible bidding options is speculative at best; the ISO
answered that NYPA believed at the time that it had no other
means, under then-existing ISO bidding rules, to differentiate
between normal and emergency circumstances.’’ Resp’t’s Br.
at 24. Setting aside the fact that this argument appears
nowhere in the Commission’s orders, we think it lacks merit.
Not only is PSEG’s specific and straightforward assertion far
from ‘‘speculative,’’ but the tariff’s plain language contradicts
the Commission’s implicit claim that a bidder’s ignorance of
its options constitutes a Market Design Flaw. The tariff
defines Market Design Flaw as ‘‘a market structure, market
design or implementation flaw giving rise to situations in
which market conditions or the application of ISO Procedures
would result in inefficient markets or prices that would not be
8
produced in a workably competitive market.’’ Services Tariff
at 1, reprinted in J.A. 70. Because ignorance and other
forms of imperfect information abound in most ‘‘workably
competitive markets,’’ there is no reason to think that the
result here would not have been produced in a working
market. Since the tariff’s plain language precludes the possi-
bility that a single bidder’s ignorance can constitute a Market
Design Flaw, ‘‘this court need not defer to FERC’s interpre-
tation.’’ Idaho Power, 312 F.3d at 461.
Intervenors NYISO and the Consolidated Edison Company
of New York offer several additional responses to PSEG’s
contention that no market flaw existed. For example, they
argue that NYPA did have to submit a bid in the Real–Time
Market because otherwise NYISO would have been unable to
calculate NYPA’s bid-production costs. But whether or not
this argument is valid—and for now we have our doubts, since
intervenors never explain why NYISO needed to calculate
NYPA’s bid-production costs—the argument, like intervenors’
other arguments, was not offered by FERC in either of the
orders under review. See, e.g., KeySpan-Ravenswood, LLC
v. FERC, 348 F.3d 1053, 1059 (D.C. Cir. 2003) (‘‘[P]ost hoc
salvage operations of counsel cannot overcome the inadequacy
of the Commission’s explanation.’’ (internal quotation marks
omitted)).
III.
Because FERC’s failure to respond cogently to PSEG’s
argument that no market flaw existed requires granting the
company’s petition, we have no need to resolve PSEG’s other
arguments. Since the Commission will have to conduct addi-
tional proceedings on remand, however, we think it appropri-
ate to comment on FERC’s response to PSEG’s argument
that NYPA’s bid may have actually reflected its opportunity
costs. Rejecting this argument, the Commission stated that
‘‘regardless of whether opportunity costs existed, NYISO’s
market was flawed [because] NYPA could not under the
NYISO bidding rules submit the complex bid it sought to
make, and nothing required NYISO to let a flawed bid set the
9
market price when it had TEP authority to correct the flaw.’’
H.Q. Energy Servs., 100 F.E.R.C. at 61,073. In our view, the
suggestion that NYPA’s inability to submit multiple bids, by
itself, justified NYISO’s invocation of its TEP authority re-
veals a misunderstanding of the tariff. The tariff defines a
Market Design Flaw as a market structure or design that
produces prices different than those that workably competi-
tive markets would have produced. Under the tariff, then,
market structures or designs that yield normal prices—i.e.,
prices that a workably competitive market would have pro-
duced—do not qualify as Market Design Flaws and thus do
not warrant the use of TEP. Hence, contrary to FERC’s
statement that ‘‘nothing required NYISO to let a flawed bid
set the market price when it had TEP authority to correct the
flaw,’’ the tariff itself required NYISO to ‘‘let a flawed bid set
the market price’’ unless NYPA would have made a different
bid absent any flaw. A market structure that co-existed with
but had no effect on market-driven (including scarcity-driven
or opportunity-cost-driven) prices could not justify the use of
TEP. Without pre-judging issues unnecessary to resolve at
this stage, we are skeptical that FERC could reach the same
outcome on remand without addressing this issue and without
saying more about why it rejected PSEG’s opportunity-costs
argument—particularly since the Commission has given no
answer to PSEG’s question of why NYPA chose the exact bid
it did if not to reflect its opportunity costs.
IV.
PSEG’s petition for review is granted and the case is
remanded to FERC for further proceedings consistent with
this opinion.
So ordered.