United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 18, 2004 Decided January 14, 2005
No. 03-1228
EDISON MISSION ENERGY, INC. AND
EDISON MISSION MARKETING & TRADING, INC.,
PETITIONERS
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
CONSOLIDATED EDISON COMPANY OF NEW YORK, INC., ET
AL.,
INTERVENORS
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
Peter W. Brown argued the cause for petitioners. With
him on the briefs were Richard C. Mooney and Pamela G.
Van Horn.
Robert H. Solomon, Deputy Solicitor, Federal Energy
Regulatory Commission, argued the cause for respondent.
With him on the brief were Cynthia A. Marlette, General
Counsel, and Dennis Lane, Solicitor.
2
William F. Young argued the cause for intervenors in
support of respondent. With him on the brief were Susan E.
Dove, Elias G. Farrah, Rebecca J. Michael, Neil H.
Butterklee, and Edgar K. Byham. David E. Blabey, Donald K.
Dankner and David P. Yaffe entered appearances.
Diane T. Dean argued the cause and filed the brief for
intervenor-appellee Public Service Commission of New York.
Before: EDWARDS and R ANDOLPH, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.
W ILLIAMS, Senior Circuit Judge: Edison Mission, an
independent power producer (which we treat as one with its
fellow petitioner, a wholly owned subsidiary engaged in
power marketing), challenges two rulings of the Federal
Energy Regulatory Commission. It says that the rulings allow
the New York Independent System Operator (“NYISO”) to
“mitigate,” i.e., unilaterally reduce, the bid prices that
generators and marketers submit to sell power in New York
State under conditions where, in the judgment of the
Commission itself, there should be no such mitigation.
Specifically, Edison Mission says that the rulings will cut
back price increments that are due to scarcity rather than to
any exercise of market power, and as a result will impair the
growth of needed power supply. Because of the seeming
inconsistency in FERC’s positions, we reverse and remand the
orders.
* * *
3
The NYISO is a non-profit corporation that operates the
bulk power transmission system in New York. It sells its
services under tariffs filed with FERC, and administers two
sets of bid-based energy markets. First is the “Day-Ahead
Market,” in which the NYISO derives a market-clearing price
from the sellers’ and buyers’ price and quantity indications for
the next day; sales are then made at the market-clearing price.
Second is the “Real-Time Market,” designed to ensure system
reliability by calculating hourly clearing prices and allowing
sellers to offer supplies to meet additional demand and even
to revise day-ahead bids. See Cent. Hudson Gas & Elec.
Corp., 86 FERC ¶ 61,062 at 61,222-23 (1999).
Under Market Mitigation Measures (“MMM”) approved
by FERC as part of the NYISO’s Market Monitoring Plan, the
NYISO has monitored the electricity markets for
circumstances in which (the NYISO contends) exercises of
market power, as opposed to true scarcity, drive up prices.
See New York Indep. Sys. Operator, Inc. & Consolidated
Edison Co., Inc., 99 FERC ¶ 61,246 at 62,038, 62,041 (2002)
(“Initial Order”). Under the MMM the NYISO has applied
so-called “conduct” and “impact” screens to bids in the Day-
Ahead Market. The conduct screen sifts out prices that by
some amount or percentage exceed a “reference price.” The
latter may be based on prior bids from a unit, or some direct
calculation of the unit’s production costs. New York
Independent System Operator, Inc., FERC Electric Tariff
(Services Tariff), Attachment H, “NYISO Market Monitoring
Plan” (“Attachment H”) at § 3.1.4. The impact screen tests
whether that price increment actually would cause market-
clearing prices to rise a certain amount or percentage over the
price that would prevail in the event of mitigation.
Under the MMM, if the conduct and impact tests were
met, the NYISO would consult with the supplier to request an
4
explanation of any legitimate basis for the unusually high bid
price. If dissatisfied with the explanation, the NYISO would
mitigate the bid price to a default bid equal to the supplier’s
reference price. The program would then calculate the
market-clearing price, using the supplier’s default bid in lieu
of its actual bid. But the supplier would, like all other
suppliers, be paid the market-clearing price for that period.
See Initial Order, 99 FERC ¶ 61,246 at 62,038, 61,041; see
also Attachment H at §§ 3, 4.2.
These procedures, as promulgated in 1999 and revised in
2000, see New York Indep. Sys. Operator, Inc., 89 FERC
¶ 61,196 (1999); New York Indep. Sys. Operator, Inc., 90
FERC ¶ 61,317 (2000), are dubbed “manual” because of built-
in lags. (They would be more accurately labeled “less
automated,” as the process is not done by hand.) Under them,
the NYISO has been unable to complete application of the
conduct and impact tests until after the end of a given day’s
Day-Ahead Market. As mitigation is not retroactive, the
NYISO had no remedy for high prices charged before the
analysis was complete. See New York Indep. Sys. Operator,
Inc., 95 FERC ¶ 61,471 at 62,688 (2001) (“June 2001
Order”); see also New York Indep. Sys. Operator, Inc., 97
FERC ¶ 61,155 at 61,682 (2001) (rejecting claim for
retroactive calculation of prices to compensate for high cost to
consumers). In practice the NYISO evidently enforced
mitigation under the “manual” scheme by cutting a supplier’s
price the following day, “if the bidding conduct continues and
market conditions [were] expected to be similar.” See May
17, 2001 letter to FERC from William F. Young, counsel for
NYISO.
In 2001 the NYISO sought to amend its services tariff,
pursuant to § 205 of the Federal Power Act, 16 U.S.C. § 824d,
proposing to “automate” its mitigation procedures and thus be
5
able to mitigate bids in real time rather than the following
day. See Mirant Americas Energy Marketing, L.P. v. New
York Indep. Sys. Operator, Inc., 95 FERC ¶ 61,189 at 61,670
(2001). The Automated Mitigation Procedure (“AMP”)
differs from the manual MMM in four important respects.
First, it doesn’t run the conduct and impact tests at all unless
the software determines that prices will exceed $150/MWh
without mitigation. See Initial Order, 99 FERC ¶ 61,246 at
62,036-37. Second, when those tests are run, mitigation will
occur automatically and immediately, substituting the
supplier’s reference prices for the bids actually made. See
June 2001 Order, 95 FERC ¶ 61,471 at 62,688. Third, bid
mitigation occurs if the bids of all suppliers running afoul of
the conduct test would in the aggregate trigger an impact on
market-clearing price, as opposed to the bidder-by-bidder
analysis under the manual system. See Initial Order, 99
FERC ¶ 61,246 at 62,041. Finally, any consultation with a
supplier over mitigation occurs only at the supplier’s request,
and most likely after mitigation has occurred.
In 2001 FERC twice approved the use of the AMP, but
limited its time span because of doubts about its suitability.
In approving the AMP for the peak demand of the summer
season, the Commission expressed concern “that the proposed
AMP may mitigate bids in situations where market power is
not the cause for high or volatile bids,” June 2001 Order, 95
FERC ¶ 61,471 at 62,690, and “that the proposal may not
provide for sufficient consultation with generators to
reasonably establish that particular bids were attempts to
exercise market power,” id. It observed that “automatic
market power mitigation may be most appropriate where it is
tied to structural market power problems . . . where generators
would otherwise be in a position to name their price.” Id.
FERC later approved the NYISO’s AMP plan for an
additional year, while instructing the NYISO to respond to
6
FERC’s concerns that the AMP would result in “unnecessary
mitigation.” New York Indep. Sys. Operator, Inc., 97 FERC
¶ 61,242 at 62,098 (2001).
In March 2002 the NYISO filed a comprehensive
market mitigation plan, which included the AMP. Edison
Mission objected, arguing that outside New York City the
AMP would mitigate when temporary shortages, rather than
market power, caused the price hikes. This would deprive
suppliers of scarcity rents and would deter new suppliers from
entering the market. FERC nonetheless approved the AMP,
for the first time imposing no time limit. See Initial Order, 99
FERC ¶ 61,246 at 62,052.
On Edison Mission’s application for rehearing, the
Commission adhered to its position, saying that Edison
Mission “submit[ted] no evidence that NYISO’s mitigation
plan keeps prices from rising to competitive levels.” New
York Indep. Sys. Operator, Inc. & Consolidated Edison Co.,
Inc., 103 FERC ¶ 61,291 at 62,136 (2003) (“Rehearing
Order”). The Commission also offered the theory that if the
markets outside New York City were competitive, “the AMP
should not be triggered and should have virtually no impact
on the markets,” and said that Edison Mission had “not made
its case” that “the AMP will trigger during competitive
conditions.” Id. at 62,139.
* * *
We first address a jurisdictional challenge by the
NYISO and other intervenors on behalf of FERC. Pointing
out that suppliers such as Edison Mission had for some time
been subject to the MMM, and had twice been subject to
temporary AMPs, they argue that the orders now before us
neither impose nor threaten Edison Mission with any new
7
harm. Alternatively, they argue that Edison Mission’s claims
here are simply a collateral attack on the prior MMM and
temporary AMP orders, for which the time to seek review has
expired. See also FERC Br. at 8; compare New York Indep.
Sys. Operator, Inc., 108 FERC ¶ 61,188, 2004 WL 1284385 at
*4 (¶ 16) (2004) (“August 2004 Order”).
These arguments are plainly inconsistent with the
NYISO’s reasoning in seeking the AMP—that it would tend
to cure the MMM’s deficiencies as a means of securing what
the NYISO regarded as adequate mitigation. By enforcing
mitigation far more rapidly, shifting the burden of initiating
consultation from the NYISO to suppliers, and making the
AMP permanent, the orders ramp up mitigation’s potential
effects on Edison Mission. Granted, both the manual MMM
and the two prior temporary AMPs pose the same conceptual
problem as the current permanent AMP—the failure to
distinguish between price increments due to scarcity (which
are completely consistent with perfect competition) and ones
due to exercises of market power (which are by definition
inconsistent with perfect competition). But the shift to what
FERC and the NYISO claimed was a more effective
mitigation program obviously increased the likely harm to
Edison Mission, as did establishment of the reformed program
on a permanent basis. See Competitive Telecommunications
Ass’n v. FCC, 309 F.3d 8, 11-12 (D.C. Cir. 2002); Public
Citizen v. Nuclear Regulatory Comm’n, 901 F.2d 147, 151
(D.C. Cir. 1990).
We thus turn to the merits, reviewing whether under
standard principles the Commission’s decisions were arbitrary
and capricious. See 5 U.S.C. § 706(2)(A). We find that
FERC did not “articulate a satisfactory explanation for its
action including a ‘rational connection between the facts
found and the choice made.’” Motor Vehicle Mfrs. Ass’n v.
8
State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)
(citation omitted).
Contrary to FERC’s statement in the Rehearing Order,
Edison Mission offered support for its claims. In the first
place, FERC appears not even to take issue with Edison
Mission’s contention that the New York power market outside
New York City is “workably competitive.” Before the
Commission, Edison Mission pointed out that an affidavit of
the NYISO’s own expert, Dr. David B. Patton, acknowledged
such competition. See Protest of Aquila Merchant Services,
Inc., Edison Mission Energy Inc., and Edison Mission
Marketing & Trading, Inc. of the Compliance Filing of the
New York Independent System Operator, Inc. Regarding
Comprehensive Market Mitigation Measures and Request for
Interim Extension of Existing Automated Mitigation
Procedure (“Edison Mission Protest”) at 26 (citing affidavit of
Dr. Patton).
The Commission’s brief responds by noting that Dr.
Patton plainly did not regard his statement as inconsistent
with occasional exercises of market power, and a need to
protect against them, as shown by his advocacy of the AMP.
See FERC Br. at 28-29. This isn’t much of an answer. While
the Commission can obviously use a definition of workably
competitive that allows for occasional exercises of market
power, the presence of workable competition would suggest
that many, perhaps most, possibly all, of the bids triggering
mitigation will be due not to market power but to temporary
scarcity. At least this would be so unless the conduct-impact
tests somehow differentiated between bid increments due to
scarcity and ones due to market power—which the
Commission doesn’t claim. This inability to distinguish
presumably explains the Commission’s earlier
acknowledgment that “automatic market power mitigation
9
may be most appropriate where it is tied to structural market
power problems . . . where generators would otherwise be in a
position to name their price.” June 2001 Order, 95 FERC
¶ 61,471 at 62,690.
In addition to the natural inference that in conditions
of workable competition the application of a “conduct” test
based on production cost would catch scarcity-based bid
hikes, Edison Mission offered a plausible example. Attached
to the Edison Mission Protest is the Affidavit of Abram Klein
(“Klein Affidavit”), pointing out that Day-Ahead Market
prices for the highest-priced six hours of August 9, 2001, a
day of extreme scarcity, averaged $762/MWh, well below
New York’s price cap of $1,000/MWh. Klein Affidavit at 2,
7. (The price cap is an additional limit on prices, applying
even if price increments are scarcity-based but where (the
Commission assumes) demand is completely inelastic. See
New York Indep. Sys. Operator, Inc., 97 FERC ¶ 61,095,
61,496 (2001).) Even though the AMP was not triggered,
Klein plausibly—and without contradiction—attributed that to
generators’ awareness of the AMP and anxiety to avoid the
effect of its rather serious penalty provisions. Klein Affidavit
at 7; for details of penalty provisions, see Attachment H at
§ 4.3.
If prices are suppressed in a competitive market, a
natural inference is that suppliers who could otherwise
profitably enter will be deterred from entry. Certainly FERC
offered nothing to contradict the analyses to that effect offered
by Klein and by Dr. Larry E. Ruff. See Affidavit of Larry E.
Ruff (“Ruff Affidavit”) at 7; Klein Affidavit at 3; see also
Edison Mission Protest at 27-31.1 In addition, Edison Mission
1
We note with dismay that Edison Mission’s briefs, though
often referring to the specific points made in the Klein and Ruff
affidavits, virtually never do us the courtesy of citing the relevant
pages. Such a violation of Rule 28(a)(9)(A) of the Federal Rules of
10
pointed to statements by the NYISO’s chief executive officer
warning that “New York remains headed towards a very
serious power shortage.” Id. at 34.
FERC responded to Edison Mission’s concerns with
vague generalities. It summarized the arguments of both
parties and then perfunctorily concluded that the NYISO had
the better argument—with little or no further explanation.
See, e.g., Initial Order, 99 FERC ¶ 61,246 at 62,041-42 (“We
accept NYISO’s contention that review of bids individually in
the AMP is impractical if not impossible to implement and
therefore will not require the changes requested by
intervenors.”). Nowhere did it seriously attempt to refute the
analysis of Edison Mission’s experts. And nowhere did
FERC try to reconcile its embrace of the AMP here with its
apparent acceptance of the workably competitive character of
New York power markets outside New York City, or with its
earlier apparent view that the AMP was too strong medicine
for markets without material structural defects. Finally, one
of its arguments for denying relief—the suggestion that if the
markets outside New York City were competitive, “the AMP
should not be triggered and should have virtually no impact
on the markets,” Rehearing Order, 103 FERC ¶ 61,291 at
62,139—appears simply to deny that scarcity can have an
impact on competitive market prices.
The AMP may well do some good by protecting
consumers and utilities against price increments caused by the
exercise of market power. But the Commission gave no
reason to suppose that it does not also wreak substantial
harm—in curtailing price increments attributable to genuine
scarcity that could be cured only by attracting new sources of
supply. “[T]he crucial question—one the Commission left
unaddressed—is whether the program FERC approved will do
Appellate Procedure is sanctionable under Rule 46(c).
11
more good than harm.” Maryland People’s Counsel v. FERC,
761 F.2d 780, 788-89 (D.C. Cir. 1985) (internal citation and
quotation marks omitted). And the Commission’s
contradiction of its prior rulings acknowledging the potential
ill effects of forcing down prices absent structural market
distortions is the epitome of agency capriciousness. See
Motor Vehicle Mfrs. Ass’n, 463 U.S. at 57.
FERC finally defends the orders by arguing that they
only “allow[ed] the AMP to remain in effect for a limited
period” while the Commission gathered additional real-world
data about how the AMP operates, evidently through a report
that FERC required the NYISO to file by December 2, 2004.
FERC Br. at 35; see also Rehearing Order, 103 FERC ¶
61,291 at 62,139 (“The Commission did not accept AMP as a
permanent measure.”). This claim of limited duration appears
based on FERC’s promise to reconsider the AMP in the
future; but that leaves the AMP to operate with as unlimited a
time span as any rule that an agency may reconsider at a later
date—i.e., all agency rules except for ones that really are
temporary.
The Commission’s orders are vacated and the case
remanded.
So ordered.