The D.C. Circuit's Public Citizen Decision May Offer Roadmap To Challenge ISO Market Outcomes

Published date20 October 2021
Subject MatterLitigation, Mediation & Arbitration, Energy and Natural Resources, Energy Law, Oil, Gas & Electricity, Trials & Appeals & Compensation
Law FirmWillkie Farr & Gallagher LLP
AuthorMr Paul J. Pantano Jr. and Kathleen DeAmico

On August 6, 2021, the United States Court of Appeals for the District of Columbia Circuit (the "D.C. Circuit") issued an opinion that explores the relationship between market manipulation and the Federal Power Act's (the "FPA") requirement that rates be just and reasonable.1 The case arose from a complex set of facts and procedural history involving the results of the April 2015 Midcontinent Independent System Operator ("MISO") capacity auction for a zone covering most of Illinois. Prices in that zone were more than 40 times higher than the prices in neighboring zones and nearly nine times higher than the prior year's price in the Illinois zone. The Federal Energy Regulatory Commission ("FERC" or the "Commission") subsequently: (1) found that the MISO auction rules were unjust and unreasonable and fixed them prospectively; (2) opened and later closed a market manipulation investigation; and (3) upheld the results of the auction as just and reasonable. On appeal, the D.C. Circuit denied in part and granted in part Public Citizen's petition for review. Notably, the court held that the Commission was not required to explain its decision to close a market manipulation investigation, but that the Commission had acted in an arbitrary and capricious manner by failing adequately to explain why the auction had resulted in just and reasonable electricity capacity rates.2

Background

In April 2015 MISO, the regional transmission organization responsible for operating the grid across 15 states and the province of Manitoba, held an auction for electrical capacity (the "2015 Auction"). During the 2015 Auction, capacity prices hit $150 per megawatt-day ("MW-day") for Zone 4, which covers most of Illinois, while selling at $3.50 per MW-day for neighboring zones within MISO. In the prior year, the capacity prices for Zone 4 were $16.75 per MW-day.3

Public Citizen, the State of Illinois, Southwestern Electric Cooperative, and Illinois Industrial Energy Consumers filed complaints under section 206 of the Federal Power Act (the "Act"), blaming the higher prices on Dynegy Inc. ("Dynegy").4 The complainants alleged that Dynegy had exercised market power through its recent acquisition of four power plants in Zone 4 and that the "demand for capacity could not be met" without purchasing power from Dynegy.5 FERC reviewed MISO's tariff and opened a market manipulation investigation.6

During the 2015 Auction, MISO had mitigation rules in place, two of which were at issue in the case: (i) capacity offers could not exceed the cost of entry for a new power plant in that particular zone; and (ii) prices would be compared to an "initial reference level" designed to prevent generators from selling capacity at prices substantially higher in MISO than the amount they would receive from exporting their capacity to another market, such as MISO's neighboring system operator, PJM Interconnection LLC ("PJM").7

As a result of its review, in 2015 the Commission ordered prospective changes to the MISO auction rules "to prevent unjust and unreasonable price spikes" (the "2015 Order").8 The Commission found that changes to PJM's capacity market made it harder to compare prices in MISO and PJM.9 In addition, the Commission found that the demand for capacity in PJM, as well as transmission availability into PJM, made such sales improbable.10 Therefore, MISO's...

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