Generators Playing With Fire: Court Further Chips Away At FERC Justification for Capacity Market
September 12,2014
A federal circuit court decision hailed by opponents of long-term capacity contracts in New Jersey (e.g. capacity owners) further chips away at the underlying premise which first gave rise to capacity markets -- that FERC somehow has jurisdiction over resource adequacy because it "affected" wholesale energy market prices (e.g., capacity shortages would cause unreasonable price spikes, etc.).
Specifically, in a decision upholding a lower court's order striking down the New Jersey long-term capacity contracts on Constitutional grounds, the United States Court of Appeals for the Third Circuit stressed that its decision was narrowly tailored because the contracts were specifically impacting the interstate capacity market, concluding that, "the federal government ... has exclusive control over interstate rates for wholesales of electric capacity."
However, the Court stressed, "FERC's authority over interstate rates does not carry with it exclusive control over any and every force that influences interstate rates." (emphasis added)
In that earlier D.C. Circuit decision, the court noted FERC had justified its demand response decision on the premise that §§ 205 and 206 of the Federal Power Act grant the agency authority over demand response compensation because these provisions of the FPA task FERC with ensuring that, "all rules and regulations affecting ... rates," in connection with the wholesale sale of electric energy are, "just and reasonable."
However, the D.C. Circuit found that FERC could not use this language, and the notion that FERC's actions are authorized because the demand response compensation "affects" wholesale rates, to expand its original charter to now regulate what are essentially retail prices, in ordering the payment of full LMP for demand response.
"The Commission's rationale ... has no limiting principle," the D.C. Circuit said of FERC's "affects wholesale rates" argument in a decision vacating FERC's order -- a conclusion similar to the Third Circuit's reasoning above.
"Without boundaries, §§ 205 and 206 could ostensibly authorize FERC to regulate any number of areas, including the steel, fuel, and labor markets. FERC proposes the 'affecting' jurisdiction can be appropriately limited to 'direct participants' in jurisdictional wholesale energy markets. But, as this case demonstrates, the directness of participation may be a function of the richness of the incentives FERC commands. The commission's authority must be cabined by something sturdier than creative characterizations," the D.C. Circuit ruled.
"States retain exclusive authority to regulate the retail market. Absent a 'clear and specific grant of jurisdiction' elsewhere, the agency cannot regulate areas left to the states," the D.C. Circuit said.
Similarly, in the New Jersey decision, the Third Circuit concluded, "Unless and until Congress determines otherwise, the states maintain a regulatory role in the nation's electric energy markets. Today's decision does not diminish that important responsibility."
More and more, courts are chipping away at FERC's previously unchecked expansion of authority under the guise that its enlarged reach is authorized under the FPA because the issues being decided and actions being ordered "affect" wholesale rates.
Resource adequacy was indisputably a state issue until FERC, under the pretext of the impact of resource adequacy on wholesale rates, began mandating a transfer of wealth from customers to capacity owners through capacity markets. As FERC's justification that it can order anything so long as it claims wholesale rates are "affected" comes under attack more and more, the legal authority for mandatory capacity markets becomes weaker and weaker.
In their appeals of both Order 745's demand response compensation, and the New Jersey long-term capacity contracts, generators got caught up in seeking short-term victories and quick price increases, no doubt blinded by cratering wholesale prices and desperate for something to buoy their fortunes. But in going after (and winning) decisions that will serve to raise capacity and/or energy prices in the short-term, they may have endangered their long-term well-being, because so much of the "candy" provided to generators is premised on the notion that FERC can order load, in what is ostensibly a "competitive" market (where the following would not be allowed), to compensate generators at the levels and at rates and for the services as prescribed by FERC, because the issues decided by FERC "affect" wholesale rates.
Now that fundamental tenet is under attack. In appealing Order 745 and the New Jersey LCAPP order, generators decided to play with fire, and as we noted recently, they might just get burned.