Connecticut Dep't of Pub. Util. Control v. FERC - Opposition

No. 09-277

In the Supreme Court of the United States

CONNECTICUT DEPARTMENT OF PUBLIC UTILITY CONTROL, ET AL., PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT

BRIEF FOR THE
FEDERAL ENERGY REGULATORY COMMISSION
IN OPPOSITION

ELENA KAGAN
Solicitor General
Counsel of Record
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217

THOMAS R. SHEETS
General Counsel
ROBERT H. SOLOMON
Solicitor
SAMUEL SOOPPER
Attorney
Federal Energy Regulatory
Commission
Washington, D.C. 20426

QUESTION PRESENTED

Whether the Federal Energy Regulatory Commis sion had authority under the Federal Power Act, 16 U.S.C. 824, 824d-824e, to review the annual calculation by ISO New England, Inc., of the minimum amount of wholesale electric capacity that must be available to as sure reliable service in the New England region.

In the Supreme Court of the United States

No. 09-277

CONNECTICUT DEPARTMENT OF PUBLIC UTILITY

CONTROL, ET AL., PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT

BRIEF FOR THE
FEDERAL ENERGY REGULATORY COMMISSION
IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 1-19) is reported at 569 F.3d 477. The orders of the Federal Energy Regulatory Commission (Pet. App. 22-83, 84- 136, 137-157, 158-196, 197-210, 211-216) are reported at 118 F.E.R.C. ¶ 61,157, 120 F.E.R.C. ¶ 61,234, 119 F.E.R.C. ¶ 61,161, 121 F.E.R.C. ¶ 61,125, 122 F.E.R.C. ¶ 61,144, and 123 F.E.R.C. ¶ 61,036.

JURISDICTION

The judgment of the court of appeals (Pet. App. 20- 21) was entered on June 23, 2009. Petitions for rehear ing were denied on July 28, 2009 (Pet. App. 217-218, 219-220). The petition for a writ of certiorari was filed on September 3, 2009. The jurisdiction of this Court is in voked under 28 U.S.C. 1254(1).

STATEMENT

1. The Federal Power Act (FPA or Act), 16 U.S.C. 791a et seq., grants the Federal Energy Regulatory Commission (FERC or Commission) exclusive jurisdic tion over the "transmission of electric energy in inter state commerce" and the "sale of electric energy at wholesale in interstate commerce" by public utilities. 16 U.S.C. 824(b)(1). Under the FPA, proposed rates for the sale or transmission of power within FERC's juris diction must be "just and reasonable" and not unduly discriminatory or preferential. 16 U.S.C. 824d(a) and (b). The Act also provides for the Commission to review rates after they have been accepted for filing and gone into effect. If, after a hearing-either on its own motion or based on a complaint-the Commission determines that any existing rate or charge is "unjust, unreason able, unduly discriminatory or preferential," it must determine and fix by order "the just and reasonable rate * * * to be thereafter observed and in force." 16 U.S.C. 824e(a).

2. a. Utilities in New England have a long history of coordinated interstate operation. In 1971, the New Eng land Power Pool-a voluntary association of public utilities-began operating the bulk electric power sys tem for the entire six-state region, centrally dispatching generating units and transmission facilities to serve the load of the various utilities in the New England States. See, e.g., New England Power Pool, 79 F.E.R.C. ¶ 61,374, at 62,576 (1997), reh'g denied, 85 F.E.R.C. ¶ 61,242 (1998).

In the late 1990s, the New England Power Pool pro posed to restructure the New England electricity mar kets, unbundling wholesale generation from transmis sion services and establishing an Independent System Operator (ISO) that would take operational control of the New England bulk electric power system. The New England Power Pool proposed that the new ISO would administer a non-discriminatory, open-access transmis sion tariff and would develop and administer competitive wholesale electricity markets in New England. In a se ries of orders issued between 1997 and 2001, the Com mission accepted those proposals. See New England Power Pool, 79 F.E.R.C. ¶ 61,374, reh'g denied, 85 F.E.R.C. ¶ 61,242 (1998) (conditionally authorizing es tablishment of ISO New England); New England Power Pool, 83 F.E.R.C. ¶ 61,045 (1998), reh'g denied, 95 F.E.R.C. ¶ 61,074 (2001) (conditionally accepting open- access transmission tariff); New England Power Pool, 85 F.E.R.C. ¶ 61,379 (1998) (conditionally accepting market rules and conditionally approving market-based rates); New England Power Pool, 87 F.E.R.C. ¶ 61,045 (1999) (conditionally accepting new and revised market rules). FERC later approved a comprehensive redesign of the New England wholesale electricity markets. See New England Power Pool & ISO New England, Inc., 100 F.E.R.C. ¶ 61,287 (2002).

b. This case involves the electric capacity market in New England. Capacity is the ability to produce energy when needed; in a capacity market, unlike a traditional wholesale energy market, an electricity provider pur chases from a generator or other supplier the option to buy a specific quantity of energy, regardless of whether the energy itself is ultimately purchased. Pet. App. 3-4. Providers make such purchases in order to maintain the reliability of the electric grid by ensuring that they are able to respond adequately to fluctuations in demand. Id. at 4.

For many years before the establishment of ISO New England, the New England Power Pool had estab lished an Installed Capacity Requirement (ICR), obli gating load-serving utilities in the power pool to acquire an amount of electric capacity equal to their peak load plus a reserve margin, or else make a required payment. See ISO New England, Inc., 91 F.E.R.C. ¶ 61,311, at 62,080 (2000). As the Commission explained, "if a utility had an [installed capacity] deficiency, it could either obtain its requirements from an entity having a surplus or be subject to a deficiency charge from the pool," with the pool charge for deficiencies "generally determined on the basis of the regulated cost of the electric facili ties." Ibid. In Municipalities of Groton v. FERC, 587 F.2d 1296 (D.C. Cir. 1978), the court of appeals rejected a challenge to FERC's jurisdiction over the deficiency charge assessed by the New England Power Pool. Id. at 1301-1302. Later, authority to set the ICR was trans ferred from the New England Power Pool to ISO New England. See ISO New England Inc., 106 F.E.R.C. ¶ 61,280, order on reh'g, 109 F.E.R.C. ¶ 61,147 (2004), petition for review denied, Maine Pub. Utils. Comm'n v. FERC, 454 F.3d 278 (D.C. Cir. 2006).

In 2006, the Commission approved a comprehensive settlement that restructured the New England capacity market. See Devon Power LLC, 115 F.E.R.C. ¶ 61,340, order on reh'g, 117 F.E.R.C. ¶ 61,133. The Commis sion's orders were affirmed in relevant respect in Maine Public Utilities Commission v. FERC, 520 F.3d 464 (D.C. Cir. 2008), cert. granted sub nom. NRG Power Marketing, LLC v. Maine Public Utilities Commission, No. 08-674 (argued Nov. 3, 2009). As the court of ap peals explained, the settlement creates a forward capac ity market that "establishes a market design for deter mining capacity charges," but it does not set the ICR "or in any way determine the appropriate amount of capac ity that must be available." Id. at 480 (citation omitted). Thus, while the court in Maine Public Utilities Com mission affirmed the Commission's statutory jurisdic tion over the forward capacity market, it reserved the question whether that jurisdiction encompasses FERC's review of the ICR itself. Ibid.

3. In the orders at issue here, the Commission con cluded that it had statutory authority to review ISO New England's ICR. Pet. App. 22-216. As the Commis sion explained, the ICR "is expressed as the total num ber of [megawatts] that New England's Load Serving Entities," that is, the public utilities that deliver elec tricity to end users, "will be required to purchase" by auction in the wholesale forward capacity market in New England. Id. at 85. That number is then "subdivided to arrive at the amount of [megawatts] of capacity that each [utility] must purchase for that year." Ibid. The Commission concluded that the ICR "directly affects the determination of the clearing price in the capacity mar ket and so directly affects charges to customers" in that wholesale market. Ibid. Accordingly, in the Commis sion's view, the calculation of the ICR fell within the agency's jurisdiction under Sections 824(b)(1), 824d(a), and 824e(a). Id. at 98. The Commission noted that the Act confers on it the responsibility for ensuring that wholesale rates and charges, including any practices af fecting them, are just and reasonable. Ibid. "[G]iven that the ICR is one of the principal determinants of the price of capacity and thus of charges to customers, re view of the determination of the ICR rests with the Com mission." Id. at 98-99.

The Commission distinguished between the "'capac ity' requirement" at issue in its orders and "electrical generating capacity," the former being "the ability to produce electric energy to serve load" when called on to do so by ISO New England, and the latter being "one means, but not the only means, of producing that prod uct." Pet. App. 100. The agency emphasized that, by reviewing the ICR, it was exercising authority solely over the capacity requirement, and not over electrical "generating capacity that states must build (or require to be built)." Id. at 99.

4. The court of appeals denied petitions for review. Pet. App. 1-19.

The court of appeals began by noting that petitioners had conceded "that the Commission may determine just and reasonable capacity charges" in the whoesale capa city market and may also "set those charges so as to in centivize the procurement or creation of additional ca pacity to ensure system reliability." Pet. App. 9 (inter nal quotation marks and brackets omitted). In the court's view, that concession "radically simplifie[d] the legal question" in this case. Ibid. The court explained that, despite its name, the ICR "doesn't actually 're quire' anyone to 'install' any new 'capacity' at all." Id. at 10. Instead, it "is better understood not as a capacity requirement but as something more like a peak demand estimate," employed in ISO New England's forward ca pacity market "to locate the price at which market in centives will be sufficient to meet that expected de mand." Id. at 10-11. Because there was no question that the Commission "could directly set the price of ca pacity at this level precisely to incentivize procurement of resources adequate to meet" the estimate of peak de mand, "and because this estimate necessarily affects prices but not necessarily new capacity construction," the court concluded that there was no "direct regulation of generation facilities." Id. at 11; see 16 U.S.C. 824(b)(1) (providing that the Commission generally "shall not have jurisdiction * * * over facilities used for the generation of electric energy").

The court of appeals also rejected the argument that the Commission had "exceeded its jurisdiction * * * by compelling [utilities] to acquire a particular amount of capacity" in the wholesale market. Pet. App. 13. First, the court explained, "nothing in the Federal Power Act expressly proscribes requiring [utilities] to pay for a certain amount of capacity." Ibid. Second, even if the Act did contain such a prohibition, the Commission had not claimed authority to require the purchase of a par ticular amount of capacity; rather, it had "claim[ed] au thority to review the capacity charges that [ISO New England] imposes on member utilities to ensure they are just and reasonable." Id. at 15. Third, the court noted, the Commission's authority to require utilities to make adequate capacity purchases had already been estab lished in Municipalities of Groton and in Mississippi Industries v. FERC, 808 F.2d 1425 (D.C. Cir.), vacated in part on other grounds, 822 F.2d 1103 (D.C. Cir.), cert. denied, 484 U.S. 985 (1987). Pet. App. 15-17.

ARGUMENT

Petitioners renew their contention (Pet. 17-40) that the Commission exceeded its statutory jurisdiction in its review of ISO New England's installed capacity require ment (ICR). The court of appeals correctly rejected that argument, and its decision does not conflict with any decision of this Court or any other court of appeals. Further review is not warranted.

1. In the orders at issue here, the Commission re viewed a calculation by ISO New England of the level of wholesale capacity that New England utilities must maintain to ensure the reliability of electric services. As the orders describe in detail, that calculation directly affects the price of wholesale electric capacity in two respects. First, it affects wholesale electric rates in that the higher the level of the ICR (i.e., the greater the de mand for capacity), the higher the eventual wholesale charges to customers. See, e.g., Pet. App. 98-99. Sec ond, the ICR is the quantity component of a wholesale electricity rate formula because it determines utilities' costs. Id. at 102-103. In making those findings, the Commission considered and rejected petitioners' conten tion that it was violating 16 U.S.C. 824(b)(1) by directly regulating facilities used for generation of electric en ergy. Pet. App. 99. As the Commission explained, it was neither "exercising authority over electrical generating capacity or setting the amount of generating capacity that states must build (or require to be built)." Ibid.

Likewise, the court of appeals recognized that the ICR "doesn't actually 'require' anyone to 'install' any new 'capacity' at all," but is instead "something more like a peak demand estimate" that ISO New England's forward capacity market uses "to locate the price at which market incentives will be sufficient to meet that expected demand." Pet. App. 10-11. As such, it is part of a mechanism for setting rates for the wholesale inter state sale of electricity, and therefore falls within FERC's jurisdiction under 16 U.S.C. 824(b)(1) and 824d(a). See New York v. FERC, 535 U.S. 1 (2002).

2. Petitioners assert (Pet. 22) that the decision be low "conflicts with this Court's guidance and the rule in other circuits for deference to an agency's interpretation of its statutory jurisdiction," because the court of ap peals erroneously deferred to the Commission's asser tion of jurisdiction over ISO New England's ICR calcu lation. Ibid. (capitalization and emphasis omitted). That is incorrect. While the court of appeals correctly stated that deference generally is appropriate when a court reviews an agency's interpretation of a statute defining its jurisdiction, Pet. App. 9, that proposition was not in any way outcome determinative. Instead the court framed the ultimate legal question in the case as wheth er "setting the ICR represent[s] the kind of direct regu lation of generation facilities plainly forbidden by" Sec tion 824(b)(1). Id. at 9-10. Based on undisputed facts established by the record before it, and without any re sort to principles of deference, the court answered that question in the negative. Id. at 10.

As the court of appeals accurately observed, ISO New England's ICR, despite its name, neither requires the installation of capacity nor interferes with state reg ulation of generating facilities: "State and municipal authorities retain the right to forbid new entrants from providing new capacity, to require retirement of existing generators, to limit new construction to more expensive, environmentally-friendly units, or to take any other ac tion in their role as regulators of generation facilities without direct interference from the Commission." Pet. App. 10. Those factors, which petitioners do not dispute, were dispositive here. Thus, even assuming that the "lower courts require further guidance" on the applica tion of Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837 (1984), to questions of agency jurisdiction (Pet. 25), this case would be a poor vehicle for providing such guid ance, because Chevron was irrelevant to the court of ap peals' decision.

3. Petitioners further argue (Pet. 26-29) that the court of appeals disregarded the statutory limits on FERC's jurisdiction under the FPA. Petitioners main tain that the ICR effectively requires the installation of generating facilities and that FERC review of the ICR is therefore contrary to Section 824(b)(1)'s prohibition of federal regulation of such facilities. That argument rests on the incorrect premise that the Commission's orders somehow require the construction of generating facilities. In fact, the orders determine electric capacity prices in order to provide an incentive for sufficient ca pacity to be available in the wholesale market for reli able electric operation; that capacity might be provided by construction of generation, but it could also be pro vided by contracts to import power or by demand re sponse (i.e., lowering electric demand at times when supply is limited). Pet. App. 10. Because petitioners conceded that "the Commission could directly set the price of capacity at this level precisely to incentivize procurement of resources adequate to meet their esti mates of peak demand, * * * and because this estimate necessarily affects prices but not necessarily new capac ity construction," the court logically concluded that the agency's orders did not effect a "direct regulation of generation facilities" that would violate Section 824. Id . at 11 (citation omitted).

Contrary to petitioners' suggestion (Pet. 23), the de cision below is fully consistent with this Court's decision in New York v. FERC, supra. In that case, the Court considered FERC's assertion of jurisdiction under 16 U.S.C. 824d and 824e to regulate unbundled transmis sion of electricity, even to retail customers otherwise subject to state regulation. New York, 535 U.S. at 10-14. The Court distinguished between the Commission's di rect regulation of unbundled transmission, which is within its FPA jurisdiction, and the indirect effects of that regulation on retail transactions, which are subject to state authority. Id. at 23. "Because federal authority has been asserted only over unbundled transmissions," the Court explained, "New York retains jurisdiction of the ultimate sale of the energy." Ibid. In this case, the purchase of capacity under the ISO New England ar rangement is in effect an option purchase by load-serv ing utilities to enable them to purchase power when needed in order to satisfy peak demand. Like the dis tinction this Court drew in New York v. FERC, the court of appeals in this case distinguished between the Com mission's clear authority to regulate the wholesale price of electric capacity-which might indirectly affect con duct within state authority by encouraging the building of generating facilities-and the jurisdiction retained by the States to regulate such facilities. Pet. App. 14.

Nor are petitioners correct when they assert (Pet. 26) that the court failed to take into account various pro visions of the FPA in which, they say, "Congress reiter ated its proscription on FERC's authority to order addi tional generation facilities in order to assure adequate, sufficient, or reliable electric service." Petitioners rely on 16 U.S.C. 824f, which allows the Commission, upon complaint of a state commission, to "determine the pro per, adequate, or sufficient service" required from an interstate utility and to "fix the same by its order." But that provision, the court of appeals explained, "actually grants authority to the Commission, and even if the clause 'upon complaint of a State commission' is read as 'only upon complaint of a state commission,' this section seems to be about energy itself rather than capacity.'" Pet. App. 14 (quoting 16 U.S.C. 824f). Petitioners also rely on 16 U.S.C. 824o, which grants FERC jurisdiction over the reliability of electric power but contains a sav ings clause, Section 824o(i)(2), stating that it "does not authorize [FERC] * * * to set and enforce compliance with standards for adequacy or safety of electric facili ties or services." Nothing in that clause, the court ob served, "prohibit[s] the Commission from requiring ca pacity purchases-as a savings clause, it deals only with the authority that section provides rather than what the Act as a whole forbids." Pet. App. 14. The court there fore correctly concluded that neither Section 824f nor Section 824o "prohibits the Commission from requiring [load-serving entities] to obtain adequate capacity." Ibid.

In any event, as the court of appeals accurately ob served, the Commission here "claims authority to review the capacity charges that ISO [New England] imposes on member utilities to ensure that they are just and rea sonable," not to require an entity to acquire a particular amount of capacity. Pet. App. 15. "That reasonable con cerns about system adequacy might factor into the fair ness of those charges," the court concluded, "is precisely what brings them within the heartland of the Commis sion's [Section 824e] jurisdiction." Ibid.

4. Finally, petitioners contend (Pet. 32-35) that the court of appeals' holding that the ICR is a "practice af fecting * * * rates" under Sections 824d and 824e is contrary to Northwest Central Pipeline Corp. v. State Corporation Commission, 489 U.S. 493 (1989), in which this Court held that a state regulation governing the timing of production of natural gas was not preempted by the Natural Gas Act, 15 U.S.C. 717 et seq. Northwest Central Pipeline, 489 U.S. at 496. In that case, the Court determined that the regulation of gas production was "a field that Congress expressly left to the States"; because the regulation at issue did "not conflict with the federal regulatory scheme," it was not preempted. Id. at 509. As the Commission explained, however, North west Central Pipeline is not relevant here, as it "speaks to the question of whether a federal agency's regulation of a particular area pre-empts state regulation in that area." Pet. App. 110. In this case, by contrast, FERC did not preempt state regulation "as to when or where or how many new generating facilities should be built in that state." Ibid.

FERC's analysis is consistent with New York, which confirmed the Commission's authority to draw reason able lines to define the extent of its own jurisdiction over wholesale sales and interstate transmission. See 535 U.S. at 16-17. As the court of appeals noted here, the Commission's review of the calculation of ISO New Eng land's capacity requirements involved similarly reason able line-drawing. Pet. App. 15; see Niagara Mohawk Power Corp. v. FERC, 452 F.3d 822, 828 (D.C. Cir. 2006), cert. denied, 550 U.S. 918 (2007). That the stat ute's direct grant of jurisdiction to the Commission may incidentally affect state matters does not diminish the agency's authority. See e.g., National Ass'n of Regula tory Util. Comm'rs v. FERC, 475 F.3d 1277, 1280-1284 (D.C. Cir. 2007), cert. denied, 128 S. Ct. 1468 (2008).

Finally, petitioners err in suggesting (Pet. 36-38) that the decision below opens the door to FERC regula tion over any number of traditional state areas, such as state zoning ordinances. The individual New England States have never regulated the electric capacity needs

of the long-integrated New England electrical transmis sion system. Instead, since the 1970s, such planning has been done on a system-wide basis by the New England Power Pool, and more recently by ISO New England. Pet. App. 17. That interstate planning and associated rates and terms fall squarely within the Commission's jurisdiction over the interstate transmission of electric power and the sale of electric power at wholesale in in terstate commerce. And the court of appeals has ap proved FERC orders regulating such arrangements since 1978. See Municipalities of Groton v. FERC, 587 F.2d 1296 (D.C. Cir. 1978). Thus, even if the Commis sion's action in this case could be characterized as re quiring capacity purchases by utilities, the court of ap peals aptly observed that "this particular camel has long since entered-ndeed, ransacked-the tent." Pet. App. 15.1

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

ELENA KAGAN
Solicitor General

THOMAS R. SHEETS
General Counsel
ROBERT H. SOLOMON
Solicitor
SAMUEL SOOPPER
Attorney
Federal Energy Regulatory
Commission

DECEMBER 2009

1 Petitioners do not suggest that the Court should hold the petition pending the disposition of NRG Power Marketing, LLC v. Maine Public Utilities Commission, No. 08-674 (argued Nov. 3, 2009), and there is no reason for doing so. Although both cases involve electric capacity in New England, they present entirely independent legal issues. NRG Power Marketing involves the applicability of the "public interest" standard prescribed in United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332 (1956), and FPC v. Sierra Pacific Power Co., 350 U.S. 348 (1956), to challenges to certain rates estab lished under the comprehensive settlement of disputes involving the New England capacity market. It does not present any question of the scope of the Commission's jurisdiction under the FPA.