Opinion ID: 2790973
Heading Depth: 3
Heading Rank: 2

Heading: Phase‐In

Text: Apart from challenging FERC’s balancing of higher consumer costs against the long‐term benefits of generating more accurate price signals, Petitioners also object to FERC’s decision to reject a phase‐in of the Lower Hudson Valley Zone and the rate increases portended by the new zone’s demand curve. This issue arose in both the Zone proceeding and the Demand Curve proceeding. In the Zone proceeding, NYISO’s proposal did not call for a phase‐in of the new zone, but a group of New York Transmission Owners (including Utility Petitioners) protested that the zone should be phased in to soften the impact of rate increases. See Zone Order at P 28. In the Demand Curve proceeding, NYISO proposed to phase in the demand curve for the new zone by discounting the demand curve to 76.06 percent of the cost of new entry in the first year and 88.03 percent in the second year, and Petitioners urged FERC to adopt this aspect of NYISO’s proposal. See Demand 42 Curve Order at PP 141‐47, 155‐56. In both proceedings, FERC rejected the phase‐in, explaining that “a phase‐in would delay the capacity market’s ability to send more efficient investment price signals to attract and maintain sufficient capacity to meet local demand.” Demand Curve Order at P 164; see also Zone Order at P 31; Zone Rehearing Order at PP 13‐20; Demand Curve Rehearing Order at P 59‐65. FERC rejected Petitioners’ arguments that the years‐long timeframe for the construction of new capacity resources in the Lower Hudson Valley Zone implied that short‐term increases in capacity prices would be irrelevant to FERC’s goal of maintaining adequate capacity supply in the new zone. FERC explained that accurate price signals would not only create the proper long‐term incentives for building new capacity resources, but would also affect “shorter term supply responses, i.e., demand response and repowering options.”6 Demand Curve Order at P 164; see also Zone Rehearing Order at P 20 (reiterating FERC’s finding that “a phase‐in could adversely affect incentives to supply shorter term capacity responses, such as demand response and repowering options.”). Additionally, FERC asserted 6 Demand response is “reduction in the consumption of electric energy by customers from their expected consumption in response to an increase in the price of electric energy or to incentive payments designed to induce lower consumption of electric energy.” Elec. Power Supply Ass’n v. FERC, 753 F.3d 216, 220 (D.C. Cir. 2014) (quoting 18 C.F.R. § 35.28(b)(4)) (internal quotation marks and emphasis omitted). 43 that accurate short‐term prices would “guide efficient investment decisions to add or retire capacity resources.” Demand Curve Order at P 162 (emphasis added); see also Zone Rehearing Order at P 16 (warning that failure to create a new zone would “encourage[] premature capacity retirements in the import‐constrained area because of the area’s inefficiently low prices”); Demand Curve Rehearing Order at P 61 (same). Thus, in FERC’s view, an immediate increase in prices would, in fact, help alleviate short‐term reliability concerns by properly incentivizing demand response and repowering options and by discouraging early retirement of existing resources; none of these sources of capacity would require years to come on line. Petitioners argue that FERC’s rejection of a phase‐in resulted in unjust and unreasonable rates and was not supported by substantial evidence.7 They contend that there was insufficient evidence of a short‐term reliability needs in the new zone, 7 FERC and Joint Intervenors assert that, because a phase‐in would require a waiver of NYISO’s tariff, FERC acted within its discretion in denying the phase‐in. They argue that it was NYISO’s burden to show that a phase‐in of the demand curve was just and reasonable. Petitioners counter that FERC nevertheless maintained the burden of showing that implementing the Lower Hudson Valley Zone without a phase‐ in would result in just and reasonable rates, and that FERC was therefore required to show that implementing the full demand curve immediately would provide cost‐ justified benefits to consumers. As explained in the text, we conclude that even if FERC were required to show that implementing the Lower Hudson Valley Zone without the phase‐in would result in just and reasonable rates, it has satisfied this burden. Thus, we do not decide whether FERC had such a burden. 44 and they accuse FERC of failing to identify short‐term supply responses whose decisions would actually be affected by higher short‐term prices. In this context, Petitioners are arguably on stronger footing in suggesting that FERC’s reliance on economic analysis alone is insufficient. As we have discussed, in describing the long‐term benefits of creating the Lower Hudson Valley Zone, FERC persuasively explained why economic theory dictated that reliability concerns are likely to arise in a transmission‐constrained area and that creating a new demand curve for the constrained area would appropriately incentivize the supply of capacity within that area on an aggregate level. But in zeroing in on specific categories of capacity suppliers that would respond to short‐term incentives and mitigate short‐term reliability needs, FERC necessarily assumed that such suppliers existed and would respond to higher prices, and that a short‐term reliability need required an immediate response. However, even accepting for the sake of argument Petitioners’ position that FERC was required to point to evidence supporting its factual premises, we conclude, for the following reasons, that the evidence was sufficient to justify FERC’s rejection of the phase‐in. NYISO asserted, in its proposed tariff revisions in the Zone proceeding, that the “reliability needs” that the new zone would address “are becoming increasingly 45 significant.” J.A. 129. FERC pointed to this statement, as well the 2012 “State of the Market” report cited by NYISO, in determining that a lack of accurate price signals in the constrained zone was already leading to a decrease in available capacity within the zone. See Zone Order at P 35; see also Demand Curve Order at P 162 (declining to “reconsider” the Zone Order’s decision not to adopt a phase‐in). The 2012 State of the Market Report supported FERC’s conclusion. It suggested that the new zone should have been created even sooner, and that the delay “has had several consequences”—including that “[t]he total amount of unforced capacity sold in Zones G, H, and I has fallen by 1 GW (or 21 percent) since the summer of 2006.” Joint Intervenors’ App’x A‐74. The report further suggested that “[s]ome of this capacity may have been economic to remain in service or been maintained more reliably if the . . . capacity zone had been implemented sooner.” Id. This evidence of negative consequences resulting from the initial delay in the Lower Hudson Valley Zone’s implementation supported FERC’s prediction that further delay would cause similar results. There was also evidence supporting FERC’s prediction that further capacity resource losses in the Lower Hudson Valley Zone not only would occur, but also 46 would jeopardize short‐term reliability.8 An expert affidavit that FERC cited in the Demand Curve Order stated that “the loss of any of . . . three large generating facilities in Zones G‐I would likely cause immediate and significant reliability problems for the NYISO.” J.A. 790; see Demand Curve Order at P 159. Moreover, in both of its orders on rehearing, FERC pointed to NYISO’s Summer 2014 Capacity Assessment, which indicated that under extreme weather conditions, Southeast New York would experience a capacity reserve shortage, and that NYISO might therefore be required to invoke its emergency operating procedures to ensure sufficient generation to meet Southeast New York’s needs. Zone Rehearing Order at P 17 n.29; Demand Curve Rehearing Order at P 62 n.49. New York Petitioners claim that FERC miscalculated the size of the potential shortage, but as Joint Intervenors point out, a shortage of any magnitude would reasonably have provided cause for concern. FERC is owed deference in drawing conclusions from this report. And although FERC’s ordinary practice is not to consider new evidence on rehearing, see Exxon 8 NYISO’s own expert’s statement that discounted capacity prices “would be adequate to retain sufficient existing capacity to meet reliability needs,” J.A. 1625, does not require us to reject FERC’s contrary conclusion. See Wis. Valley Improvement Co. v. FERC, 236 F.3d 738, 746‐47 (D.C. Cir. 2001) (describing “the presence of disputing expert witnesses” as “a classic example of a factual dispute the resolution of which implicates substantial agency expertise” (quoting Marsh v. Or. Natural Res. Council, 490 U.S. 360, 376 (1989)) (internal quotation marks omitted)). 47 Corp. v. FERC, 114 F.3d 1252, 1260 n.12 (D.C. Cir. 1997), Petitioners point to no authority suggesting that FERC is prohibited from doing so when the evidence is in the record already or, as with NYISO’s Summer 2014 Capacity Assessment, is publicly available. See, e.g., Wis. Power & Light Co. v. FERC, 363 F.3d 453, 463 (D.C. Cir. 2004) (approving consideration of “relevant, publicly available studies, which need not have been introduced into the record”). Furthermore, there was evidence in the record suggesting that specific resources would respond to the incentives created by immediate implementation of the Lower Hudson Valley Zone’s demand curve. In the Demand Curve Order, FERC cited a submission from Entergy, which suggested that “a phase‐in that would suppress prices for a two‐year period would discourage competitive supply.” Demand Curve Order at P 164. The cited portion of Entergy’s submission discussed a specific generating facility called Bowline Unit 2, which NRG was considering restoring in response to the creation of the Lower Hudson Valley Zone. J.A. 1721‐23. NRG had indicated that it was far more likely to pursue this restoration if there were no phase‐in of the demand curve for the new zone.9 (Contrary to Utility Petitioners’ 9 The brief filed by NRG as an Intervenor in this appeal supports Entergy’s argument before FERC that the restoration of Bowline Unit 2 was financially justified only upon creation of the new zone. 48 argument, this evidence was not newly introduced at the rehearing stage.) Although Utility Petitioners challenge NRG’s suggestion that the phase‐in of the demand curve would actually affect its investment decisions given that Bowline Unit 2 would not be restored in time for, or eligible to participate in, 2014 capacity auctions, we think FERC rationally could have credited NRG’s and Entergy’s arguments, which were supported by an affidavit from Entergy’s expert, that a phase‐in would increase perceived regulatory risk and therefore reduce the likelihood of Bowline Unit 2’s being restored in the short term—regardless of when the facility would actually be able to participate in capacity auctions. See J.A. 1721‐ 23. Finally, New York Petitioners also suggest that FERC’s concern about reliability cannot be squared with its rejection of a reliability criterion in the New Zone Criteria Orders, rendering its reasoning arbitrary and capricious. This argument is a red herring. As we have discussed, FERC made clear throughout both of the proceedings at issue that the “highway” deliverability criterion that it instructed NYISO to apply in determining the need for a new zone was designed to address reliability concerns caused by transmission constraints. Accordingly, FERC’s reliance on reliability concerns in rejecting a phase‐in was wholly 49 appropriate. Given the deference that FERC is owed in this highly technical area, we conclude that its economic predictions about the effects of immediately implementing the Lower Hudson Valley Zone and its demand curve, combined with the evidence described above suggesting that a phase‐in of the demand curve would inhibit efforts to incentivize needed short‐term supply responses, were sufficient to support its decision to reject the phase‐in of the new zone and its demand curve. Because FERC adequately justified higher prices by reference to specific offsetting short‐term benefits, there is no basis for us to disturb FERC’s conclusion that the higher rates generated by the immediate implementation of the new zone were just and reasonable.