Keyspan-Ravenswood, LLC v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 14, 2006 Decided Jan 12, 2007

No. 05-1332

KEYSPAN-RAVENSWOOD, 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 M. Simon argued the cause for petitioner. With
him on the briefs was Robert C. Fallon.

Judith A. Albert, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on the
brief were John S. Moot, General Counsel, and Robert H.
Solomon, Solicitor.

Neil H. Butterklee argued the cause for intervenors
Consolidated Edison Company of New York, Inc., et al. With
him on the brief were James J. Dixon, Elias G. Farrah, and
 2

Rebecca J. Michael in support of respondent.

William F. Young, Susan E. Dove, and Carl F. Patka were
on the brief for intervenor New York Independent System
Operator, Inc. in support of respondent.

Before: HENDERSON and TATEL, Circuit Judges, and
SILBERMAN, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge: Petitioner, an owner and operator
of electric generation facilities in New York City, appeals an
order of the Federal Energy Regulatory Commission, arguing
that the Commission acted arbitrarily and capriciously in
deciding that the New York Independent System Operator
(NYISO) had not violated the filed rate doctrine in
establishing a pair of formulae for translating “installed
capacity” into “unforced capacity.” Because we agree, we
vacate and remand.

I.

The New York Independent System Operator is a not-for-
profit organization charged with administering New York’s
electricity markets. Among other duties, NYISO enforces
rules designed to ensure the reliability of the state’s electricity
grid. One way NYISO does this is by requiring electricity
retailers (referred to as ‘load-serving entities’ or LSEs) to
purchase capacity–as opposed to actual electricity–from
generators in regularly held auctions. The purchase of
capacity differs from the purchase of electricity. Like an
option contract, the LSE compensates the generator for the
option of buying a specified quantity of power irrespective of
whether it ultimately buys the electricity.
 3

NYISO calculates the amount of capacity LSEs must
purchase by multiplying each LSE’s expected peak load by
one plus a figure called the installed reserve margin, which is
set by the New York State Reliability Council (NYSRC), a
non-profit corporation established by NYISO. During the
summer of 2002, the period at issue here, NYSRC set the
installed reserve margin at 18%. For instance, if an LSE
expected that the most power it would need–its peak
load–would be 1,000 MW, then that LSE would have to
acquire access to 1,180 MW of capacity in order to maintain a
cushion against shortfall. NYSRC sets the installed reserve
margin at a level necessary to prevent system failure from
occurring (probabilistically) more than once every ten years.

Until 2001, NYISO denominated the LSEs’ capacity
obligation in terms of “installed capacity,” i.e., the amount of
power a generating facility can produce under ideal
conditions. This approach had a significant shortcoming: it
gave generators little incentive to improve their reliability,
leaving them free to sell their entire quantity of installed
capacity regardless of how often their facilities underwent
“forced” outages–that is, unplanned outages such as
mechanical breakdowns and the like. NYISO sought to
correct this problem by requiring LSEs to purchase “unforced
capacity” instead of installed capacity. For those unfortunate
souls not steeped in the vernacular of electricity regulation, a
generator’s unforced capacity (UCAP) is its installed capacity
(ICAP) discounted or “de-rated” by its forced outage rate (or
equivalent forced outage rate demand (EFORd)). The forced
outage rate equals the historical percentage of the generator’s
maximum output lost to forced outages when such output is
demanded. The translation of installed into unforced capacity
can be represented mathematically as follows:
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UCAP = ICAP x (1 – EFORd)

For example, consider a generating facility with installed
capacity of 1,000 MW that has historically lost 10% of its
output to forced outages. That generator would have unforced
capacity of 900 MW. If it could have sold 1,000 MW in the
capacity auctions before the switch from installed to unforced
capacity, then after the switch it could sell only 900 MW,
giving it an incentive to reduce its forced outage rate.

Having reduced the quantity of capacity generators could
sell, NYISO also reduced the quantity of capacity LSEs had to
purchase in order to reflect that they were purchasing
unforced rather than installed capacity. Critical to the issue in
this case, NYISO used different methodologies for making the
two translations. For translating generators’ installed capacity
into unforced capacity, NYISO directed–in revisions to its
Services Tariff filed in July 2001–that the forced outage rate
would be calculated from the past twelve months of outage
data for each generator. Nothing in the tariffs, however,
specified how the LSEs’ capacity obligation would be
translated, only that it would be done “in accordance with the
ISO procedures.” J.A. 487. NYISO later filled this gap in the
“ICAP Manual,” a document that specified various aspects of
the new system and that had been prepared as part of a
months-long stakeholder process. The ICAP Manual
explained that for purposes of translating installed capacity
into unforced capacity for LSEs the forced outage rate would
be “based on the data used to determine the Installed Reserve
Margin by the NYSRC,” J.A. 485, a formulation understood
to mean that NYISO would discount the LSEs’ installed
capacity requirement by the average forced outage rates
generators had experienced over the past ten years.
 5

Because forced outages had declined significantly over
the ten years leading up to 2002, measuring forced outage
rates over two different time periods produced substantially
different results: the average generator’s 12-month forced
outage rate was roughly 5%, while the 10-year outage rate
used by the LSEs was roughly 10%. Using a higher forced
outage rate for LSEs than for generators effectively reduced
the amount of capacity LSEs had to purchase, regardless of
whether capacity is measured in terms of installed or unforced
capacity. To see why, imagine a market that, for ease of
illustration, has LSEs obligated collectively to buy 10,000
MW of installed capacity and generators collectively
possessing 10,000 MW of installed capacity. In this simple
scenario, supply and demand are in balance. If, however,
installed capacity is translated into unforced capacity using a
10% outage rate for buyers and a 5% outage rate for sellers,
the balance shifts. Under such a scenario, LSEs must
purchase 9,000 MW of unforced capacity, but generators can
sell 9,500 MW of unforced capacity, creating a capacity
surplus of 500 MW or about 5% of total supply.

In other words, using a lower forced outage rate for
generators than for LSEs decreases the quantity of capacity
sold in the market. This decrease can be measured by
translating the quantity of unforced capacity sold in the above
hypothetical back into installed capacity. Rearranging the
equation produced above yields a formula for doing so:

(1) UCAP = ICAP x (1 – EFORd)

(2) ICAP = UCAP
(1 – EFORd)

The generators in this example sold 9,000 MW of unforced
capacity and were de-rated using a 5% forced outage rate.
 6

Plugging those numbers into the above equation yields 9,474
MW of installed capacity sold, substantially less than the
10,000 MW sold before the application of differential forced
outage rates.

Following the summer of 2002, the NYSRC and NYISO
staffs produced calculations using the same logic as above
showing that the use of different translation methodologies for
generators and LSEs had reduced the quantity of installed
capacity sold from 35,960 MW, the amount required by the
NYSRC formula, to 34,189 MW, a 1,771 MW reduction. As
a result, the NYSRC and NYISO staffs concluded, the actual
statewide installed reserve margin had fallen from the
NYSRC-specified level of 18% to 12.2%. NYISO’s
Business Issues Committee later wrote that “the unforeseen
and unintended consequence of the current translation
methodology is a shortfall of Installed Capacity and therefore
an inability to comply fully with the New York State
Reliability Council’s Reliability Rules.” J.A. 115.
Accordingly, in the fall of 2002, NYISO switched to a system
in which both generators and LSEs measure forced outage
rates over 12-month periods.

Petitioner Keyspan-Ravenswood (Ravenswood) generates
electric power and sells capacity in New York City. In 2004,
Ravenswood filed a complaint with the Commission claiming
that NYISO had violated Section 205 of the Federal Power
Act (FPA), which requires public utilities to file with the
Commission all “practices” and “regulations” affecting their
“rates and charges” and mandates that public utilities may
only depart from such filed rates “after sixty days’ notice to
the Commission and to the public.” 16 U.S.C. § 824d(c), (d).
Ravenswood argued that in three separate filings NYISO had
obligated itself to enforce NYSRC’s installed capacity
requirements, yet by using a lower forced outage rate for
 7

generators than for LSEs in the summer of 2002, NYISO had
fallen well short of NYSRC’s installed capacity requirement,
thus violating the FPA. Ravenswood presented economic
evidence purporting to show that, by both reducing the
quantity of capacity sold and, through the law of supply and
demand, reducing the market price of capacity, NYISO had
caused it to lose $23.3 million in sales, which it asked the
Commission to order in refunds.

Rejecting Ravenswood’s complaint, the Commission
stated that “the rates charged by NYISO . . . conformed with
the Commission’s applicable orders governing NYISO’s
ICAP and UCAP requirements, and were consistent with
NYISO’s then-effective tariffs, rate schedules and manuals.”
Keyspan-Ravenswood, LLC v. N.Y. Indep. Sys. Operator, 110
F.E.R.C. ¶ 61,116 at 61,471 (2005) (“Complaint Order”). The
Commission explained that it had “approved” the
methodologies employed by the Commission in an earlier set
of orders referred to as the “UCAP Orders,” which rejected
Ravenswood’s challenge to NYISO’s 2001 filing that effected
the overall change from installed capacity to unforced
capacity. Id. at 61,475 (citing N.Y. Indep. Sys. Operator, 96
F.E.R.C. ¶ 61,251 (2001), order on reh’g, 98 F.E.R.C. ¶
61,180 (2002), vacated sub nom. Keyspan-Ravenswood, LLC
v. FERC, 348 F.3d 1053 (D.C. Cir. 2003), on remand sub
nom. N.Y. Indep. Sys. Operator, 108 F.E.R.C. ¶ 61,309
(2004)). The Commission also appeared to rely on the fact
that the ICAP Manual required NYISO to use different forced
outage rates for LSEs and for generators. Complaint Order at
61,475.

Ravenswood petitioned for rehearing, arguing that the
UCAP Orders were irrelevant. Those orders, Ravenswood
claimed, concerned another aspect of NYISO conversion from
installed to unforced capacity and had nothing to do with
 8

NYISO’s decision to use different forced outage rates for
LSEs and generators. Responding to the Commission’s
reliance on the ICAP Manual, Ravenswood argued that the
manual could not possibly cure a violation of the filed rate
doctrine because NYISO had never filed it with the
Commission.

The Commission denied rehearing, basing its decision on
slightly different reasons than it had given in the Complaint
Order. Keyspan-Ravenswood v. N.Y. Indep. Sys. Operator,
111 F.E.R.C. ¶ 61,336 (2005) (“Rehearing Order”). No
longer insisting that the UCAP Orders had “approved”
NYISO’s translation methodology, the Commission stated
only that those orders “did not prescribe the use of
Ravenswood’s recommended particular methodology.”
Rehearing Order at 62,488. The Commission also de-
emphasized the importance of the ICAP Manual, explaining
that it had not “solely rel[ied] on the ICAP Manual as a basis
for its conclusion,” but rather that “the Commission primarily
relied on the fact that what NYISO did was not only
consistent with the ICAP Manual, but also was consistent
with Commission orders and was not inconsistent with any
requirement in NYISO’s tariffs.” Id. at 62,487. Finally,
introducing an alternative ground for its decision, the
Commission asserted that even had NYISO violated its tariff
obligations, the Commission would have ordered no refunds
because Ravenswood failed to prove its injury with sufficient
“clarity.” Id. at 62,488.

Once again, Ravenswood petitioned for rehearing,
challenging the Commission’s new rationale that the company
had failed to prove its injury. Without reaching the merits, the
Commission denied rehearing, resting on the proposition,
unchallenged here, that “[t]he Commission does not allow
rehearing of an order denying rehearing.” Keyspan-
 9

Ravenswood, LLC v. N.Y. Indep. Sys. Operator, 112 F.E.R.C.
¶ 61,153 at 61,885 (2005).

Ravenswood petitions for review, claiming that the
Commission failed to confront its argument that NYISO’s use
of two different translation methodologies violated NYISO’s
filed commitment to enforce NYSRC’s installed capacity
requirements. We review the Commission’s decisions under
the arbitrary and capricious standard, affirming if the
Commission has articulated a “rational connection between
the facts found and the choice made.” Motor Vehicle Mfrs.
Ass’n v. State Farm Mut. Auto Ins. Co., 463 U.S. 29, 43
(1983) (internal quotation marks omitted).

II.

As a public utility regulated under the FPA, NYISO may
only change its rates or “practices . . . affecting such rates” by
first filing those rates with the Commission. 16 U.S.C. §
824d(c). The Commission’s regulations require that “[e]very
public utility shall file with the Commission . . . full and
complete rate schedules . . . clearly and specifically setting
forth all rates and charges . . . [and the] practices, rules and
regulations affecting such rates and charges.” 18 C.F.R. §
35.1(a).

The Commission does not dispute that, despite the fact
that NYISO switched the requirement it imposed on LSEs and
generators from installed to unforced capacity, NYISO
nonetheless had a filed obligation to enforce NYSRC’s
installed capacity requirements, which required 35,960 MW
of installed capacity in New York State during the summer of
2002. Complaint Order at 61,473 (“The three Commission-
approved rate schedules applicable to NYISO required
NYISO to enforce ICAP requirements for 2002 for both
 10

statewide and In-City generation.”); see also Agreement
Between the New York Independent System Operator and
New York State Reliability Council § 3.4 at Pet’r’s Br.
Attach. at C4 (“The ISO shall require LSEs … to maintain
appropriate levels of Installed Capacity consistent with the
Reliability Rules.”). Nor does the Commission dispute the
analysis, explained supra, that the use of different forced
outage rates for generators and for LSEs effectively reduced
the quantity of installed capacity purchased during the
summer of 2002 from 35,960 MW to 34,189 MW. Given
these two undisputed facts, and given that NYISO never filed
its translation methodology with the Commission, we have no
trouble concluding that the Commission acted arbitrarily and
capriciously in ruling that NYISO had not violated the filed
rate doctrine. The Commission and the intervenors advance
several additional arguments, all unpersuasive.

The Commission’s argument that “nothing in the
NYSRC’s Reliability Rules . . . [or] the tariffs themselves
expressly spell out the appropriate methodology” misses the
point. Rehearing Order at 62,487. Ravenswood has never
argued that NYISO must adopt any particular method for
translating installed capacity into unforced capacity, only that
NYISO may not adopt a method that causes it to violate its
filed commitment to enforce NYSRC’s installed capacity
requirements.

The Commission also insists that it properly relied on the
ICAP Manual because the Manual had been “incorporated by
reference in the Service Tariff.” Resp’t’s Br. 21; see also
Complaint Order at 61,474. In support, the Commission
points to a passage in the 2001 Services Tariff stating that
NYISO shall translate the installed capacity requirement into
an unforced capacity requirement “in accordance with the ISO
Procedures.” J.A. 487. We fail to see, and the Commission
 11

fails to explain, how the unelaborated reference to “ISO
Procedures” can be understood as “clear[] and specific[]”
notice that NYISO intended to follow the translation
methodology in the yet-to-be-adopted ICAP Manual.
Moreover, as Ravenswood points out, the ICAP Manual
nowhere states expressly that the forced outage rate used by
LSEs will be measured over ten years. Rather, the Manual
cryptically says that the translation would be “based on the
data used to determine the Installed Reserve Margin by the
NYSRC,” J.A. 485, thus placing still more distance between
the vague reference to “ISO Procedures” and the regulatory
obligation that NYISO “clearly and specifically” set forth all
“practices, rules and regulations affecting [its] rates and
charges.” 18 C.F.R. § 35.1(a).

Next, the Commission suggests that NYISO had no need
to file its method for translating installed capacity into
unforced capacity because requiring such detail in a filing
goes beyond the “rule of reason.” In City of Cleveland v.
FERC, 773 F.2d 1368, 1376 (D.C. Cir. 1985), upon which the
Commission relies, we held that utilities must file “only those
practices that affect rates and service significantly, that are
realistically susceptible of specification, and that are not so
generally understood in any contractual arrangement as to
render recitation superfluous.” A cursory review of the facts
of this case shows why City of Cleveland’s exception to the
filing requirement is inapplicable. Analysis by NYISO’s own
staff demonstrates that by reducing the installed reserve
margin by nearly a third from 18% to 12.2% NYISO’s
translation methodology significantly affected its compliance
with the Reliability Rules. Just as clear, the translation
methodology is “susceptible of specification”–the rule that
forced outage rates be measured over a one-year period for
generators and a ten-year period for LSEs is, to say the least,
easily reduced to writing.
 12

Appearing as intervenors, NYISO and a coalition of LSEs
argue that the Commission approved NYISO’s translation
methodology in the UCAP Orders, a rationale that the
Commission appeared to advance in the Complaint Order. As
the Commission concedes in its brief, however, the issue of
how NYISO should translate quantities of installed capacity
into quantities of unforced capacity was never raised in those
orders. Rather, those orders concerned a different aspect of
the conversion from installed to unforced capacity. In the
capacity market, NYISO enforces a price cap designed to
prevent abuse of market power among capacity sellers.
Because the capacity sellers had, by definition, less unforced
capacity to sell than they had installed capacity, NYISO
needed to raise the price cap to account for that reduction.
Concerning only the method for adjusting that price cap, the
UCAP Orders have no direct bearing on the issue in this case,
i.e., the translation of installed capacity quantities into
unforced capacity quantities. See generally The UCAP
Orders, supra.

The Commission and the intervenors also suggest that we
excuse NYISO’s violation of the filed rate doctrine because
Ravenswood participated in the stakeholder process that
developed the ICAP Manual. Ravenswood’s participation in
the development of the ICAP Manual, the character of which
is not entirely clear from the record, may have relevance to
the Commission’s refund inquiry. See Towns of Concord v.
FERC, 955 F.2d 67, 75 (D.C. Cir. 1992) (describing refunds
as “a form of equitable relief”). But the Commission provides
no reason to believe that Ravenswood’s participation in such a
stakeholder process relieved NYISO of its statutory obligation
to file significant changes to its rates and “practices …
affecting such rates.” In any event, the Commission clearly
stated in the Compliance Order that it reached its decision
without regard to the argument that Ravenswood
 13

“sidestepp[ed] NYISO’s stakeholder process.” Complaint
Order at 61,475.

III.

Ravenswood also challenges the Commission’s
alternative ground for its decision, articulated for the first time
in the Rehearing Order, that even had NYISO violated the
filed rate doctrine, it would deny Ravenswood the refunds it
seeks. The Commission’s explanation consisted, in its
entirety, of the following:

[H]ad NYISO actually used the ICAP to
UCAP translation supported by Ravenswood, it
still remains unclear what prices would
actually have been paid by LSEs because of the
nature of the translation and the auction. This
lack of clarity, and no instances of reliability
problems arising from capacity shortages
during the Summer 2002 Capability Period,
leads the Commission to conclude that, even if
we agreed with Ravenswood that NYISO's
actions violated its tariffs, Ravenswood still
would not have met its burden to show that it
was entitled to any refunds, let alone the $23.3
million in refunds that it requested.

Rehearing Order at 62,488. This brief passage contains three
shortcomings that leave us unable to “discern a reasoned path
to the decision the Commission reached.” East Tex. Elec.
Coop., Inc. v. FERC, 218 F.3d 750 (D.C. Cir. 2000) (internal
quotation marks and alterations omitted). First, the
Commission refers only to its uncertainty regarding what the
price of capacity would have been had NYISO used uniform
methods for translating installed capacity into unforced
 14

capacity. But Ravenswood also claims to be injured by the
reduction in quantity of capacity sold, a figure precisely
calculated by NYISO’s own staff. Specifically, in its
economic analysis presented to the Commission, Ravenswood
claimed that $8.1 million of its losses arose from reduction in
the price of capacity and that the remaining $15.2 million
arose purely as a result of lost sales, irrespective of changes in
price. By focusing exclusively on uncertainty relating to
price, the Commission’s explanation for denying the entire
$23.3 million in refunds remains incomplete.

Second, as to the uncertainty regarding the effect of
NYISO’s translation methodology on the price of capacity,
the Commission offered no reasons for rejecting
Ravenswood’s extensive economic analysis. We will defer to
the Commission’s judgment in technical matters within its
expertise, but only when the Commission has in fact exercised
its judgment. See, e.g., Pub. Citizen Health Research Group
v. Tyson, 796 F.2d 1479, 1505 (D.C. Cir. 1986) (“While we
acknowledge our deference to the agency’s expertise in most
cases, we cannot defer when the agency simply has not
exercised its expertise.”). The Commission’s conclusory
statement that it “remains unclear what prices would actually
have been paid by LSEs” fails to clear this diminutive hurdle.

Finally, the Commission’s fleeting reference to the
absence of reliability problems during the summer of 2002
requires further explanation. Although this clause comes in
the middle of a sentence concluding that Ravenswood failed
to meet its burden to demonstrate its entitlement to refunds,
the clause appears to speak to a different concern. Namely,
the Commission seemed to be implying a policy judgment
that violations of the Reliability Rules should be remedied
only when reliability problems actually arise. It is true that
the Commission has considerable discretion to deny refunds
 15

for reasons of either policy or equity. See Towns of Concord,
955 F.2d at 75-76. But it is also true that “when deciding
whether to order refunds, FERC must provide a reasonable
explanation for its decision: it must show that it has
considered relevant factors and struck a reasonable
accommodation among them.” Consol. Edison Co. v. FERC,
347 F.3d 964, 972 (D.C. Cir. 2003) (internal quotation marks
and alteration omitted). Here, the Commission’s brief
statement raises some fairly obvious concerns. To name just
one, Ravenswood argued both in its initial complaint and on
appeal that an important reason for the absence of reliability
problems is that NYISO ordered it to produce electricity at
several points during that summer–a fact that appears
undisputed in the record. Thus, to rely upon the absence of
reliability problems as a reason for denying Ravenswood
refunds seems–without further explanation–inequitable if not
Kafkaesque. The Commission will have the opportunity to
address this and other questions on remand.

IV.

The petition for review is granted and this case is
remanded to the Commission for further proceedings
consistent with this opinion.

So ordered.