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Exelon Corp. v. Federal Energy Regulatory Commission

United States Court of Appeals, District of Columbia Circuit

December 28, 2018

Exelon Corporation, Petitioner
Federal Energy Regulatory Commission, Respondent

          Argued November 19, 2018

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

          Matthew E. Price argued the cause for petitioner. With him on the briefs was William K. Dreher.

          Carol J. Banta, Senior Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief was Robert H. Solomon, Solicitor. Ross R. Fulton, Attorney, entered an appearance.

          Before: Katsas, Circuit Judge, and Silberman and Williams, Senior Circuit Judges.


          Williams, Senior Circuit Judge.

         In a very very few cases, the dispute between the parties vanishes in the course of oral argument. This case may be a variation of that pattern. Agency counsel seemed to contend that the correct meaning of the challenged order was in conformity with the meaning that petitioner ascribed to the controlling statute. Because the parties' dispute may be illusory, we remand the record to the agency to sort out what it really means.

         * * *

         Petitioner Exelon, which owns a number of electric generation resources in New England, challenges the adoption by the Federal Energy Regulatory Commission of changes to the Transmission, Markets, and Services Tariff ("Tariff") proposed by the Independent System Operator for New England ("ISO-NE"), the non-profit entity overseeing organized wholesale power markets in that region. The Tariff governs the annual Forward Capacity Auction in which energy suppliers contract to provide capacity three years in advance as part of the Forward Capacity Market. FERC approved the proposed tariff changes, subject to certain conditions. ISO New England Inc., 155 FERC ¶ 61, 029 (Apr. 12, 2016) ("Final Order"). The Commission then accepted ISO-NE's modified filing. 156 FERC ¶ 61, 067 (Jul. 27, 2016). Exelon sought rehearing, which FERC denied. ISO New England Inc., 161 FERC ¶ 61, 115 (Oct. 30, 2017) ("Rehearing Order"). Exelon now seeks our review.

         ISO-NE's proposed changes to its tariff sought to tackle the perceived risk that suppliers might exercise market power through improper use of ISO-NE's retirement options via "physical" or "economic" withholding. In the first case, a multi-plant generator prematurely withdraws a unit from participation in the Forward Capacity Auction, thereby dampening supply, driving up prices, and enjoying higher returns from other plants. Though a physical withholding, the retirement is "uneconomic" in the sense that the unit would be expected to remain profitable if it were not retired. See Final Order ¶ 7 n.8. In "economic" withholding, the supplier has a unit participate in the auction but sets an artificially high retirement "bid" when it has reason to believe that its capacity is needed for the market to clear, thereby nudging up the clearing price. In that case, of course, the unit would reap undue profits rather than retire. See Prepared Testimony of Jeffrey D. McDonald on Behalf of ISO New England Inc. (Dec. 17, 2015), Joint Appendix ("J.A.") 62-63. Each "bid" represents a "price below which a supplier does not wish to provide capacity from an existing resource[.]" Final Order ¶ 2.

         Whereas before the disputed orders a unit could retire under a Non-Price Retirement Request without submitting a bid into the auction, see Final Order ¶ 2, all units wishing to retire must now submit such bids, see id. ¶¶ 6-7. Under the new rules, all retirement bids are reviewed by ISO-NE's Internal Market Monitor. Id. ¶ 7. The market monitor evaluates the "appropriateness" of the proposed bid after "consult[ing]" with the supplier as to the "reasonableness" of "cost assumptions" underlying its retirement bid. Id. If the monitor determines that certain cost items are unsupported, and the original bid exceeds the monitor's preferred price by more than 10% (the "materiality threshold"), the monitor will substitute a "mitigated bid" for the supplier's original bid. Rehearing Order ¶¶ 8, 15. All bids are submitted to FERC by ISO-NE in a filing under § 205 of the Federal Power Act, 16 U.S.C. § 824d. See Tariff § III.13.8.1(a), J.A. 40. If FERC approves the mitigated bid, then that bid will stand in-as a so-called "proxy bid"-for the capacity of the retiring resource. If the market clears at or above the proxy bid price, but below the supplier's original bid-that is, above what the market monitor thinks reasonable, but below what the supplier is willing to accept-the auction is re-cleared to obtain the missing capacity from other suppliers. See Rehearing Order ¶ 6.

         A supplier may acquiesce in the mitigated bid, though it must do so before ISO-NE's § 205 filing-and, a fortiori, before it knows the clearing price. See Rehearing Order ¶¶ 5, 20. In that event, presumably, the unit retires if the auction clears below the proxy bid.

         Finally, the distinction between unconditional and conditional retirement needs explaining. If the market monitor decides to mitigate a bid, a supplier may opt to retire a unit no matter what-that is-unconditionally. See Final Order ¶ 61. If the owner of the unconditionally retiring unit owns multiple units, the monitor must carry out a "Portfolio Benefits Test" to assess whether "the resource owner's portfolio, as a whole, benefits from the retirement." Id. ¶ 8; see Rehearing Order ¶ 5. If a portfolio benefit exists, a proxy bid will be used, neutralizing the effects of a possibly uneconomic retirement.

         A supplier knowing that a mitigated bid will be filed may choose to retire the relevant unit conditionally-i.e., contingent on the auction clearing price. If a supplier unsuccessfully protests a mitigated bid and a proxy bid is entered into the auction, three possibilities arise. (1) If the clearing price is below both the original bid and mitigated bid, the unit retires. (2) If the clearing price is at or above both bids, the supplier takes on a capacity obligation. (3) If the ...

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