Court Opinion

ID: 4702453
Source: CourtListenerOpinion
Date Created: 2021-07-09 15:02:58.971921+00
Date Added: 2024-06-11T08:06:24.975573
License: Public Domain

United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 6, 2021                   Decided July 9, 2021

                       No. 20-1212

   DELAWARE DIVISION OF THE PUBLIC ADVOCATE, ET AL.,
                     PETITIONERS

                             v.

       FEDERAL ENERGY REGULATORY COMMISSION,
                    RESPONDENT

              PJM INTERCONNECTION, L.L.C.,
                      INTERVENOR

            On Petition for Review of Orders of
        the Federal Energy Regulatory Commission

     Casey A. Roberts argued the cause for petitioners. With
her on the briefs were Kim Smaczniak, Regina A. Iorii, Paula
M. Carmody, William F. Fields, Joseph G. Cleaver, Karen R.
Sistrunk, and Anjali G. Patel.

    Carol J. Banta, Senior Attorney, Federal Energy
Regulatory Commission, argued the cause for respondent.
With her on the brief were David L. Morenoff, Acting General
Counsel, and Robert H. Solomon, Solicitor.
                               2
     Paul M. Flynn argued the cause for intervenor PJM
Interconnection, LLC in support of respondent. With him on
the brief was Ryan J. Collins.

    Paul W. Hughes, David G. Tewksbury, and Matthew A.
Waring were on the brief for amicus curiae PJM Power
Providers Group in support of respondent.

    Before: SRINIVASAN, Chief Judge, HENDERSON and
PILLARD, Circuit Judges.

    Opinion for the Court filed by Circuit Judge HENDERSON.

     KAREN LECRAFT HENDERSON, Circuit Judge: The Federal
Energy Regulatory Commission (Commission) approved PJM
Interconnection, LLC’s (PJM) proposed revisions to its
capacity market auction mechanism, which is designed to
determine the price and amount of electric capacity. The
Delaware Division of the Public Advocate, Maryland Office of
People’s Counsel, the Office of the People’s Counsel for the
District of Columbia and Sierra Club (Petitioners) challenge
the Commission’s approval of two elements of that
mechanism. We deny the petition in part, grant the petition in
part and remand without vacatur.

                      I.   BACKGROUND

     The Federal Power Act (Act) gives the Commission
jurisdiction of the transmission and wholesale of electric
energy in interstate commerce. 16 U.S.C. § 824(b). The Act
requires that “[a]ll rates and charges . . . for or in connection
with” such transmission or sale be “just and reasonable.” Id.
§ 824d(a). Under Section 205 of the Act, if a utility seeks to
change any rate or charge, it must file notice of the proposed
changes with the Commission. Id. § 824d(d).
                               3
     PJM is a regional transmission organization (RTO) that
manages an electric grid covering all or part of thirteen
Mid-Atlantic and Midwestern states and the District of
Columbia. As an RTO, PJM “promot[es] efficiency and
reliability in the operation and planning of the electric
transmission grid.” 18 C.F.R. § 35.34(a). To promote
reliability and prevent service interruptions, PJM must
“ensur[e] that its system has sufficient generating capacity.”
Md. Pub. Serv. Comm’n v. FERC, 632 F.3d 1283, 1284 (D.C.
Cir. 2011) (per curiam).

     PJM ensures sufficient generating capacity through its
“capacity market.” Capacity is not “actual electricity” but
instead “a commitment to produce electricity or forgo the
consumption of electricity when required.” Advanced Energy
Mgmt. All. v. FERC, 860 F.3d 656, 659 (D.C. Cir. 2017) (per
curiam). To establish the capacity market, PJM conducts a
yearly auction in which electricity suppliers submit offers to be
available to provide capacity during a one-year period, three
years in the future. Suppliers offer a specific amount of
capacity at a specific price and together the offers comprise the
auction’s “supply curve.” The auction utilizes an
administratively-set “demand curve”—the Variable Resource
Requirement Curve (VRR Curve)—which represents the
prices that consumers should pay for varying quantities of
capacity. The intersection of the two curves dictates the amount
of capacity committed and the price suppliers are paid.

    The VRR Curve is set based on several inputs. The
Reliability Requirement input is the amount of capacity that
must be produced to meet peak demand, including a reserve
margin, which together are intended to allow no more than one
power outage every decade. The “net cost of new entry” input
(net CONE) is how much revenue a hypothetical new
generator—referred to as the “Reference Resource”—would
                                  4
need to earn in the capacity market to justify construction. In
other words, the net CONE is an estimate of the revenue the
Reference Resource cannot recover from other markets1 and
thus needs to recover from the capacity market to recoup its
construction costs. To set the net CONE, PJM selects a type of
electric generation technology to serve as the Reference
Resource and estimates two values, one of which is subtracted
from the other: (1) an estimate of the cost to install and operate
a Reference Resource (i.e., the gross cost of new entry), minus
(2) an estimate of revenues from PJM’s “energy and ancillary
services” markets (EAS Revenue Estimate). The Reference
Resource affects the net CONE estimate, which in turn
positions the VRR Curve, whose intersection with the supply
curve determines the price and amount of capacity.

    PJM must review the VRR Curve every four years. For the
2018 review, PJM hired The Brattle Group (Brattle) to review
the VRR Curve and Brattle eventually produced two reports.
As relevant here, Brattle suggested PJM change its Reference
Resource from a combustion turbine plant—the Reference
Resource since the inception of the capacity market—to a
combined cycle turbine plant. Despite making that

     1
        PJM operates several “‘markets’ for the wholesale sale of
electricity and other related products.” Advanced Energy, 860 F.3d
at 659. For example, the “electricity market” is the real-time supply
of electricity “in which generators sell actual power to retailers.” TC
Ravenswood, LLC v. FERC, 741 F.3d 112, 114 (D.C. Cir. 2013). A
“capacity market,” on the other hand, is a market for the future
supply of electricity. Id. The suppliers’ offers are commitments to
provide future electricity and are utilized if utilities “need more
electricity in order to meet consumer demand.” Advanced Energy,
860 F.3d at 660. When the utilities need more electricity to meet
demand, “PJM calls on resources with a capacity commitment” and
“[c]apacity resources must provide their committed share of the
needed electricity.” Id.
                                 5
recommendation, Brattle acknowledged the rationale for
choosing a “[combustion turbine]-based curve if PJM and
stakeholders are highly risk-averse about ever procuring less
than the target reserve margin.” Joint Appendix (J.A.) 127
(Brattle Curve Report). On October 12, 2018, pursuant to
Section 205 of the Federal Power Act, PJM filed several
proposed revisions to the capacity market. Among the
revisions, PJM proposed keeping a combustion turbine plant as
its Reference Resource2 and proposed an update to the EAS
Revenue Estimate by increasing the value of the Reference
Resource’s estimated offer to supply energy in the energy
market by 10% (10% adder). The Petitioners intervened to
oppose these two proposals. On April 15, 2019, the
Commission accepted PJM’s proposed revisions as just and
reasonable. PJM Interconnection, LLC, 167 FERC ¶ 61,029
(2019). The Petitioners requested rehearing but, on April 16,
2020, the Commission denied rehearing and affirmed its order
in all relevant respects. PJM Interconnection, LLC, 171 FERC
¶ 61,040 (2020). The Petitioners timely sought judicial review
pursuant to 16 U.S.C. § 825l(b).

                         II. DISCUSSION

    A Commission order will be set aside if it is “arbitrary,
capricious, an abuse of discretion, or otherwise not in
accordance with law.” 5 U.S.C. § 706(2)(A); Pac. Gas & Elec.
Co. v. FERC, 373 F.3d 1315, 1319 (D.C. Cir. 2004). The

    2
         Combustion turbine plants can be greenfield (wholly new
construction) or brownfield (modifications to existing generation
facilities). PJM’s Reference Resource does not specify whether it is
a greenfield or brownfield combustion turbine plant. But the
estimates for PJM’s combustion turbine plant Reference Resource
utilize costs associated with greenfield facilities. Accordingly, the
parties often refer to PJM’s Reference Resource as a greenfield
combustion turbine plant.
                                6
Commission “must be able to demonstrate that it has made a
reasoned decision based upon substantial evidence in the
record,” N. States Power Co. v. FERC, 30 F.3d 177, 180 (D.C.
Cir. 1994) (internal quotations omitted), and must “articulate a
satisfactory explanation for its action including a rational
connection between the facts found and the choice made,”
Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut.
Auto. Ins. Co., 463 U.S. 29, 43 (1983) (internal quotations
omitted). The Commission is accorded substantial deference in
rate-making decisions because “‘just and reasonable’ is
obviously incapable of precise judicial definition,” Morgan
Stanley Cap. Grp. Inc. v. Pub. Util. Dist. No. 1 of Snohomish
Cty., 554 U.S. 527, 532 (2008), and rate-related matters “are
either fairly technical or involve policy judgments that lie at the
core of the regulatory mission,” S.C. Pub. Serv. Auth. v. FERC,
762 F.3d 41, 55 (D.C. Cir. 2014) (per curiam) (internal
quotations omitted). For the reasons set out below, we conclude
that the Commission met this standard of review as to its
approval of the Reference Resource as just and reasonable but
not as to its approval of the 10% adder.

                   A. Reference Resource

     Before addressing the validity of the Commission’s
decisionmaking, we must dispense with the Petitioners’
argument that the Commission erred by not applying its
“established framework” for evaluating an RTO’s choice of
Reference Resource. Pet’rs’ Br. 30. In ISO New England Inc.,
the Commission applied three factors to assess the
appropriateness of an RTO’s Reference Resource choice:
(1) whether the unit is likely to be developed in the region,
(2) whether cost and revenue estimates for that unit can be
developed with confidence and (3) whether the VRR Curve
produces prices high enough to meet the reliability standard
while not adding unnecessary costs. 147 FERC ¶ 61,173,
                                7
¶¶ 32–33 (2014). Other than review of subsequent capacity
market changes in the same region, however, we are unaware
of any other case in which the Commission has applied the
“framework.” See ISO New Eng. Inc., 161 FERC ¶ 61,035,
¶¶ 38–41 (2017). Moreover, ISO New England’s language does
not suggest that it meant to dictate factors the Commission
must use to assess a Reference Resource in every case. See 147
FERC ¶ 61,173 at ¶¶ 32–33. Accordingly, the ISO New
England factors are far from an “established framework” and
the Commission’s decision not to apply them is not error.3

    The Petitioners’ remaining arguments suggest use of a
combustion turbine plant as the Reference Resource is unjust
and unreasonable because use of a combined cycle plant would
be more just and more reasonable. But “our role is ‘not to ask
whether a regulatory decision is the best one possible or even
whether it is better than the alternatives.’” PJM Power
Providers Grp. v. FERC, 880 F.3d 559, 562 (D.C. Cir. 2018)
(quoting FERC v. Elec. Power Supply Ass’n, 577 U.S. 260, 292
(2016)). Accordingly, “we must determine not whether record
evidence supports [the Petitioners’] version of events, but
whether it supports FERC’s.” La. Pub. Serv. Comm’n v. FERC,
522 F.3d 378, 395 (D.C. Cir. 2008) (per curiam) (internal
quotations omitted). The Commission articulated a satisfactory
explanation for its decision that the use of a combustion turbine
plant as the Reference Resource is just and reasonable and
substantial evidence supports that decision.

    The Commission recognized that combustion turbine
plants possess qualities which are valuable as a Reference
Resource—they are relatively inexpensive to build and can be

    3
       The Commission subsequently addressed ISO New England’s
factors in its rehearing order, concluding that PJM’s proposal was
just and reasonable even applying the factors. See PJM
Interconnection, 171 FERC ¶ 61,040 at ¶ 14.
                                 8
built quickly due to those lower costs and thus, are more
responsive to address increases in capacity demand. PJM
Interconnection, 167 FERC ¶ 61,029 at ¶ 59. Combustion
turbine plants are built at a significantly lower total cost than
combined cycle plants.4 Adam Keech, PJM’s Executive
Director for Market Operations, explained that combustion
turbine plants “have the lowest project cost and are the quickest
resources to bring to market.” J.A. 67 (Keech Aff.). Keech
further explained these qualities allow combustion turbine
plants to respond quickly to reliability concerns and “long have
operated well to meet rapid changes in demand.” Id. at 67–68.
The Commission’s emphasis of these qualities is reasonable
given “time to market” is an “important consideration[] in
deciding on the Reference Resource configuration” because the
Reference Resource configuration requires “quick and reliable
provision of resource adequacy and reliability.” J.A. 199 (Aff.
Accompanying Cmts. of LS Power Assocs., LP); see also J.A.
276 (PJM Answer); J.A. 67–68 (Keech Aff.).5

    4
        Combustion turbine plants cost approximately $300 million
to construct; combined cycle plants cost approximately $1 billion.
“A combined cycle power plant is, in essence, the configuration of
one or more combustion turbines that incorporates additional
technology to capture waste heat as steam. The same technology
without the additional process to capture waste heat is the simple
cycle combustion turbine.” Pet’rs’ Br. 10 n.4 (internal quotations
omitted) (citing FERC, Market Assessments – Glossary,
https://www.ferc.gov/industries-data/market-assessments/overview/
glossary#C (last updated Aug. 31, 2020)).
      5
         The Commission also noted that combustion turbine plants
“represent the generation technology that is most dependent on
capacity market revenue due to their high marginal operating costs
and low capacity factors.” PJM Interconnection, 167 FERC ¶ 61,029
at ¶ 59. In other words, combustion turbine plants operate more often
in the capacity market when consumer demand is peaking and prices
are high. Keech explained that there are good reasons to use a
                                 9
     The Commission found that combustion turbine plants
continue to serve a role in PJM’s region—over 1,600
megawatts of combustion turbine plant capacity was built in
PJM’s region since the capacity market was adopted, including
two combustion turbine plants added after 2014. PJM
Interconnection, 167 FERC ¶ 61,029 at ¶ 61. Granted, the two
combustion turbine plants built since 2014 were brownfield,
not greenfield (as in the Reference Resource) and those two
plants represent a small portion of generating capacity
constructed in PJM’s region since 2014. Brattle found,
however, that variability exists in resource construction type
over time in PJM’s region and the Petitioners contend only that
a greenfield combustion turbine plant “has not been built in
PJM in the past five years.” Pet’rs’ Br. 21 (emphasis omitted);
accord id. at 28–29. Brattle, PJM and the Commission have
emphasized the importance of stability in Reference Resource
type. See J.A. 156 (Brattle Curve Report); J.A. 68 (Keech Aff.);
ISO New Eng. Inc., 147 FERC ¶ 61,173 at ¶ 34. The
Commission recognized as much here, noting “negative
impacts [from] shifting between a [combustion turbine] and
[combined cycle] plant from year to year.” PJM
Interconnection, 171 FERC ¶ 61,040 at ¶ 15 n.32 (citing PJM
Interconnection, LLC, 126 FERC ¶ 61,275, ¶ 39 (2009)). This
variability, and related negative impacts from shifting the
Reference Resource type, are partly why the selected
Reference Resource need not be “the most frequent new
entrant” into PJM’s region. PJM Interconnection, 167 FERC
¶ 61,029 at ¶ 61. “[D]ifferent technologies can efficiently exist
within the market and are needed to meet different types of
demand.” PJM Interconnection, 171 FERC ¶ 61,040 at ¶ 15.

“peaking” resource like combustion turbine plants as the Reference
Resource and, provided that resource is viable in the region, doing
so is “highly consistent with the purpose of capacity markets.” J.A.
67 (Keech Aff.).
                              10
The Commission appropriately found that combustion turbine
plants have an important role to play and continue to be
deployed in PJM’s region.

     The Commission also found reliability benefits flow from
the use of a combustion turbine plant as the Reference
Resource. PJM Interconnection, 167 FERC ¶ 61,029 at ¶ 61.
This finding is important given that ensuring the reliability of
the electric grid is a primary function of RTOs and of PJM’s
capacity market. See 18 C.F.R. § 35.34(a); J.A. 174 (Brattle
Curve Report). Combined cycle plants are more reliant on
energy market revenues to justify construction. Those energy
market revenues—included in the EAS Revenue Estimate—
are often considered more difficult to estimate than the
construction costs that also factor into the net CONE.
Accordingly, any mis-estimation of energy market revenues
has a larger impact on the accuracy of a combined cycle plant’s
net CONE than on a combustion turbine plant’s. The
Commission recognized that Brattle’s estimates of its
recommended combined cycle plant showed that if energy
market revenues were mis-estimated, that “could result in the
curve failing to meet the required reliability standards.” PJM
Interconnection, 167 FERC ¶ 61,029 at ¶ 61; see also PJM
Interconnection, 171 FERC ¶ 61,040 at ¶ 15.

     Brattle “disagree[d]” with “[t]he conventional wisdom . . .
that [combined cycle plants] are subject to more estimation
error in [energy and ancillary services] offsets, since their
[energy and ancillary services] offsets are larger.” J.A. 156
(Brattle Curve Report). In Brattle’s view, estimation of a
combined cycle plant’s EAS revenue is more accurate than
estimation of a combustion turbine plant’s EAS revenue in
PJM’s region. Brattle nevertheless found PJM’s approach to
combustion turbine plant EAS Revenue Estimates
“reasonable.” Id. at 142. Regardless, even if it is easier to
                               11
estimate a combined cycle plant’s EAS revenue than that of a
combustion turbine plant, as noted above, Brattle’s modeling
showed that its recommended combined cycle plant would fail
the Reliability Requirement if the net CONE estimate was
understated due to “inaccurate [EAS] [R]evenue [E]stimates.”
J.A. 69 (Keech Aff.). In contrast, a VRR Curve based on a
combustion turbine plant satisfied the Reliability Requirement
under all tested scenarios.

     As the Petitioners point out, Brattle’s recommended
combined cycle plant resulted in a VRR Curve which cost
consumers approximately $140 million less each year than
PJM’s proposed combustion turbine plant. Further, PJM’s
proposed combustion turbine plant resulted in a VRR Curve
over four times more protective than the Reliability
Requirement envisions. Yet we do not find that the
Commission’s approval of a VRR Curve which costs
consumers $140 million more each year and achieves more
reliability than required is unreasonable. Brattle’s
recommended, cheaper combined cycle-based curve is the
same one that would fail the Reliability Requirement if the
EAS Revenue Estimate were mis-estimated. Moreover, the
costs associated with the increased reliability of the combustion
turbine plant are not as significant when put in context. Brattle
acknowledged that it “see[s] an argument that a [combustion
turbine]-based curve would more strongly guarantee resource
adequacy under all conditions, at a cost that is modest when
put in context.” J.A. 192 (Brattle Curve Report) (emphasis
added). The $140 million difference between PJM’s proposed
curve and Brattle’s recommended curve represents only a 1.7%
reduction in consumer costs. The Commission plainly
understood the increased costs were modest, as it noted PJM’s
explanation that the cost difference among all of the different
studied curves “rang[ed] only a few percent.” PJM
Interconnection, 167 FERC ¶ 61,029 at ¶ 17. Further, the
                                 12
Commission has recognized that, even if a resource provides
more reliability than the Reliability Requirement estimates,
that additional reliability has value. See PJM Interconnection,
LLC, 119 FERC ¶ 61,318, ¶ 106 (2007); see also J.A. 131
(Brattle Curve Report).

     The Commission articulated several reasons, supported by
substantial evidence in the record, that the use of a combustion
turbine plant as the Reference Resource is just and reasonable.
Accordingly, the Commission’s determination is not arbitrary
and capricious and we deny the petition in relevant part.6

                         B. 10% Adder

    Under PJM’s energy market rules, actual generation
resources are permitted to increase their offers to supply energy

    6
         The Petitioners’ alternative attacks on the Commission’s
reasoning—based on the proposition that the Commission
disregarded consumer interests by not considering consistent
oversupply in PJM’s market—are unavailing. Reliability is a
consumer interest. Indeed, excess reliability—i.e., more capacity
than is necessary to meet the Reliability Requirement—still has
value in PJM’s region. The Commission reasonably determined that
an oversupplying combustion turbine plant-based VRR Curve, at a
modest cost increase, was compatible with consumer interests
because it ensured reliability more consistently than a combined
cycle plant-based VRR Curve. Moreover, the Petitioners fail to
establish why previous oversupply is a relevant consideration now,
when the Commission was evaluating new inputs which will change
the price and supply of capacity in PJM’s market. Indeed, Brattle
estimated PJM’s proposed combustion turbine plant-based VRR
Curve will reduce the price and supply of capacity in PJM’s region
overall compared to the VRR Curve approved in 2014. Accordingly,
the Commission reasonably considered consumer interests by
prioritizing reliability over avoiding future oversupply when it made
its determination.
                               13
by 10% above their estimated costs (effectively their fuel
costs). The 10% adder is intended to account for uncertainties
in determining future costs because suppliers must estimate
their costs before submitting an offer to supply electricity to
PJM’s energy market. Generation resources are not required to
use the 10% adder in their offers. In 2015, the Commission
approved the 10% adder as just and reasonable. See PJM
Interconnection, LLC, 153 FERC ¶ 61,289, ¶ 30 (2015). In the
2018 review of its capacity market, PJM proposed including
the 10% adder in the energy market offer assumed for the
Reference Resource in its EAS Revenue Estimate and the
Commission approved the proposal as just and reasonable.
Nonetheless, the Commission did not provide a satisfactory
explanation for its approval, which reasoned decisionmaking
requires, and we grant the Petitioners’ petition in relevant part.

     The evidence before the Commission indicated that
combustion turbine plants may not utilize the 10% adder in
their energy market offers. Economist James Wilson found that
if the Reference Resource incorporated the 10% adder, its net
EAS revenues would decline by up to 32%. Wilson further
explained that most combustion turbine plants would face the
uncertainties that underlie the 10% adder “relatively rarely, if
at all.” J.A. 271 (Wilson Aff.). The Independent Market
Monitor7 noted that many gas-fired generation resources—like
the Reference Resource—exclude the 10% adder from their
offers. And Brattle’s research gathered “mixed reactions”
regarding whether combustion turbine plants would face costs
requiring an offset from the 10% adder. J.A. 146 (Brattle Curve
Report). Brattle recommended only that “PJM investigate this

    7
         The Independent Market Monitor is a neutral entity that
oversees compliance with PJM’s market rules. See N.J. Bd. of Pub.
Utils. v. FERC, 744 F.3d 74, 91 n.15 (3d Cir. 2014).
                              14
further and consider applying the 10% cost offer adder.” Id. at
147 (emphasis added).

     The Commission found that utilizing the 10% adder
“improves [the] accuracy” of the EAS Revenue Estimate. PJM
Interconnection, 171 FERC ¶ 61,040 at ¶ 31. The Commission
did not, however, assess whether, or the extent to which,
combustion turbine plants would utilize the 10% adder. Nor did
the Commission explain why such an assessment would be
unnecessary. Moreover, the Commission’s response to the
contrary evidence can be described as little more than a hand
wave. It approved the use of the 10% adder because the adder’s
general use was already approved as just and reasonable and
because including the adder would make the EAS Revenue
Estimate “consistent with existing energy market rules.” PJM
Interconnection, 167 FERC ¶ 61,029 at ¶ 128.

     The net CONE should estimate the costs and revenues of
the Reference Resource based on accurate market signals and
data. See PJM Interconnection, LLC, 129 FERC ¶ 61,090, ¶¶ 9,
40 (2009). Whether the type of supplier the Reference Resource
is based on would utilize the 10% adder, then, is a relevant
consideration. Simply because suppliers are permitted to utilize
the 10% adder—and recognizing there are good reasons for
them to be so permitted—we do not think it reasonable to
assume the suppliers will utilize the 10% adder, especially
when the evidence here indicates that the use of the adder
would run counter to a combustion turbine plant’s economic
interest. If no or few actual combustion turbine plants ever use
the 10% adder, or if those that do use less than the maximum
10%, it makes little sense to include the 10% adder for a
hypothetical combustion turbine plant’s EAS Revenue
Estimate if the goal is to estimate accurately the Reference
Resource’s revenues. Accordingly, we believe the
Commission’s approval of the 10% adder as just and
                               15
reasonable on this record is arbitrary and capricious. See State
Farm, 463 U.S. at 43 (action arbitrary and capricious if agency
“failed to consider an important aspect of the problem” or
“offered an explanation for its decision that runs counter to the
evidence before the agency”).

    For the foregoing reasons, the petition for review is
granted in part and denied in part. As the Petitioners expressly
abjure vacatur, we remand for reassessment of the 10% adder
without vacatur.

    So ordered.