Opinion ID: 2790973
Heading Depth: 3
Heading Rank: 1

Heading: Zone Creation

Text: Petitioners contend that FERC did not adequately support its conclusion that the creation of the new Lower Hudson Valley Zone justified the costs imposed by the zone—i.e., its conclusion that the creation of the new zone would ultimately result in just and reasonable rates. We disagree. FERC adequately supported its decision to approve the creation of the Lower Hudson Valley Zone by relying on economic theory. The D.C. Circuit has held that FERC may permissibly rely on economic theory alone to support its conclusions so long as it has applied the relevant economic principles in a reasonable manner and adequately explained its reasoning. See, e.g., Sacramento Mun. Util. Dist. v. FERC, 616 F.3d 520, 531 (D.C. Cir. 2010) (holding that FERC appropriately made findings based on “‘generic factual predictions’ derived from economic research and theory . . . given that it explained and applied the relevant economic principles in a reasonable manner” (quoting Transmission Access Policy Study Grp. v. FERC, 225 F.3d 667, 688 (D.C. Cir. 2000))); Wis. Pub. Power Inc. v. 36 FERC, 493 F.3d 239, 260‐61 (D.C. Cir. 2007) (holding that FERC’s prediction that a given formula for allowing electricity suppliers to recover fixed costs in setting prices would “provide an efficient incentive to invest” was a “reasonable predictive judgment that warrants judicial deference”); Associated Gas Distribs. v. FERC, 824 F.2d 981, 1008 (D.C. Cir. 1987) (stating that courts should not set aside an agency’s “reliance on generic factual predictions merely because they are typically studied in the field called economics”). We agree, and we will therefore consider whether FERC reasonably applied sound economic principles and articulated an adequate explanation for how those principles justified its conclusion. As FERC explained in the New Zone Criteria Order, the “highway” deliverability test pursuant to which NYISO determined that the Lower Hudson Valley Zone should be created is designed to address reliability concerns that arise due to transmission constraints between different areas of an existing zone. Because NYISO’s capacity auctions are zone‐wide, capacity resources that bid to supply capacity for a given zone can be located anywhere in the zone. If a transmission constraint exists, “the capacity auction for that zone may accept more capacity in the unconstrained area than can be delivered to the constrained area.” New Zone Criteria Order at P 56. Capacity in the unconstrained area may even “displace 37 capacity located in the constrained area,” id. at P 56, if, for example, the cost of supplying capacity is lower in the unconstrained area and resources in that area therefore provide lower bids at auction, see Zone Rehearing Order at PP 15‐16. Under those circumstances, the amount of capacity that is actually deliverable to the constrained area might be “less than the amount needed for reliability.” New Zone Criteria Order at P 56. Moreover, failing to pay resources located in the constrained area for their capacity could lead to insufficient capacity supply in the constrained area, jeopardizing long‐term reliability. To put it in simple terms, NYISO’s auctions award capacity payments to the resources who supply capacity at the lowest cost, and if those payments are going only to cheaper upstate resources that may be unable to actually deliver power to downstate consumers, then downstate resources who can deliver power to those consumers might not stay in business. By providing for the creation of a new zone in a way that accounts for transmission constraints, FERC sought to ensure that capacity prices in the constrained area would “be allowed to rise above prices in the unconstrained area, thereby providing stronger incentives to attract and retain capacity needed to meet reliability objectives in the constrained area.” Id. at P 57. 38 After NYISO applied the deliverability test prescribed by the New Zone Criteria Orders and sought FERC’s approval to create the Lower Hudson Valley Zone in the Zone proceeding, FERC reaffirmed the economic basis for its conclusion that the new zone would lead to just and reasonable rates by generating more accurate price signals. See Zone Order at P 24 (“The results of NYISO’s application of the . . . Deliverability test demonstrate that a significant transmission constraint currently exists into NYISO’s proposed new capacity zone. Any resulting higher capacity prices in the new capacity zone will help to encourage the development of new generation and/or transmission capacity to help alleviate the constraint. Such price changes promote efficient decisions and are not unreasonable.”). Indeed, in its request for rehearing in the Zone proceeding, the NYPSC recognized the validity of FERC’s economic reasoning, conceding that “creating [the Lower Hudson Valley Zone] could have long‐term reliability benefits” and “may eventually incent new generation in that location.” J.A. 1076. We conclude that FERC articulated sound economic principles supporting the creation of the Lower Hudson Valley Zone and satisfactorily explained how those principles justified its conclusion. Accordingly, FERC’s determination that the creation of the new zone would lead to just and reasonable rates was adequately 39 supported, and was not arbitrary and capricious. New York Petitioners’ arguments to the contrary are not persuasive. New York Petitioners claim that the long‐term benefits that FERC claims will follow from the accurate price signals generated by the new zone “are merely predictions.” N.Y. Pet’rs’ Br. at 22. Quoting the D.C. Circuit’s decision in Electricity Consumers Resource Council v. FERC, they contend that “mere reliance on an economic theory cannot substitute for substantial record evidence and the articulation of a rational basis for [FERC’s] decision.” 747 F.2d 1511, 1514 (D.C. Cir. 1984). But the D.C. Circuit has since clarified (repeatedly) that FERC’s economic argument in Electricity Consumers was unavailing not because reliance on economic theory alone is never permissible, but because the court there “was persuaded that the Commission had ‘inexplicably distorted’ the theory that it claimed to apply.” Associated Gas. Distribs., 824 F.2d at 1008 (quoting Elec. Consumers, 747 F.2d at 1514); see also Sacramento Mun. Util. Dist., 616 F.3d at 531 (“Neither Electric [sic] Consumers nor any other case law prevents the Commission from making findings based on generic factual predictions derived from economic research and theory.”) (internal quotation marks and citation omitted). Here, as we have explained, FERC has not distorted economic theory in 40 reasoning that the creation of the Lower Hudson Valley Zone will ensure accurate price signals and thereby alleviate the risk of reliability problems in the long run. Petitioners also argue that FERC failed to consider the new zone’s impact on consumer rates. FERC’s orders, however, show that it did consider the new zone’s impact on consumer rates. See, e.g., Zone Rehearing Order at P 17 (“The reality is that, in the short run, consumers may pay more but doing so is necessary to provide the appropriate price signals to incent developers to build or restore capacity and address a long‐standing problem. . . . The Commission hopes to emphasize that decision‐making based only on avoiding price increase in the short‐term could threaten reliability and price stability in the long‐term.”). FERC also explained that rates in the Lower Hudson Valley Zone would be likely to decrease over time “[a]s more capacity locates in the new capacity zone.” Id. (And, as we have explained, New York Petitioners failed to preserve their argument that FERC was required to quantify consumer benefits.) “[T]he FPA has multiple purposes in addition to preventing excessive rates, including protecting against inadequate service and promoting the orderly development of plentiful supplies of electricity.” Consol. Edison Co. of N.Y., Inc. v. FERC, 510 F.3d 333, 342 (D.C. Cir. 2007) (citations and internal quotation marks 41 omitted). In determining whether rates are just and reasonable, FERC is charged with balancing these competing interests, see, e.g., New Eng. Power Generators Ass’n, v. FERC, 757 F.3d 283, 298 (D.C. Cir. 2014), and we are not persuaded that there is anything unreasonable in FERC’s conclusion that higher prices were necessary to ensure reliability by generating accurate price signals in the long run.