On December 13, 2013, the United States Court of Appeals for the District of Columbia Circuit ruled in favor of the Federal Energy Regulatory Commission (“FERC”) in TC Ravenswood, Inc. vs. FERC, No. 12-1008.The dispute focused on FERC’s decision to suspend the capacity market demand curves proposed by the New York Independent System Operator (“NYISO”) for the full five months permitted by statute. TC Ravenswood, Inc. and the NRG Companies (“Petitioners”) claimed that the suspension term was arbitrary and capricious because FERC’s precedent called for only a nominal suspension.
Section 205 of the Federal Power Act authorizes FERC to suspend proposed rates for a maximum of five months before they become effective. In West Texas Utility Co., 18 FERC ¶ 61,189 (1982), FERC stated that, as a general matter, it would suspend rate proposals for only one day, rather than the statutory five-month maximum, in cases where only 10 percent or less of the proposed rate increase may be excessive and therefore not just and reasonable. However, if “extraordinary factors” could result in “irreparable harm” to wholesale customers, FERC reserves the right to impose a five-month suspension.
FERC chose to impose a five-month suspension period for NYISO’s proposed demand curves because it found that NYISO’s capacity auction constituted such an “extraordinary factor.” FERC’s view was that an extraordinary factor need not relate to only higher prices, but could relate to non-monetary circumstances as well. Specifically, if the demand curves had not been suspended, but instead had been implemented subject to refund, then market participants would have had to bid into the NYISO auction without knowing the final prices. The court found FERC’s position reasonable, noting that even the Petitioners recognized that it was beneficial for bidders to have access to “actual recalculated rates” prior to placing their bids. The D.C. Circuit’s decision in this matter is particularly important for participants in those organized electric markets that use capacity auctions. Post-hoc changes to auction rules can undermine the market mechanism, and refunds are particularly hard to calculate in such auctions because they are necessarily based on assumptions about how market participants would have bid under different rules.