Notice: This opinion is subject t o formal revision before publicat ion in the Federal Reporter or U.S.Ap p.D.C. Repo rts. Users are requested to notif y the Clerk of any f ormal err ors inorder tha t correct ions maybe made be fore the bound volumes go to press. 

# Un ited S tates C ourt o f Ap peals

FOR T HE D ISTRIC T OF CO LUM BIA C IRCU IT

Argued April 11, 2005 Decided May 13, 2005

No. 03-1449

E LECTR ICI TY C ONSUM ERS R ESOURCE C OU NCIL ,

P ETITIONER

v.

F EDERA L E NERGY R EGULATORY C OMMIS SI ON ,

R ESPONDE NT

C ONSOLI DATED E DIS ON C OMPANY OF N EW Y ORK , I NC ., ET AL .,

I NTERVENO RS

On Petition for Review of Orders of the Federal Energy

Regulatory

Commission

Sara D. S cho tla nd argued the cause for petit ioner. With her on the briefs was Rob ert A. Weisha ar, Jr.

Lona T. Perry , A ttorn ey, F ed eral En erg y R egu latory Co mm is si on, argued the cau se for respo nde nt. W ith her on the bri e f

were Cy nth ia A . M arle tte , Gene ra l Couns el, and Dennis Lane
, Solicitor.

J onathan D. Fe inberg was on the bri ef f or i nter veno r Pu bli c2

Service Commission of the Stat e of New York.

William F. Young and Su s an E. D ove were on the brief for intervenor

Ne w Y ork In dep end ent S yst em Op erator, Inc. Ar nol d H. Quint entered an appearance.

Frederick

W. M orris , James J

. Ber tr and
, Brian M. Mel oy , Deb ra R

. Bolt on , Sco tt G. S ilverste in , M ary M . Fa bic , and K enneth R

. Ca rretta wer e on the b rief for in terven ors N RG Co mp anie s, et al.

Befor e: S ENTE LLE , R OGERS and T ATEL , Circuit Judges

. Op in io n f or th e C ou rt fi le d b y Circuit Judge R OGERS

.

R OGERS , Circuit Judge : The Electricity Con sume rs Resource Council (“ELCON”) cha llenges two orders of the FederalEnergy

Regulatory

Commission approving a rate d esign for the instal led capa

city market administered by the Ne

w York Independent Sy

stem Operator, Inc. ( “NYISO”). See NY Indep. Sys. Operator, Inc. , 103 F.E.R.C. ¶ 61,201 (2003) (“ Initial Order ”); NY Indep. Sy

s. Operator, Inc. , 105 F.E.R.C. ¶ 61,108 (2 003 ) (“ Rehearing Order ”). While maintaining that the Commission’s or ders violate both the “just and reasonable” ratemaking

standard of the F ederal Power Act (“FPA”), 16 U.S.C. § 824d(a) (2000), and the arbitrary and ca pri cious stan da rd of the Ad ministrati ve Proce dure Ac t (“APA” ), 5 U.S.C. § 706(2)(A) (2000), EL CON urges a hei ght ened standard of review for “inc entive r

atemakin g” req uiring t he Commission to demonstr ate tha t the rate

increa se is no mor

e than ne cessar

y to

ac hieve its purpose of encouraging investment in new g enerat io n facilities in New York

State. Becau se we conclude that the ra te d esign does not impose an incremental rate increase a bov e traditional cost-ba sed rate s but rath er seeks to stabili ze rates t o promote the development a nd re te nt io n o f i ns ta ll ed ca pa ci ty, there i s no basis for applying a heightened standard of revie w. Uponapply

ing the u sual APA st

an dard, we conclude that3

the Commission’s approval of the rate d esign is supported by substantial evidence in the record and is not otherwise arbitrary and capricious. Accordingly , we deny the

petition for review.

I. To prev ent el ectricity shortages during periods of peak demand, the New Y ork State Reliabilit y Co uncilrequire d retail utilities
, known as load se rving e ntities (“ LSEs” ), to purc

hase installed capaci ty ( “ICA P”) equa l to 118% of

their pe ak loads. See Initial Order , 103 F.E .R.C. ¶ 61,201, at 61,750. If an LSE failed to procure the required amount of ICAP throug h its own supply or through bilatera l contra cts, it wa s requir

ed to purchas e the deficient quantity throug h NYISO auct

ions, a t which the price equal ed a “deficiency charge” of $255 per kilowatt-y ear,
o r three times the annualized cost of installing a new “pe aker ” power plant. See id. This rate design resulted in a v e rtical demand curve for ICAP, with t

he price e qual to $25 5 for all quantities up to 118%, and $0 for all quantities exceeding 118%.

Figure 1: Vertical Demand Curve4

See id. & fig.1. Accord

ing to NYISO, the vertical dema nd curve caused extreme volatility in I CAP prices, thus discouraging inv estment

in new generation facilities and cre ating “t h e potential for a capacity

deficiency

” in New York Stat e. Id. at 61,751.

To add ress this p roblem, NYISO applied to the Commission for approval of amendments to its tariff to incorp orate a

new rate design replacing the vertical demand curve with a sloped “ICAP Deman d Cur ve,” whi ch would b e used in monthly auctions to determine both the quantity and price of required ICAP. See id. For 118% of peak load, the price would equal the an nualized cost of a new peaker

plant. See id. As supply increase d above 118%, the price would gradually decrease until it reached zero for 132% of peak load, and as supply decreased bel ow 118 %, the pric e would gradually increase until it reached a maximum of two times the annualized cost of a new peaker plant. See id. & fig.2.

Figure 2: Sloped ICAP Dema nd Curve5

Each m ont h, capa city supplier s, includi

ng L SEs with exc ess
ca pa ci ty, would bid into an ICAP auction and create the supply
curve; the pointof intersection between the supply curve a

nd the ICAP Demand

Curve would determine the quantity and price of

re quiredICAP. See id. at 61,752. If the monthly auction yie ld ed a quantit y le ss than 118 % of pea

k load, NY

ISO w ould pu r chase the deficient amount outside the auction market and charge each LSE a “supplementa l supply fee” e qual to 1.5 times the annualized cost of a new peaker plant. See id. at 61,753. NYI SO al so proposed a “periodic independent review of the Demand Curve every

three ye ars to determine whether adjustments are warranted.” Id.

ELCON, which represents industrial consumers of el ec tr ic it y, intervened and protested the new r ate design, arguing that it would increase electricity prices for c ons umers without spurring inves tment in new ge n eration capaci ty, and that i

t violated inc en tive ratemaking case law bec ause the ICAP Demand Cu rv e w as no t c ar ef ul ly c alibr ated to increase investment

in new generation facilities witho ut granti ng a windfall to existing

capaci ty s uppliers . The Co mmis sion approved NYISO’s ratedesign with modifications, finding that it would “benefi t custo mers because it [would] provide better price signals to investors for construction o f new generation,

encou rage the formation

of long-term

bilateral transactions, and reduce incentives to withhold capacity.” Id . at 61,750. The Commission agreed with NYI SO that the ICAP Demand Curve would “encou rage g reater investmen

t in gener ation ca pacity and thus improve r eliability, by reducing the volatility

of ICAP revenues,” and conc luded tha t it would “

provide net benef

its especia lly compared w i th the existing vertical demand curve.” Id. at 61,753-54. The Commission eliminated the supplemental supply fee bas e d on the co ncern that supplie

rs would w

ithhold capaci ty from the monthly I CAP auction in order to sell capaci ty at the higher price of the supp lemental supply fee

. See id. at6

61,761. Characterizing the I CAP Demand Curve as “a n o vel proposal ” requiring“some measure of judgment” in setting the specific parameters, and observing that it “will be important to evaluat e and moni tor the appropriateness of these parameter s after some experience is gained,” the Commission required NYI SO to file “a detailed evaluation of the Demand Curve and its implementation by

December 1, 2003, and annually for two yea rs thereafter.” Id. at 61,754. The Commission denied ELCON’s petit ion fo r rehea ring and approved NYISO’s proposal to set the supplemental supply fee equal to the monthly ICAP auction price. See Rehearing Order , 105 F.E.R.C. ¶ 61,108, at 61,625. This petition for review followed.

II. The court ordinarily r

eviews the Commission’s orders to determine whether they

are “arbitrary, capricious, an a bu se of discreti on, or othe

rwisenot in acc ordance

with law.” 5 U .S.C. § 706(2)( A); see Pub. Utils. Comm’n v. FERC , 254 F.3d 250, 253-54 (D.C. Cir. 2001). Such review is limited to whether

the Commission has “examine[d] the relevant data and articulate[d]

a satisfac tory explanation for its a

ctio n, in cluding a ‘rational connection

betwee n the f

acts found and the choice made.’” Motor Vehicle Mfrs. Ass’n v. State Farm Mutual Auto. Ins. Co.
, 463 U.S. 29, 43 (1983 ) (quo ting Burlington Truck Lines, Inc. v. Un ited States , 371 U.S. 156, 168 (1962)). Specifically , “our revi ewof wheth er a par ticular r ate desi gn is ‘ju st an d reasonable’ is hi gh ly defer ential” b ecause “[i]ssues of

rate design are fairly

technical and, insofar

as they are not t echnica l, involve policy

judgmen ts that lie at th e core of the regulatory mission.” Pub. Utils. Comm’ n , 254 F.3d a t 254 (alte

ration in origina l) (quot ing Sithe/Independence Power Partners, L.P. v. FERC
, 165 F.3d 944, 948 (D.C. Cir. 1999)) (internal quotation marks omitted). The Commission’s factua l find ings are conclusive if supported

by substantial evidence

in the record, 16 U.S.C. § 825 l (b), and the cour t defer s to the Commission’s7

resolutionof fact

ual disput

es b e tween expert witnesses, see Wisc. V alley Improvement Co. v. FERC , 236 F.3d 738, 746-47 (D.C. Cir. 2001).

ELCON contends that the c halleng ed order

s are sub ject to

a heigh tened standard of review because the I CAP Demand Curve is neither market-based nor cost-based but rathe r ad ministrati

vely constructed to encourage investment in ne w generation

c apacit y. Accor ding to ELCON, the Commission must demonstrate that such “incentive ratemaki ng” is “in fact needed, and is no more than is needed, for the purpose.” City of Detroit v. Fed. Power Comm’n , 230 F.2d 810, 817 (D.C. Cir. 1955). I n support of this heightened standard of review, ELCON cites a l ine of cases involving the Commission’s approval of incremental rate increases a bove cost-based

rates to

encou rage increa ses in

energy supply. See, e.g.
, Farmers Union Cent. Exch., Inc. v. FERC , 734 F.2d 1486, 1503 (D.C. Cir. 1984); City

of Charlottesville v. FERC , 661 F.2d 945, 950 (D.C. Cir. 1981); Pub. Serv. Comm’n v. FERC, 589 F.2d 542, 552-53 (D.C. Cir. 1978) ; City of Det roit , 230 F.2d at 817-818. ELCON also cites the Commission’s 1992 Policy Statement on incentive ratem aking, which states that the Commission “i s f ree to set rates [above co st-base d rates] to provid e incentives so long as there is a correlation between the incentive and the r esult to be induced.” Incentive Ratemaking for Interstate Natural Gas Pipel ines, Oil Pipelines, and Electric Utilities , 61 F.E.R.C. ¶ 61,168, 61,594 (1992). ELCON maintains

that the new rate design violates the ince

ntive ra temaking caselaw and the 1992 Policy Statemen

t becaus e it offe

rs incre ased re

venues to all capaci t y supp liers, regardless of whether the y invest in new ge nera tion facil itie s. In ELCON ’s vie w, the new rat e desi gn grants a windfa ll to existing capacity suppliers a tthe expense of LSEs a nd their c ustomers.

Inthe Initial Order , the Commis sion expla i ned that the8

incentive ratemaking cases and the 1992 Policy Statement were inapplic able to the ICAP Demand Curve beca use they “involved increme ntal rate increa ses levie d upon all customers,” whereas “ICAP charges are

n ot automatically applied to eve ry sale of power, and they ca

n be a voided by self-supply ing or procuring adequa te capacity

through bilateral contracts.” Initial Order
, 103 F.E.R.C. ¶ 61,201, at 61,755. On rehe aring, the Commission further explained that although the incentive ratemaking

cases “involved proposals to encourag e new supplies, as does New York’s I CAP Demand Curve, they were implemented

as different

types of rate s than the instant one and with a different potential impact on ra tepayers.” Rehearing Order
, 105 F.E.R.C. ¶ 61,108, at 61,620 . While the Commission does not explore this difference indetail, the court

can “discern a reasoned

path” to the Commission’s conclusion, E. Tex. Elec. Coop., Inc. v. FERC , 218 F.3d 750, 755 (D.C. Cir. 2000), because the intervening capa city suppliers lay

out that path in detail in their brief.

Unlike incentive ratem a

king, the ICAP Demand Curve doe s notimpose an

increme ntal rate increa se above

traditional costbased rates. “For the r

ationale of the inc entive r

ate cas es to apply here,” the intervening capa city suppliers explain, ELCON “would need to identify a ‘ rate incre ase’ over and above the rates permitte d under the Vertic al D emand Curve — rates that [ELCON] conced

e[s], at lea st implicitl

y — fall within the ‘zone of reasona bleness’ under the

just and r easonab le standard.” Br. of Supplier Intervenorsat 8. Under the vertical demand curve, ICAP prices ranged

from zero to the deficiency charge, or three times the annualized cost of a new peaker plant. See Initial Order
, 103 F.E.R.C. ¶ 61,201, at 61,750. Under the sloped demand curve, ICAP prices ra

nge f rom zero to two times the annualized

cost of a new p ea ker plant. See id. at 61,751. At quantities above 118% of peak l oad, I CA P prices are higher under the sloped demand curve than under the ve rtical demand9

curve, but at quantities equal to or below 118%, ICAP prices a re lower under the sloped demand curve than under the vertical demand curve. Compare id. at 61,7 50 fig.1 with id. at 61,751 fig.2. Thus, the

interve ning ca pacity supplier s poin

t out, the sl opeddemand c

urve doe s not impose

an incre mental ra te increase.

More important , unlike incentive ratema kin g, the ICAP Demand Curve enc ourages investment in new gener ation capaci ty by ensuring

“increased stability

in ICAP revenues,” not higher rates across the board. Id. at 61,758. Instead of gr

anting “above -cost

premiumsto suppliers of capacity ,” Br. of Resp’t at 26, the I CAP Deman

d Curve r estructu res I CAP price s to “more

rea listi cally

reflect[] the econ

omic value of cap acity

reserv es” and to “send better price signals to encoura ge the constru ct ion of generation bef

ore a sh ortage occurs.” Initial Order , 103 F.E.R.C. ¶ 61,201, at 61,756- 5 7. In the Commission’s view, stable ICAP revenues will reduce the risk and

cost of financing investment

in new g enerat

ion capa city and thus redu ce the c ost of electricity to consume

rs in the long term. See id. Its conclusionis supported by substantial evidence in the record. See infra Part III.
Insisting that the ICAP Demand Curve imposes excessive incen tiv e rates, ELCON

relies on two decis ions of the

First Circuit: Central Maine Power Co. v. FER C , 2 52 F.3d 34 (1st Cir. 2001), and Sithe New England Holdings, LLC v. FERC , 308 F.3d 71 (1st Cir. 2002), which address ICAPcharges similar to those here. In Central Maine , the Commis sion had in i tially imposed a defici ency charge equal to $ 8.75 per kilowatt- month based on the amortized cost of a new peaker plant, and then later abandoned

the deficiency

charge in favor of

an I CAP auction market. See 252 F.3d at 39. After the ICAP auction market proved a failure, the Commission reinstated the $8.75 deficiency charge without responding to objections that it was no lo nger10

necessary to encourage investmen

t i n new ge

neration capac ity and that the cost of

a new peaker plant had since dec reased. See i d. at 39-45. Although the First Circuit remanded the case f or the Commission to explain its reinstatement of the deficiency ch arge, see id. at 47-48, it did not, contrary to EL CON’s suggestion, require the Commission to demonstrate that the $8.75 charg e was no more than necessa ry to enco urage inv e stmentin new g enerat ion capa city . The cou

rt did not c ite the incentive ratemaking cases and in fact suggested a deferential stand

ard o f rev

iew, stati ng that “[i ]f

FERC had provided even a semblance of serious discussion as to wh y a
s ubsta ntial ICAP charge

was still required and why the preexisting figure

was the b est solution on short n otice, qu ite probably the char ge woul d be sustained outright.” Id. at 4 4. In Sithe
, whic h was “a sequel to Central Maine ,” 308 F.3d at 73, the issue was whether the FPA req uired the Commissi on to apply the reinstated d ef

iciency c harge retroactively

. Id. at 76. As ELCON

point s out, the First Circuit explained that the deficiency

charge was not a “statutory entitlement” but rather “an extra incentive to c onstruct new plants.” Id. at 77. But contrary to ELCON’s contention, and as the Commission noted inthe challenged orders, n o where in Sithe did the Fi rst Circu it sugge st that the deficiency

charge was subject

to the heightened standard of review articulated in the incentive ratemaking cases. See Initial Order
, 103 F.E.R.C. ¶ 61,201, at 61,755; Rehearing Order
, 105 F.E.R.C. ¶

61,108, a t 61,620. T

hus, ELCON

fails to demonstr ate that the n ew rate design imposes incentive rates subject to a heig htened s tandard of review, and we apply the usual arbitrary

and capricious standard.

The Commission maintains that the c ourt owes “special deference”

to its develop ment of the “experimental” ICAP Demand Curve because regar

dless of the evidence in the record, “t here is no substitute for reviewing the actual results of a regulatory

action.” Interstate Natural Gas Ass’n v. FERC
, 28511

F.3d 18, 30 (D.C. Cir. 2002). The court has recognized that “the formulationof such an experimental po li cy (where the probabil ity

of success is uncertain) is the ty pe of activity that the [Commission] was cre ated to perform, and we give g reat weight to the Commissi on’s dete

rmination regar ding this policy.” Pub. Serv. Comm’n v. Fed. Power Comm’n , 463 F.2d 824, 828 (D.C. Cir. 1972). Howe ver, even this highly deferential standard of

rev ie w “demand[s] an articulation, in response to serious objections, of

the Commission’s reasons for believing that more good t han harm will come of its action — even experimen ta l action

. ” Md. People’s Counsel v. FERC, 761 F.2d 768, 779 (D.C. Cir. 1985). Moreover, the deference the court affords the Commission is based onthe understanding that the Commission will monitor its experiment andre vi ew it ac co rd in gl y. See Pub. Serv. Comm’n , 463 F.2d at 8 28. Under thesecircumstances, the

cour t will defer to the Commission’s predictive judgment that the new rate

des ign will result in “more good than harm,” as long as the Comm

ission art iculates reasons for its judgment and responds adequately

to ELCON’s objections. Although the C ommission did not schedule a sunset date or periodic rev ie w of the ICAP D emand Cur

ve, it did require NYISO to file annua l evaluations of the Demand Curve, s ee Initial Order , 103 F.E.R.C. ¶ 61,201, at 61,754, thereby ensuringthat NYI SO and the Commission will have the information needed to determine whether the rate design r

equires modific ati on should their predictions fail to be born e o ut by experience. Dur ing oral argument ELCON sug gested

that t he Commission’ s characterization

of the ICAP Demand C urve as an experiment is a post-hoc rationalization, but even if true that would not change the result here, for we conclude that the petition must be denied under the ordinary APA standard of review.

III. ELCON raises a number of

challenges to the Commission’s approval of the newrate design. While ELCON maintains that12

the Commission f

ailed toconsider

certain objections, the record demonstrates other wise, indi catin g that E LCON’s c halle nge s ar e to the Commission’s pr edi ctive jud gments a nd policy choices
, to which the court owes deference.

First, ELCON

contends

that the Commission fa iled to conside r objections that the ICAP charg es under the Demand Curve were too high and that the slope of the Demand Curve

was t oo gradual. ELCON points to the testimony of expert witn ess David W. Segal indicating that the Commission overestimated

the annua

lized cost o f insta llin g a new peaker plant, underestimated the useful life of a new pe aker pla nt, ignored the revenue earn ed fr om the energy and ancillary service markets, and over estimate d the valu

e of rel iability

to

consumer s. In fact, the Commission considered

the objections raised by EL CON and determined based on the evidence offered by NYISO and

its ex pert witness Dr. David B. Patton that the parameters of

th e IC AP Demand Curve were “appropriate a nd reasonable.” Rehearing Order , 105 F.E.R.C . ¶ 61,108, at 61,623. After reciting

the objections to Dr. Patton ’s estima tes,

see id. , the Commis sion explained that it c onsid ere d the parameters to be reasonable, emphasizing thefact that the ICAP Demand Curve was initially pr oposed by the

New Yor k Public Service Commission (“ NYPS C”) and reflected a y ear of negotiations and dis cu ssions among NYPSC, NYISO, and I CAP market participants. See id. at 61,618 , 61,623; Initial Order , 103 F.E.R.C. ¶ 61,201, at 61,754. While the Commission expressed

some uncerta

inty about the

accura cy of the exa

ct points and slope of the Demand

Curve, it observed that confirming specific parameters would require “some measure of experience ,” and required NYI SO to monitor

the resu lts of the Demand Curve, expecting NYI SO to reviewthe Demand Curve with stakeholder inputand to ad

just the pa

rameter s as appr opriate , subject

to Commissi on ap proval. Rehearing Order , 105 F.E.R.C. ¶ 61,108, at 61,623. Moreover, as the Commission points out in13

its brief, Se gal’s e sti mates were not offered as an alter native calcula tion of a r easonab le ICAP charge

but rather as evidence th at such a calcula

tion was di fficult t o determ in e ad mi ni st ra ti ve ly. Because there is substantial eviden ce in the record to support the Commission’s conclusions, we defer to the Commission’s evaluation of the experimental rate design.

S e cond, ELCON

contends that the Commission fa

iled to consider the incr eased c osts that the ICA

P Demand Cu

rv e will imposeon electricity c onsumers. It cites Dr. Patton’s est imate that the ICAP Demand

Curve will increase costs by $70 million inNew York City and $84 million in the rest of the State during the first y

ear, Dr . Carl Pec

hman’s e stima

te that the Demand Curve will incre ase cost s by $700 mill ion o ver a three-y ear period, and Strategic Energy ’s estimate that the Demand Curve will increa se costs by $1 billio n per year. T he Commission considered

and reje cted the se estimates. See Initial Order , 103 F.E.R.C. ¶ 61,201, at 61,757-758. Noting that one interve nor
co nclud ed

that Dr. Pe chman’s

estimate

was “g

rossly

ove rstated,” and th at sev eral i nterv enors argued t hat th e longtermbenefits of the ICAP Demand Curve would outweigh any short-term costs, id. at

61,757, the Commission concluded that by reduci ng vol atil ity in ICAP revenu es and spurr ing n e w generation

capaci ty , the ICAP Demand Curve would “provide long term benefits to NYISO markets a nd customers,” id. at 61,758. Indeed, the Commission emphasizes in its brief Dr. Patton’s conclusion that any costs of the ICAP Demand Curve

are “transitional and will be eliminated over time as the market

moves toward

a long-run equilibrium.” Patton Aff. ¶ 61, at 17; Br. of Resp’t at 37. While the Com mission re cognize d that it could not predict the ex act amount of savings achieved by the ICAP Demand Curve, see Initial Order , 103 F.E.R.C. ¶ 61,201, at 61,758, it d

id citeDr. Patton ’s estima tes that a 1% incre ase in capaci ty would y ield savin gs of $1 mil li on per yea

r in the long term, and that even

in the short term, the ICAP Demand Curve14

could save Ne w York City

betw een $57 million and $212 million. See id. at 61,757 n.23, 61,758 n.24; Patton Aff. ¶¶ 22, 31 at 5, 8. T he Commission also noted that compared to the vertical demand curve, u nder whi ch the de ficienc y charge is equal to three

times the a

nnualized cost o f a new pe aker pla nt, the new rate design would provide saving s. See Initial Order
, 103 F.E .R.C. ¶ 61,201, at 61,758. Because the Commission’s predictive judgment that

the I CAP Deman

d Curve wi ll result in long-term savings is supported by substantial e videnc e inthe record, and bec ause the

balanci ng of short-ter

m costs ag ainst long-term benefit s is within the Commis sio n’s discretion, the court defers to the Commission’s policy choic e.
Third, ELCON contends that the Commission fai led to consider evidenc e in the r

ecord that the I CAP Dema nd Curve will not en co ur ag e i nv es tm en t i n n ew ge ne ra ti on ca pa ci ty. ELCON cites comments by Ener gy Ea s t, Ne w Y or k C it y, Strategic Energy , and the Morgan Stanley Group suggesting

that reluctance to build new generation facilities in NewYork State arises from con cern s other than the structure of the I CAP market, and that the ICAP Demand Curve off ers an “indiscr iminate subsidy ” to all ca

pacity su pplie rs without requiringthem to use their increased revenues to build new generation

facilities in New York. The Commissionconsidered

an d re jected these comments. See Initial Order , 103 F.E .R.C. ¶ 61,201, at 61,763-64. Th e Commission explained th at while it did not expe ct the I CAP Deman d Curve to

“alone r esult i n
more fin ancing,” it did expect that “more reliable and predict able ICAP r

evenue s would contribute to a more

reliable overall reve nue structure for an I CAP supplier and thus play

some role in improving t

hat suppli er’s pr

ospectsfor financing.” Id. That expectation is supported by substantial evidence in the record, including the expert wit ness testimony of Dr. Patton, Dr. Thomas Paynter, and Ma rk You nge r. Moreover, even if the record does not show “for certain that theC ommission’s15

incentive po li cy will work . . . it is nonet hele ss true that the record does not show that

su ch a p ol ic y will not work,” and “we cannot say that the Commission’s incentive theory lacks logic.” Pub

. Serv. Comm’n , 463 F.2d at 828. In response to th e conten tion t hat the ICAP Demand Curve offe rs increased

r ev enues to both new and existing capacity suppliers, the Commission explained

that “all capaci ty s uppliers , rega

rdless of the age of their re sources , are entitled t o the same

treatme nt in the ICAP market.” Initial Order , 103 F.E.R.C. ¶ 61,2 01, at 61,764. On rehearing the Commission further explained that

its “acceptance

o f the ICAP D emand Cur ve was ba sed on its readjustment of the incentives for building new generation and retaining existing generation .” Rehearing Order , 105 F.E .R.C. ¶ 61,108, a

t 61,621 (e

mphasis a

dded). T he Commissi on thu s considered

ELCON’s objections and articulated a re asonable explanation for re

jecting them.

Fourth, ELCON

contends that the Co mmission fa iled to consider its object

ion that the

ICAP D emand Cu

r ve replaces pr ice volatility with quantity volatility, thus discourag in g bilateral contracts and destroy ing the stabi li ty needed to

encou rage investmen

t in newgener

ation ca pacity . Accor

ding to ELCON, quantity

volatili ty is more damaging than price volatility because LSEs “have

no way to hedg e against the uncerta inty associated

with the monthly

required quantity.”

Br. of Pet’r at 3 7. The Comm is sion c onsidere d and rej ected th is objection. See Initial Order , 103 F.E.R.C. ¶ 61,201, at 61,759- 760. Inresponse to the contention that quantity volatility could

n otbe hedg ed, the Co mmission quo ted Dr. Pa tton’s te stimon y that “LSE s will have

the oppor tunity to purcha se any

quantity of capaci ty they desire in the f

orward market and the spot market provides a means to sell back any excess ca

p acity purcha sed forward.” Id. at 61,760 (quoting Supplemental Patton Aff. ¶ 17, at 5) (internal quotation mar ks omitted). The Commission further explained on rehearing that L SEs could “hedge most of16

their [ICAP] ob ligation s by

purchas ing an e stimate of their ICAP obligat ion through bilateral contracts” and “se ll[ing] the

excess back into the spot market.” Rehearing Orde r , 105 F.E.R.C. ¶ 61,108, at 61,622. The Commission also concluded th at the quantity volatility

under the sloped ICAP Demand Curve, which was limited to a range of 118% to 132% of pea k lo ad, was less extreme and thus less damaging than the price volati lity under the vertical demand curve, which r anged fro m $0 to more than $200 per

kilowatt-year

. See Initial Order , 103 F.E.R.C. ¶ 61,201, at 61,760; Rehearing Order , 105 F.E.R.C. ¶ 61,108, at 61,621-22

. It further noted that any quantity volatility would likely decre ase over time as ma rket participants gained

ex perience with the D emand Cur ve and a s the mark

et r eache d long-run equilibri um. See Initial Order , 103 F.E.R.C. ¶ 61,201, at 61,760; Rehearing Order , 105 F.E.R.C. ¶ 61,108, at 61,622. Thus, the Commissi on adequ ately consider ed and re sponded to ELCON ’s objec tions.

Fifth, E LCO N conten

ds that the

Commission f

ailed to consider alternatives to the ICAP Demand Curv e propo sed by Strategic En er gy, Co n E di so n, En er gy E as t, an d N ew Yo rk Ci ty. The Commission c onsidere d the tw o al ternatives proposed directly to it and

not to NYISO — bilateral contrac ts and demand r esponse — and determined that they were compatib le with the ICAP Demand Curve. See Initial Order , 103 F.E.R.C. ¶ 61,201, at 61,763 ; Rehearing Order , 105 F.E .R.C. ¶ 61,108, at 61 ,621. Because the Commission provided a reasonab l e explanation for choosing the I CAP Dem and Cu rve despite the proposed alternatives, the court defers to the Commission’s policy choice.

ELCON’s final obje ction, tha t the Commiss io n “ignored substantial evidence that supply c onditions in New York are not critical and thus do no t justify the level of the Dema nd Curve ICAP charges,” Br. of Pet’ r at 23, is not properly be f ore th e17

cour t. EL CON did not raise this objection in its petition for rehearing by t h e Commission, and thus it is waived. See 16 U.S.C. § 825 l (b). In an y event, NYISO presente d evidence of

a capaci ty shortag e in

New York, and the Commission pointed outthat the ICAP Demand Curve would prevent future shortag es. See Initial Order , 103 F.E.R.C. ¶ 61,201, at

61,756.

According ly
, because ELCON fa ils to show that the Commission’s approval of the new rate design was arbitrary and capricious, we deny

the petition for review.18

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