Maryland Public Service Commission v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 15, 2010 Decided February 8, 2011

No. 09-1296

MARYLAND PUBLIC SERVICE COMMISSION AND NEW JERSEY
BOARD OF PUBLIC UTILITIES,
PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

AMERICAN MUNICIPAL POWER, INC., ET AL.,
INTERVENORS

On Petition for Review of Orders
of the Federal Energy Regulatory Commission

Randall L. Speck argued the cause for petitioners. With
him on the briefs was David L. Cousineau.

Robert A. Weishaar Jr., Robert Weinberg, Randolph Lee
Elliott, Susan N. Kelly, Paula M. Carmody, William F. Fields,
Charles F. Wheatley Jr., David R. Straus, and Stephanie A.
Conaghan were on the brief for intervenors PJM Industrial
Customer Coalition, et al. in support of petitioners. Joshua E.
Adrian entered an appearance.
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Carol J. Banta, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on
the brief were Thomas R. Sheets, General Counsel, Robert H.
Solomon, Solicitor, and Jennifer S. Amerkhail, Attorney.

Paul M. Flynn argued the cause for intervenor PJM
Interconnection, L.L.C. in support of respondent. With him
on the brief was Barry S. Spector.

John N. Estes III. argued the cause for intervenors PJM
Power Providers Group, et al. in support of respondent. With
him on the brief were John L. Shepherd, Ashley C. Parrish,
David G. Tewksbury, Richard Paul Bress, Randall Verne
Griffin, John Longstreth, Donald A. Kaplan, Kenneth R.
Carretta, David O. Dardis, Cortney Madea, A. Karen Hill,
Stephen L. Huntoon, Kirk J. Emge, and Michael J. Rustum.
James C. Beh, Shay Dvoretzky, Nicholas G. Terris, and Paul
F. Wight entered appearances.

Before: ROGERS and GRIFFITH, Circuit Judges, and
EDWARDS, Senior Circuit Judge.

Opinion PER CURIAM.

PER CURIAM: Petitioners, the Maryland Public Service
Commission and the New Jersey Board of Public Utilities,
challenge higher electricity rates that were the result of a new
pricing model the Federal Energy Regulatory Commission
adopted to encourage increased investment in capacity. We
deny the petition for review because the Commission
adequately explained why the new rates were just and
reasonable.

Respondent-Intervenor PJM Interconnection, LLC,
(“PJM”) is the regional transmission organization for thirteen
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mid-Atlantic states and the District of Columbia. Among its
duties, PJM is responsible for preventing interruptions to the
delivery of electricity in that region by ensuring that its
system has sufficient generating capacity. In August 2005,
PJM filed a proposal to replace its old pricing model with
what it called the Reliability Pricing Model (RPM), arguing
that the old model did not sufficiently encourage investment
in electrical capacity. FERC agreed, and adopted the RPM
with some modifications. See PJM Interconnection, L.L.C.,
115 FERC ¶ 61,079 (2006) (finding preexisting pricing model
to be unjust and unreasonable); PJM Interconnection, L.L.C.,
117 FERC ¶ 61,331 (2006) (approving, with conditions, the
RPM); PJM Interconnection, L.L.C., 119 FERC ¶ 61,318
(2007) (clarifying nature and extent of order approving the
RPM). Petitioners argue that the RPM allowed suppliers of
electric capacity to exercise their market power to set
artificially inflated prices in auctions held before May 2008.

The Commission anticipated concerns about the
suppliers’ market power and adopted three measures to
mitigate this market power. First, the Commission oversees
the availability of physical capacity and, as a general matter,
requires that suppliers offer all available capacity at RPM
auctions. Second, where the Commission determines that a
supplier has market power, it requires PJM to substitute a
proxy bid, determined by a formula that the RPM provides, in
the place of the supplier’s actual offer. This pushes high bids
down to more competitive levels. And third, what is most
relevant to this petition, the RPM encourages the entry of new
suppliers into the market with auctions that set rates three
years in advance of delivery. For example, the May 2008
auction set the rate for the delivery year beginning in May
2011. This lag time allows competition from new suppliers
that lack the capacity to deliver electricity now but could
develop that capacity within three years of winning a bid.
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Of course, the protection of the three-year lag would not
be available for the sale of electricity that needed to be
delivered before May 2011, and the Commission allowed
auctions for those deliveries to proceed under the RPM with a
shorter lag. Petitioners claim that this shorter lag time allowed
suppliers to exercise market power to artificially inflate prices
in those auctions. They fault the Commission for failing to
determine whether the challenged rates were just and
reasonable, and for relying instead on the conclusion that the
provisions of the RPM were followed. 1

But the Commission did determine that the rates were
just and reasonable. It reviewed analytical reports from expert
consultants retained by the states, PJM’s Market Monitor
(who reviewed the auctions and specifically addressed the

1
As a preliminary matter, the Commission contends that under our
decision in Blumenthal v. FERC, 552 F.3d 875 (D.C. Cir. 2009), it
is not enough for a petitioner to show that the challenged rates are
not just and reasonable; the petitioner must also propose rates that
are. See id. at 885. But the language cited by the Commission was
unnecessary to our holding and inaccurate insofar as it implied that
a challenge to rates must propose alternative rates that are just and
reasonable. As the Federal Power Act clearly provides, “[w]henever
the Commission, after a hearing held upon its own motion or upon
complaint, shall find that any rate . . . [under its jurisdiction] is
unjust, unreasonable, unduly discriminatory or preferential, the
Commission shall determine the just and reasonable rate . . . to be
thereafter observed and in force, and shall fix the same by order.”
16 U.S.C. § 824e(a) (emphasis added); see also Tenn. Gas Pipeline
Co. v. FERC, 860 F.2d 446, 454 (D.C. Cir. 1988) (“Once [FERC
determines a rate is unjust], the Commission is required to reach a
further determination: the just and reasonable rate to be fixed in
place of either an unlawful proposed or existing rate.”). It is the
Commission’s job—not the petitioner’s—to find a just and
reasonable rate.
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issue of market power), and an independent consulting group
hired by PJM. Only then did it conclude that there was no
reason to believe that market power was being exercised. The
Commission found instead that prices went up in some areas
because the RPM accounted for transmission constraints that
increased the costs of delivering electricity to those areas. The
old pricing model, by contrast, had assumed that capacity
created anywhere within PJM’s territory could readily be
transmitted to any other point in that territory, an assumption
that created artificially low prices for areas facing
transmission constraints. The Commission recognized that the
price hikes petitioners challenge would encourage much
needed long-term investment in energy capacity. And there is
substantial evidence the Commission was right. The PJM’s
independent report found that the RPM spurred an
unprecedented amount of potential new resources—including
approximately 33,000 MW of new generation projects—and
that reliability had been increased to meet the PJM’s target
levels.

Given this evidence, we conclude that the Commission
had a substantial basis on which to conclude that the RPM
was an appropriate tool for increasing reliability in electricity
markets, that the RPM did precisely what it was intended to
do, even during the transition period before the three-year lag
could take effect, and that the price hikes in its wake were
attributable to legitimate causes, not the suppliers’ exercise of
market power. See, e.g., FPL Energy Maine Hydro LLC v.
FERC, 287 F.3d 1151, 1160 (D.C. Cir. 2002) (stating that the
Commission’s factual findings are conclusive if supported by
substantial evidence, which “requires more than a scintilla,
but can be satisfied by something less than a preponderance of
the evidence”). As we have stated before, “[b]ecause issues of
rate design are fairly technical and, insofar as they are not
technical, involve policy judgments that lie at the core of the
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regulatory mission, our review of whether a particular rate
design is just and reasonable is highly deferential.” Pub. Utils.
Comm’n v. FERC, 254 F.3d 250, 254 (D.C. Cir. 2001)
(internal quotation marks omitted). Accordingly, we uphold
the Commission’s orders under the arbitrary and capricious
standard. See, e.g., Sithe/Independence Power Partners v.
FERC, 165 F.3d 944, 948 (D.C. Cir. 1999).

For the foregoing reasons, the petition for review is

Denied.