Opinion ID: 187286
Heading Depth: 1
Heading Rank: 5

Heading: Hybrid Market Inherently Unjust and Unreasonable

Text: Connecticut's argument to FERC rested most heavily on its contention that the hybrid electricity market, in which some generators receive market-based rates and some receive cost-based rates, is inherently unjust and unreasonable. In Connecticut's view, generators can select whichever system will provide them the most benefit: Because generators effectively have a choice to elect the `higher of' either cost-of-service or market compensation, rates are by definition higher than they would be under either a fully competitive or fully regulated market. Br. for Pet'r at 31. But this conclusion is not self-evident, as Connecticut contends. As FERC explained in its orders, generators cannot opt into and out of cost-based compensation depending on the prevailing market prices. A generator must demonstrate financial need before it can receive an RMR agreement or, in the past, PUSH-bidding authorization. Moreover, an RMR agreement remains in effect until the implementation of the Forward Capacity Market and may only be canceled by ISO-NE. Connecticut's argument that generators can act strategically to reap the highest possible rewards is not borne out by the record evidence. Likewise, Connecticut's assertion that bids from generators with RMR contracts artificially inflate the market-clearing price fails to account for the restrictions imposed by those contracts. A generator operating under an RMR agreement must bid all of its available supply into the market at its marginal cost. Contrary to Connecticut's argument, FERC explained that this requirement actually serves to lower the market-clearing price. See Blumenthal I, 117 F.E.R.C. ¶ 61,038, at 61,177. Connecticut neither acknowledges the bidding requirement nor contradicts FERC's explanation of its effects. Connecticut also offers no information about the actual prevailing electricity rates and no meaningful analysis of whether those rates are just and reasonable. By contrast, FERC thoroughly explained the difficulties posed by the New England electricity market and the reasons for its response to the problems. In regulating that market, FERC must contend with transmission constraint, insufficient supply to meet high demand, and outdated generation facilities and transmission infrastructure. It encouraged the successful development of the new Forward Capacity Market, which will address many of these problems. Until that market can take effect, however, FERC reasonably chose to employ interim measures to ensure system reliability and to spur development and improvements. RMR agreements keep necessary generation facilities in operation, while the high returns earned by low-cost generators charging market rates provide an incentive for the development of new generation facilities as well as increased efficiency on the part of existing generators. Furthermore, higher prices are likely to affect consumers' behavior, reducing the strain on the system created by high demand. At the same time, price caps and mitigation rules remain in place to protect against anticompetitive behavior and excessive rates. FERC acknowledges the imperfections of these interim solutions. But its defense of employing them in the period before the Forward Capacity Market takes effect is thoroughly reasoned and supported. Congress has entrusted the regulation of the electricity industry to FERC, not to the courts. A presumption of validity therefore attaches to each exercise of the Commission's expertise. In re Permian Basin, 390 U.S. at 767, 88 S.Ct. 1344. The Connecticut electricity market presents intensely practical difficulties demanding a solution from FERC, id. at 790, 88 S.Ct. 1344, and the Commission must be given the latitude to balance the competing considerations and decide on the best resolution. We defer to FERC's reasonable approach here, particularly in light of a complaint based on little more than conjecture.
To prevail on its complaint, Connecticut would have had to prove not only that the existing market structure is unjust and unreasonable, but also that its proposed alternativea requirement for all Connecticut generators to apply for RMR agreementswould be just and reasonable. See Atl. City Elec. Co., 295 F.3d at 10. This it has not done. Connecticut makes little attempt to prove that it satisfied its burden on this issue. It alleges that if the existing market structure is unjust and unreasonable, mandating regulated, cost-based compensation is the only alternative method for compensating generators. Reply Br. for Pet'r at 26. This is a facially flawed contention, given that another alternative the Forward Capacity Markethas met our approval and is being put into place. Strangely, Connecticut argues that if we were persuaded that the existing market is unjust and unreasonable, we should remand this matter for FERC to consider whether Connecticut's proposed alternative is just and reasonable. See id. at 27. But FERC has already determined it is not. See Blumenthal II, 118 F.E.R.C. ¶ 61,205, at 61,934; Blumenthal I, 117 F.E.R.C. ¶ 61,038, at 61,181. Furthermore, FERC's rejection of Connecticut's proposal was not arbitrary or capricious. As FERC explained, the proposal would unreasonably restrain legitimate market revenues earned by some generators without a finding that those generators are exercising market power, Blumenthal I, 117 F.E.R.C. ¶ 61,038, at 61,175, and would stifle the necessary price-signaling function served by market-based rates, id. at 61,180. FERC reasonably concluded that the current market structure is the superior interim solution to ensure the workability of the Connecticut electric power markets until the Forward Capacity Market takes effect in 2010.