Limited Court Challenge Fails to Stop NYISO Lower Hudson Capacity Zone; Prices Rising

The New York Independent System Operator (NYISO), which is a FERC regulated utility, amended its tariff to create a new capacity market zone in the Lower Hudson Valley.  The NYISO’s tariff requires that a new zone be created when the total transmission transfer capability is insufficient to allow all of the capacity resources in a pre-existing zone to be deliverable throughout the pre-existing zone.  The capacity markets, a FERC deregulatory innovation, have drawn considerable criticism. See

COURTS AND FERC CONSIDER CHALLENGES TO STATE EFFORTS TO DETERMINE ELECTRIC CAPACITY RESOURCES AND PRICES, NYUP  January 22, 2014.  

SECOND CIRCUIT BARS CONSUMER ANTITRUST CLAIMS AGAINST NYISO CAPACITY MARKET GAMERS UNDER STANDING AND FILED RATE DOCTRINES, NYUP  October 20, 2012.

FEDERAL COURT APPROVES SETTLEMENT OF ANTITRUST CASE INVOLVING THE USE OF DERIVATIVES TO SUPPORT MARKET GAMING IN THE NYISO CAPACITY MARKET, NYUP August 7, 2012

There was a huge uproar when the public learned that the new NYISO capacity zone for the Lower Hudson Valley will substantially raise electric bills for consumers in the area — 6% for residential customers and 10% for industrial.  Responding in outrage to the FERC’s action, New York’s Public Service Commission (PSC) and distribution utilities (a/k/a the investor owned utilities) joined in a chorus of opposition, and sought a rehearing based on a variety of arguments challenging the need for the new market zone.  In a May 27, 2014 Order on rehearing, the FERC basically upheld the NYISO tariff creating the capacity zone.

So the PSC and utilities then went to court seeking to reverse FERC’s approval of the NYISO tariff.   The court challenge to the new FERC-approved NYISO capacity zone in the Hudson Valley was rejected in an April 2, 2015 decision of the Court of  Appeals for the Second Circuit in Manhattan.    See Craig Wolf, Power prices point upward, for now, April 9, 2015; see, also, William Opalka, Appeals Court Ratifies New York Capacity Zone, RTO Insider, April 14, 2015.

While it is possible to seek an en banc rehearing by the Second Circuit or seek Supreme Court review, the prospects of success on that are very low.  Central Hudson Gas & Electric’s representative put it well:

“We are disappointed, as the capacity zone has unfairly and artificially raised energy prices for homes and businesses in our service territory. We are reviewing the court’s decision, however our legal options are very limited as there are no reasonable or promising actions available to us,” said Central Hudson Gas & Electric spokesman John Maserjian.  Central Hudson says monthly bills have increased by 6% for residential customers and 10% for large industrials.

The court challenge claimed the FERC orders approving the NYISO capacity zone were arbitrary and capricious, unsupported by substantial evidence, and did not ensure capacity rates are just and reasonable.  More specifically, they claimed

1. FERC did not adequately justify its conclusion that consumers would benefit from the creation of the new Lower Hudson Valley Zone and the implementation of its associated demand curve;
2. FERC failed to adequately support its conclusion that implementing the new zone without a phase-in of its demand curve would result in just and reasonable rates;
3. in creating the new zone, FERC improperly ignored evidence regarding New York’s transmission upgrade initiatives;
4. FERC improperly failed to set forth criteria for the potential elimination of the Lower Hudson Valley Zone after the transmission constraint no longer exists; and
5. FERC did not demonstrate that the increases in rates arising from the new zone would “reflect to some degree the costs actually caused by the customer who must pay them.” See, Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361, 1368 (D.C. Cir. 2004) (quoting KN Energy, Inc. v. FERC, 968 F.2d 1295, 1300 (D.C. Cir. 1992)).

The Court also found that the impact on customers had not been previously argued at FERC by any of the parties now challenging the decision in Court, and so the impact on customers was never properly raised and was not preserved for judicial review:

“[T]he NYPSC’s failure even to mention to FERC that quantifying price impacts was required led FERC (quite understandably) not to consider that question at all.”

The court challenge was difficult if not quixotic, in that the Petitioners were attempting to fight the agency on its high ground, on issues where substantial judicial deference is given to administrative action.

Also, the Court viewed part of the challenge as a belated effort to challenge a prior order involving the capacity zone, which had not been appealed:

“When a petitioner’s objection is aimed not at the order purportedly under review but instead at an earlier FERC order, it is barred as a collateral attack on the earlier order unless (1) the objection attacks FERC’s constitutional or statutory authority, (2) FERC has “effectively reopened” the earlier order, or (3) the earlier order failed to place parties on notice of what would be required.”

The Court did find however that one of the claims had been “effectively reopened” by FERC and could be litigated (ultimately to no avail), but there was no objection based on FERC’s constitutional or statutory authority.

FERC’s statutory authority to adopt a “market-based rate” scheme for setting prices for electric capacity is an open question.  By this sort of action, FERC is attempting to jettison the statutory filed rate regulation system of the Federal Power Act in favor of the agency’s preference for deregulatory “market-based” rates. FERC indulges the fiction that filing a so-called “market-based rate” tariff — which simply says charges will be determined by seller and buyer — satisfies the statutory requirement of the Federal Power Act that all changes in rates and charges shall be publicly filed by sellers subject to public scrutiny and agency review prior to taking effect. Further, to satisfy the statutory command that all rates be just and reasonable, and the corollary that any rates or charges that are not reasonable are illegal, FERC assumes that prices set in the market would always be reasonable if the seller singlehandedly lacked power to change the market price.

This system created by this FERC action allows sellers and traders to demand prices without filing them in advance. It is vulnerable to market malfunction, market gaming and possible manipulation, and has resulted in huge overcharges to New York consumers without any meaningful remedies.  See  Mohler, Has the “Complete and Permanent Bond of Protection” Provided by FERC Refunds Eroded in the Transition to Market-Based Rates?, 33 Energy L.J. 41, 44 (2012).

The Supreme Court has described FERC’s market rate regime as based on a “metaphysical” assumption, and has never approved its legality.  See Utility Project Files Supreme Court Amicus Brief in Electricity Market Rate Case, and  SUPREME COURT LEAVES FUNDAMENTAL QUESTIONS ABOUT FERC MARKET RATE SCHEME UNANSWERED, NYUP June 26, 2008. 

The New York litigants in the challenge to the NYISO capacity zone case included utilities that have been allowed to have their lesser-regulated affiliates  sell energy at wholesale market rates.  For example, Central Hudson is part of the Fortis holding company which owns some power generation in upstate New York that benefits from market rates, and Con Edison Energy (an affiliate of Con Edison) sells energy as an asset manager for a large Athens, New York power plant.  The utilities are beneficiaries of the prices allowed by FERC that their subsidiaries collect from residential customers, and so their opposition to the capacity zone was not so strong as to jeopardize the interests of subsidiaries that sell at market rates.  The other parties are also supporters, in general, of the FERC market rate regime, and did not raise concerns over the price impact on consumers.  No independent representative of residential consumers participated in the FERC case or in the judicial action to review the FERC decision, which one might argue is why none of the litigants actually paid attention to the impact upon residential consumers.

Perhaps one day a litigant will raise and pursue the issue of whether FERC has statutory authority to adopt its market rate policies.  Similar litigation in the telecom area led to a landmark decision of the Supreme Court in MCI v ATT, striking down a similar effort of the FCC to deregulate without changing the governing statute.  Subsequently, Congress amended the statute to allow some telephone deregulation while adopting measures that benefitted consumers, including new universal service safeguards, Lifeline rate requirements, and broadband for schools and libraries. It is only to be hoped that someday soon a similar result will arise for residential customers of energy.