Consolidated Edison Co. of New York, Inc. v. Federal Energy Regulatory Commission

Notice: This opinion is subject to formal revision before publication in the

Federal Reporter or U.S.App.D.C. Reports. Users are requested to notify

the Clerk of any formal errors in order that corrections may be made

before the bound volumes go to press.

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 16, 2003 Decided November 7, 2003

No. 01-1503

CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.,

PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

NRG POWER MARKETING, INC., ET AL.,

INTERVENORS

Consolidated with

02-1004, 02-1010, 02-1187

On Petitions for Review of Orders of the

Federal Energy Regulatory Commission

William F. Young and Elias G. Farrah argued the cause

for petitioners and intervenors in support of petitioners.

Bills of costs must be filed within 14 days after entry of judgment.

The court looks with disfavor upon motions to file bills of costs out

of time.

2

With them on the briefs were Neil H. Butterklee, Elizabeth

Ward Whittle, and J. Cathy Fogel. Arnold H. Quint entered

an appearance.

Larry D. Gasteiger, Attorney, Federal Energy Regulatory

Commission, argued the cause for respondent. With him on

the brief were Cynthia A. Marlette, General Counsel, and

Dennis Lane, Solicitor.

Howard E. Shapiro argued the cause for intervenors.

With him on the brief were Kenneth M. Simon, Woody N.

Peterson, David P. Yaffe, Jonathan D. Simon, and Steven A.

Weiler.

Before: SENTELLE, ROGERS, and TATEL, Circuit Judges.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge: In these consolidated cases, we

consider what remedies, particularly monetary ones with

retroactive effect, are available for electric service providers

and ultimately electricity consumers who experience substan-

tial price increases when a deregulated energy market fails to

operate properly. Here, the Federal Energy Regulatory

Commission—though finding serious problems in the market

for operating reserves, imposing a prospective rate cap, and

requiring other corrective actions—held that it lacked author-

ity under the Federal Power Act to revise rates retroactively.

Although we agree with that holding, we find that FERC (1)

failed to explain adequately why certain emergency proce-

dures for rebilling were unavailable, (2) erred in concluding

that the independent operator had not violated its tariff for

pricing different types of reserves, and (3) failed to consider

other alleged tariff violations. We therefore grant the peti-

tions in part and remand for further proceedings consistent

with this opinion.

I.

The New York Independent Service Operator (NYISO), a

non-profit corporation, operates the bulk power transmission

3

system in New York. NYISO provides open access transmis-

sion service and maintains system reliability. Cent. Hudson

Gas & Elec. Corp., 83 F.E.R.C. ¶ 61,352, 62,406 (1998), order

on reh’g, 87 F.E.R.C. ¶ 61,135 (1999). It also administers

competitive, bid-based electricity markets and monitors them

for exercises of market power. N.Y. Indep. Sys. Operator,

Inc., 89 F.E.R.C. ¶ 61,196 (1999) (Market Monitoring Plan or

MMP Order). NYISO operates under tariffs filed with

FERC, including the tariff involved in this case, the Market

Administration and Control Area Services Tariff (Services

Tariff). Unlike tariffs for traditional cost-of-service rates, the

filed tariffs at issue here contain no precise prices; instead,

they set standards for NYISO’s administration of competitive

electric power markets.

Under the Services Tariff, NYISO maintains a market for

ancillary services, including operating reserves. See Services

Tariff, J.A. at 594–751. Operating reserves allow utilities to

produce electricity on short notice to meet load (the total

demand for service on a utility system). Ten-minute spinning

reserve (SR) is synchronized to the system and available

almost immediately. Ten-minute non-spinning reserve

(NSR), though not loaded, can be synchronized within ten

minutes. Certain amounts of ten-minute operating reserves

must be available every hour to maintain system reliability.

Power suppliers offer ‘‘bids’’ to sell SR and NSR at certain

prices in the NYISO market. Load-serving entities (LSEs)—

transmission facility owners that provide electric load—then

purchase reserves from NYISO.

NYISO also operates under its Market Monitoring Plan

(MMP) and Temporary Extraordinary Procedures (TEP), two

measures filed with and approved by FERC that give NYISO

authority to remedy specified problems that may arise in the

deregulated market. While the precise scope of these mea-

sures is in some dispute, they allow NYISO to take certain

actions, such as issuing letters under the MMP to request

that a participant cease behavior that suggests the exercise of

market power and recalculating the prices under TEP to the

level that would have cleared the market absent a software

malfunction.

4

The Federal Energy Regulatory Commission oversees this

market-based system pursuant to the Federal Power Act

(FPA), 16 U.S.C. § 791a et seq., several provisions of which

are at issue in this case. Under sections 205 and 206, FERC

has both the authority and duty to regulate rates for whole-

sale electric power and to prohibit utilities from charging

unreasonable rates. Id. §§ 824d, 824e (2000). Section 205(d)

requires public utilities to file new rates or proposed changes

with FERC, which typically take effect in sixty days. Id.

§ 824d(d). For ‘‘good cause shown,’’ however, FERC may

waive the sixty-day notice requirement, thus allowing rate

changes to take effect immediately. Id. Under section

206(a), FERC may investigate whether a particular rate or

charge is ‘‘just and reasonable.’’ Id. § 824e(a). If FERC

finds a rate unreasonable, it must order imposition of a just

and reasonable rate. Id. FERC may then order refunds for

any period subsequent to the ‘‘refund effective date,’’ a date

FERC establishes that must be at least sixty days after the

filing of the complaint. Id. § 824e(b). Under section 206,

however, FERC may not order refunds for any period prior

to the filing of the complaint. Id. In contrast, FPA section

309 gives FERC authority to order refunds if it finds viola-

tions of the filed tariff. See id. § 825h (vesting FERC with

authority to ‘‘perform any and all acts TTT it may find

necessary or appropriate to carry out the provisions of [the

Act]’’); Towns of Concord, Norwood, & Wellesley, Mass. v.

FERC, 955 F.2d 67, 73 (D.C. Cir. 1992) (explaining that

authority to give refunds derives from FPA section 309).

This case arises out of events that occurred approximately

two months after NYISO began operations. Between Janu-

ary 29, 2000, and late March the LSEs experienced a dramat-

ic increase in prices in the bid-based market for NSR. Prices

spiked from averages of $1.04 per megawatt per hour in

November 1999 and $1.06 the following month to an average

of $65.57 in February 2000, reaching a high of $302 that

month. At the same time, the quantity of NSR that suppliers

offered dropped dramatically. For example, NSR offered at

less than $30 declined approximately seventy-five percent,

from over 1200 megawatts prior to January 29 to a low of just

5

over 300 megawatts during that period. According to NYI-

SO, during the six weeks from January 29 to March 10, the

total cost to LSEs purchasing ten-minute reserves rose by

approximately $65 million. During that same period, NYISO

reported that the market for NSR was also highly concentrat-

ed—just three generators controlled ninety-seven percent of

NSR capacity. See N.Y. Indep. Sys. Operator, Inc., 91

F.E.R.C. ¶ 61,218, 61,794 (2000) (Initial Order).

On March 27, 2000, NYISO responded to this substantial

price increase by filing a request with FERC pursuant to

FPA section 205 to suspend immediately market-based bids

for ten-minute reserves. It also asked for authority to (1)

revise its Services Tariff to subject NSR bids to a $2.52 cap,

the highest market clearing price for NSR prior to January

29, the last day on which the market appeared to function

normally, and (2) rebill for March ‘‘pending the outcome of

[an alternative dispute resolution (ADR)] process’’ that

NYISO requested FERC to initiate. Request of NYISO for

Suspension of Market-Based Pricing for 10-Minute Reserves

and To Shorten Notice Period, J.A. at 54. Around the same

time, the LSEs filed complaints with FERC pursuant to FPA

section 206. According to the LSEs, NYISO violated its

Services Tariff and operated under several market design

flaws—such as failing to accept bids from other qualified

suppliers—that compounded the problems in the reserves

market. The LSEs asked FERC to direct NYISO to correct

the practices that allegedly violated the Tariff and to order

refunds for the alleged overcharges resulting from the viola-

tions. They also sought to compel NYISO to invoke its

Temporary Extraordinary Procedures, a set of remedial mea-

sures that FERC had previously approved. See N.Y. Indep.

Sys. Operator, Inc., 88 F.E.R.C. ¶ 61,228 (1999) (First TEP

Order), reh’g denied, 89 F.E.R.C. ¶ 61,168 (1999).

In the first of three orders, FERC found that NYISO had

‘‘presented sufficient evidence to call into question continued

reliance on market-based pricing for non-spinning reserves.’’

Initial Order, 91 F.E.R.C. at 61,798. It found that the

markets were ‘‘even more concentrated than indicated in the

6

original analysis,’’ and that the ‘‘conditions under which mar-

ket-based rate authority for ancillary services was granted do

not match the current operational realities of the New York

ISO’s reserve markets.’’ Id. at 61,799. That said, FERC

stated that it ‘‘ma[d]e no finding here that any supplier

engaged in the withholding of capacity.’’ Id.

Based on its conclusion that the market was not operating

properly, FERC granted NYISO’s request for a $2.52 bid cap

and waived the sixty-day notice requirement so that the cap

could take effect the day after the filing. Id. at 61,793.

Explaining that it had no authority to grant retroactive relief,

however, FERC rejected NYISO’s requests to rebill for

reserves in March and to initiate ADR procedures. Id.

FERC affirmed this decision in two subsequent orders. See

97 F.E.R.C. ¶ 61,155 (2001) (First Rehearing Order); 99

F.E.R.C. ¶ 61,125 (2002) (Second Rehearing Order). With

respect to the LSE complaints alleging NYISO tariff viola-

tions and market design flaws, FERC denied the request for

refunds because it found that NYISO had not violated the

Services Tariff. Initial Order, 91 F.E.R.C. at 61,806–07. It

also declined to require NYISO to implement its Temporary

Extraordinary Procedures. See id. at 61,804. Granting pro-

spective relief, however, FERC directed NYISO to make

several changes in its administration of the reserves market.

Id. at 61,800. The Commission affirmed this decision in its

First Rehearing Order. See 97 F.E.R.C. at 61,677–82.

Both NYISO and the LSEs now seek review of these three

orders. The suppliers intervene in support of FERC. Be-

fore us are three issues: whether FERC properly (1) con-

cluded that it lacked authority to provide retroactive relief

under FPA section 205, (2) found the Temporary Extraordi-

nary Procedures inapplicable and unavailable to provide re-

lief, and (3) determined that NYISO had not violated the

Services Tariff. We address each issue in turn.

II.

We begin with the question of retroactive relief under FPA

section 205. Section 205(d) provides:

7

Unless the Commission otherwise orders, no change

shall be made by any public utility in any TTT rate,

charge, TTT or TTT rule TTT, except after sixty days’

notice to the Commission and to the public. Such

notice shall be given by filing with the Commission

and keeping open for public inspection new sched-

ules stating plainly the change or changes to be

made in the schedule or schedules then in force and

the time when the change or changes will go into

effect. The Commission, for good cause shown, may

allow changes to take effect without requiring the

sixty days’ notice herein provided for by an order

specifying the changes so to be made and the time

when they shall take effect and the manner in which

they shall be filed and published.

16 U.S.C. § 824d(d). Although FERC found good cause to

waive the sixty-day notice period, thus allowing the bid cap to

become effective the day after NYISO’s filing, it concluded

that it had no authority to grant retroactive relief for the two

months prior to the filing despite the dramatic price spike.

Both NYISO and the LSEs insist that FERC may order such

retroactive relief upon a finding of good cause. We disagree.

In Columbia Gas Transmission Corp. v. FERC, 895 F.2d

791 (D.C. Cir. 1990), we interpreted a provision in the Natural

Gas Act that is virtually identical to FPA section 205, holding

that FERC’s good cause waiver authority does not permit it

to make a retroactive rate adjustment. Id. at 795–97.

Courts have applied interpretations of Natural Gas Act provi-

sions to their counterparts in the Federal Power Act because

‘‘the relevant provisions of the two statutes are in all material

respects substantially identical.’’ City of Girard, Kan. v.

FERC, 790 F.2d 919, 920 n.4 (D.C. Cir. 1986) (quoting Arkan-

sas Louisiana Gas Co. v. Hall, 453 U.S. 571, 577 n.7 (1981)

(quoting Fed. Power Comm’n v. Sierra Pacific Power Co., 350

U.S. 348, 353 (1956))) (internal quotation marks omitted). As

FERC explains, moreover, its decision to deny NYISO retro-

active relief rested on Columbia Gas’s rationale—the filed

rate doctrine and its corollary, the rule against retroactive

ratemaking. The filed rate doctrine ‘‘forbids a regulated

8

entity to charge rates for its services other than those

properly filed with the appropriate federal regulatory authori-

ty.’’ Ark. La. Gas Co., 453 U.S. at 577. The related rule

against retroactive ratemaking ‘‘prohibits the Commission

from adjusting current rates to make up for a utility’s over-

or under-collection in prior periods.’’ Towns of Concord, 955

F.2d at 71 n.2. By authorizing only prospective rate changes,

these doctrines ensure rate predictability, see Columbia Gas,

895 F.2d at 793, and by preventing discriminatory pricing,

they promote equity, see Exxon Co., U.S.A. v. FERC, 182

F.3d 30, 49 (D.C. Cir. 1999).

Courts have recognized only two circumstances in which a

rate adjustment may take effect prior to a section 205 filing:

when parties have notice that a rate is tentative and may be

later adjusted with retroactive effect, or when they have

agreed to make a rate effective retroactively. See id. at 49

(noting that ‘‘[t]he rule against retroactive ratemaking TTT

does not extend to cases in which [customers] are on ade-

quate notice that resolution of some specific issue may cause

a later adjustment to the rate being collected at the time of

service’’ (alteration and omission in original) (internal quota-

tion marks and citations omitted)); City of Holyoke Gas &

Elec. Dep’t v. FERC, 954 F.2d 740, 744 (D.C. Cir. 1992)

(finding FERC’s decision to make the rate change effective

prior to the filing date proper because the parties had con-

tracted to make rate retroactive and a waiver was not against

the public interest). Neither of these circumstances under-

mines the twin goals of predictability and equity. See Exxon,

182 F.3d at 49 (finding that ‘‘equity and predictability are not

undermined when the Commission warns all parties involved

that a change in rates is only tentative and might be disal-

lowed’’ (quoting OXY USA, Inc. v. FERC, 64 F.3d 679, 699

(D.C. Cir. 1995) (internal quotation marks omitted)); Colum-

bia Gas, 895 F.2d at 796 (describing City of Piqua v. FERC,

610 F.2d 950, 954–55 (D.C. Cir. 1979), in which the parties

agreed to make a rate change effective on a date before the

filing, as a case that did not implicate the filed rate doctrine).

NYISO argues that this case falls under the notice excep-

tion. It points to its Market Monitoring Plan and Temporary

9

Extraordinary Procedures as sources of notice to suppliers

that rates might be adjusted retroactively. Although the

MMP authorizes NYISO to undertake remedial measures to

correct problems associated with the exercise of market

power, NYISO points to nothing in the MMP suggesting that

such measures may have retroactive effect. See MMP Order,

89 F.E.R.C. at 61,601–02. We thus see no way that the MMP

could have provided the requisite notice to market partici-

pants.

NYISO’s reliance on TEP as a source of notice also fails,

but for a different reason. TEP allows NYISO to recalculate

prices to the level they would have reached absent market

design or implementation flaws that produced non-

competitive prices. First TEP Order, 88 F.E.R.C. at 61,754.

According to NYISO, this demonstrates that suppliers had

notice that rates could be adjusted retroactively even without

a showing of market power. NYISO, however, failed to raise

this argument before the Commission, either in the initial

proceedings or in its rehearing request, so we may not

consider it now. See 16 U.S.C. § 825l(b) (‘‘No objection to

the order of the Commission shall be considered by the court

unless such objection shall have been urged before the Com-

mission in the application for rehearing unless there is rea-

sonable ground for failure so to do.’’).

NYISO offers a second, more intriguing argument for

avoiding the filed rate doctrine and the rule against retroac-

tive ratemaking. Pointing out that sellers and buyers in a

deregulated market rely not on a single published rate, but

rather on a filed tariff that provides for a competitive bid

process, NYISO argues that participants expect to transact

business pursuant to market-based prices; rebilling for past

non-market prices would therefore be neither inequitable nor

unpredictable. This argument is twice waived: NYISO never

presented it to FERC, and although NYISO hints at the

argument in its opening brief here, see Petitioners’ Br. at 54,

it failed to develop it fully until its reply brief, see Petitioners’

Reply Br. at 15–16; see also A.J. McNulty & Co. v. Sec’y of

Labor, 283 F.3d 328, 338 (D.C. Cir. 2002) (‘‘[B]ecause this

10

point appears for the first time in the company’s reply brief,

we will not consider it.’’).

III.

We next turn to the LSEs’ argument that because of the

design and implementation flaws associated with NYISO’s

administration of the electricity market, FERC should have

directed NYISO to provide a remedy under its Temporary

Extraordinary Procedures. TEP is designed to address un-

anticipated market design flaws and transitional abnormali-

ties. A ‘‘market design flaw’’ is defined as ‘‘a market struc-

ture, market design, or implementation flaw which would

result in market outcomes that would not be produced in a

workably competitive market.’’ First TEP Order, 88

F.E.R.C. at 61,752–53. ‘‘Transitional abnormalities’’ refer to

‘‘systemic equipment malfunctions, including telecommunica-

tions failures or TTT equipment outages.’’ Id. at 61,753.

The LSEs argue that FERC should have used TEP to

remedy two market flaws: NYISO’s exclusion of a qualified

supplier, the Blenheim-Gilboa facility, from bidding into the

NYISO reserves market, and NYISO’s failure to accept low-

er-priced bids from western suppliers. These flaws, the

LSEs charge, resulted in non-market-based prices. Accord-

ing to the LSEs, using the ‘‘extraordinary corrective actions’’

under TEP would have allowed NYISO, after following re-

quired procedures, to rebill the LSEs at the newly calculated

rates that would have cleared the market had no flaws

existed. This would have granted the LSEs—and presum-

ably their customers—some monetary relief from the $65

million spike.

Although FERC acknowledged that TEP allows for retro-

active recalculation, it insisted that TEP applies only in

circumstances of straightforward calculation errors. First

Rehearing Order, 97 F.E.R.C. at 61,682. ‘‘The NYISO’s TEP

authority,’’ FERC concluded, ‘‘was not designed to be used in

circumstances such as these.’’ Id. FERC went on to explain

that NRG Power Marketing, Inc. v. NYISO, 91 F.E.R.C.

¶ 61,346 (2000), in which it approved NYISO’s use of TEP,

11

was ‘‘clearly distinguishable, since it involved limited, simple,

and precise corrections to ensure that prices conformed to the

filed rate.’’ First Rehearing Order, 97 F.E.R.C. at 61,682.

FERC’s explanation suffers from two related defects.

First, FERC imposed no such limitation when it initially

approved this part of TEP. See First TEP Order, 88

F.E.R.C. at 61,754. Indeed, FERC used the same broad

language contained in TEP itself: ‘‘We will accept the ISO’s

proposal to recalculate prices to the level [they] would have [ ]

reached in the absence of a market design flaw or transitional

abnormality.’’ Id. Finding this approach reasonable, FERC

explained that ‘‘the recalculated prices are intended to reflect

the prices that would have resulted from the market design

[ ] already approved.’’ Id. To be sure, when FERC extend-

ed TEP beyond its initial ninety days it used slightly different

language, appearing to limit the procedures to correct ‘‘tech-

nical implementation errors and operational anomalies.’’ See

N.Y. Indep. Sys. Operator, Inc., 90 F.E.R.C. ¶ 61,320, 62,066

(2000) (Second TEP Order). But FERC neither defined what

it meant by ‘‘technical implementation errors’’ nor explained

whether or how such errors differ from ‘‘market design

flaws’’—the language in TEP itself and in the First TEP

Order. Hence we do not think that FERC’s past orders can

justify its narrow view of TEP in this case.

Second, we see nothing in NRG Power to suggest that

FERC’s decision there actually turned on whether the price

recalculation was simple, straightforward, or precise. Al-

though FERC described the case as involving ‘‘erroneous

calculation’’ and ‘‘computational error,’’ NRG Power, 91

F.E.R.C. at 62,166, the problem seems to have been more

complex. Indeed, NRG Power bears some resemblance to

the situation here. There, the error arose from software

problems and NYISO’s disregard of low-cost bids, resulting in

posted prices that exceeded what properly established mar-

ket-clearing prices would have been. Here, FERC squarely

found that certain aspects of NYISO’s ‘‘design and operating

protocols,’’ including its failure to accept bids from the Blen-

heim-Gilboa facility and from western suppliers, exacerbated

market concentration and the opportunity for the exercise of

12

market power. Initial Order, 91 F.E.R.C. at 61,799–800.

FERC also pointed out that the analysis submitted in support

of market-based rates contemplated that the supply market

would include these suppliers. Id. at 61,799 n.13, 61,800.

For its part, NYISO conceded both that it had failed to model

reserve bids from Blenheim-Gilboa into its software, and that

software limitations and the nature of NYISO’s market de-

sign prevented it from accepting bids from western suppliers.

NYISO Answer, J.A. at 214, 218. Given the similarities

between this case and NRG Power, we cannot accept FERC’s

claim that these two flaws fall outside the scope of a TEP-

based remedy.

Moreover, even if NRG Power had involved only an errone-

ous calculation, it still would not preclude the application of

TEP to problems beyond technical miscalculation. Although

in NRG Power, NYISO took remedial action under TEP,

FERC stated that ‘‘[u]nder these circumstances involving the

erroneous miscalculation of a formula rate, the NYISO did

not have to rely on any temporary authority or interim

procedures to correct incorrect energy clearing prices.’’ 91

F.E.R.C. at 62,166. If, as FERC found, TEP is not needed

for miscalculation errors, then we do not understand how its

scope can be limited to such errors.

In sum, given that FERC points to only one case as

precedent for limiting the scope of TEP to technical miscalcu-

lations—a case that itself expressed no such limitation—and

given the broad language of TEP and the orders approving it,

we find FERC’s summary conclusion that TEP is inapplicable

to the circumstances of this case fails its obligation of rea-

soned decisionmaking. See Motor Vehicle Mfrs. Ass’n of the

United States, Inc. v. State Farm Mut. Auto. Ins. Co., 463

U.S. 29, 52 (1983). Accordingly, we will remand for FERC to

explain why TEP does not apply here.

IV.

We turn finally to the LSEs’ argument that NYISO violat-

ed its own Tariff. FERC’s interpretation of tariffs receive

Chevron-like deference. See Idaho Power Co. v. FERC, 312

13

F.3d 454, 461 (D.C. Cir. 2002). If the tariff language is

unambiguous, we need not defer to FERC’s interpretation; if

the language is ambiguous, we defer to FERC’s construction

so long as it is reasonable. Id. While the Commission has

discretion to determine the remedy for tariff violations—

which may include refunds, see 16 U.S.C. § 825h; Towns of

Concord, 955 F.2d at 73—it has a ‘‘general policy of granting

full refunds’’ for overcharges, id. at 76. In addition, when

deciding whether to order refunds, FERC must provide a

reasoned explanation for its decision: it must show that it has

‘‘considered relevant factors and TTT struck a reasonable

accommodation among them,’’ and that its order was ‘‘equita-

ble in the circumstancesTTTT’’ Id. (first omission in original).

The LSEs argue that FERC erred in failing to find that

NYISO had violated four requirements of its Tariff.

Pricing of Spinning and Non-spinning Reserves

The LSEs claim that NYISO violated its Services Tariff by

setting the price of ten-minute SR no lower than the price of

ten-minute NSR. According to the LSEs, this practice mag-

nified the effect of the NSR price spike—as NSR prices went

up, NYISO’s practice drove SR prices up as well. Finding

the Tariff’s language ambiguous, FERC explained that

NYISO’s pricing of NSR was ‘‘reasonable’’ because it was

needed to clear the market. First Rehearing Order, 97

F.E.R.C. at 61,679. According to FERC, NYISO feared that

if higher bids were accepted for NSR, suppliers with SR

capacity might decline to bid into the SR market and offer

NSR instead. See id. Had this occurred, NYISO might have

been unable to ensure that SR represented fifty percent of

available reserves, as the Tariff requires. See Services Tariff,

J.A. at 729.

FERC’s explanation might well be reasonable, but we

agree with the LSEs that NYISO violated the Tariff’s plain

language. Rate Schedule 4 of the Services Tariff sets forth

the rule for pricing SR: ‘‘The Day-Ahead Availability price

for Spinning Reserve for each hour shall be equal to the

highest Day-Ahead Availability Bid made by a Supplier that

14

has been scheduled Day-Ahead to provide Spinning Reserve

in that hour.’’ Id. at 736 (emphasis added). The Rate

Schedule repeats the same instruction for pricing Day-Ahead

Availability NSR, id. at 739, and gives similar instructions for

the Real-Time Availability prices for SR and NSR, id. at 736,

740. Moreover, Section 4.21 of the Tariff states that pay-

ments for each megawatt ‘‘shall be determined separately for

each of the three categories of Operating Reserves: spinning

reserve, 10-minute non-[spinning] reserve and 30-minute re-

serve.’’ Id. at 674 (emphasis added).

We see nothing ambiguous about this language. It re-

quires NYISO to price SR and NSR separately. If NYISO

believed it needed to modify its practice to ensure adequate

supplies of SR, it should have sought permission from FERC.

In its brief, FERC insists that even if it had found a tariff

violation, it would have exercised its discretion to deny re-

funds. Perhaps so, but this argument comes from agency

counsel, not FERC. Because FERC never determined that

NYISO violated the Tariff, the Commission had no opportuni-

ty to exercise its refund discretion. Accordingly, we will

remand to FERC for it either to follow its ‘‘general policy’’ of

providing refunds, or to explain, in accordance with Towns of

Concord, 955 F.2d at 76, its divergence from this policy.

Blenheim-Gilboa Facility

The LSEs argue that NYISO also violated its Services

Tariff by excluding the Blenheim-Gilboa facility from the

NSR market. Before considering the merits of this claim,

however, we must address FERC’s argument that the LSEs

waived this issue because they characterized their complaint

against NYISO not as a tariff violation, but as a market

design flaw.

Although it is true that in their initial complaint, the LSEs

did not describe their claim as one of tariff violation, they

clearly did so in their rehearing request. See Application for

Rehearing of LSE Intervenors, J.A. at 319, 335–36. FERC

expressly acknowledged the argument, stating that ‘‘LSE

15

Intervenors argue that the NYISO’s practices were contrary

to the Services Tariff’’ because ‘‘NYISO improperly excluded

the Blenheim-Gilboa pumped storage facility from competing

to supply 10-minute reserves.’’ First Rehearing Order, 97

F.E.R.C. at 61,681. But instead of addressing the argument,

FERC simply explained that its prospective remedy was

‘‘best suited’’ to remedy the problem. See id. It now claims

here—erroneously, as we discuss below—that it found a tariff

violation. Under these circumstances, FERC cannot reason-

ably argue that it lacked notice of the tariff violation claim.

See Villages of Chatham & Riverton, Ill. v. FERC, 662 F.2d

23, 30 (D.C. Cir. 1981) (‘‘[A]ny argument brought clearly to

the attention of the Commission by the party’s petition for

rehearing has been preserved for review in a court of ap-

peals.’’).

As to the merits of the Blenheim-Gilboa issue, Rate Sched-

ule 4 of NYISO’s Tariff incorporates New York State Relia-

bility Rules, see Services Tariff, J.A. at 729, which in turn

allow NSR to ‘‘be composed of [units generated by] pumped

storage hydro’’ facilities, id. at 310 n.2. The LSEs assert that

because Blenheim-Gilboa is a pumped storage hydro plant

that satisfies NYISO’s criteria for supplying operating re-

serves, NYISO had no basis under its Tariff for excluding the

facility.

FERC agreed with the LSEs that NYISO should have

included Blenheim-Gilboa and that doing so would have sig-

nificantly reduced market concentration. Initial Order, 91

F.E.R.C. at 61,800. Concluding that this error required

correction ‘‘as quickly as possible,’’ FERC directed NYISO to

model Blenheim-Gilboa into its software and to accept the

facility’s reserve bids. Id. As to the LSEs’ claim that the

exclusion of Blenheim-Gilboa amounted to a tariff violation

requiring a refund, however, FERC had only this to say:

[T]he question here is what is the fairest and most

efficient way to ensure that the participants in the

New York market receive the benefits of a well

functioning competitive market. The Commission

believes that the procedures it has chosen and the

16

determinations it has made are best suited to accom-

plish these ends within the bounds of the Federal

Power Act.

First Rehearing Order, 97 F.E.R.C. at 61,681.

We think this response entirely inadequate. Not only does

it fail to address the LSEs’ claim that NYISO violated its

Tariff, skipping instead straight to the question of remedy,

but FERC never explains why it chose a prospective remedy.

Given FERC’s findings that the market analysis underlying

approval of market-based rates anticipated the inclusion of

Blenheim-Gilboa, that NYISO had no reason to exclude the

facility, and that accepting bids from Blenheim-Gilboa would

have dramatically lowered market concentration, we will re-

mand to FERC to explain why NYISO did not violate the

Services Tariff. If the Commission finds a tariff violation but

decides against ordering a refund, then, again, it has an

obligation to explain why it is departing from its ‘‘general

policy of granting full refunds.’’ Towns of Concord, 955 F.2d

at 76.

Western Suppliers

The LSEs’ third tariff violation claim arises from NYISO’s

refusal to accept bids of cheaper reserves from western

suppliers of operating reserves. Again, FERC argues that

the LSEs characterized this claim as one of market design

flaw rather than tariff violation. This time FERC is correct.

The LSEs neither presented the argument in their complaint

nor adequately raised it in their rehearing request. The

LSEs did assert that failure to include western suppliers

violated the Services Tariff, but they failed to point to the

relevant portion of the Tariff. They identify a specific Tariff

provision in their brief here, but this comes too late. Parties

claiming a violation of a published tariff must point to the

specific provision involved and give FERC an opportunity to

address the issue. Otherwise, we lack jurisdiction to hear the

claim. See 16 U.S.C. § 825l(b).

17

Self-Supply

Last, the LSEs contend that NYISO violated its Tariff

when it refused to allow them to ‘‘self-supply’’ operating

reserves without first bidding into the NYISO market. Al-

though FERC ordered NYISO to give the LSEs the option of

self-supply without the bidding requirement, it concluded that

denying them this opportunity in the past had not violated the

Tariff. See Initial Order, 91 F.E.R.C. at 61,806; First Re-

hearing Order, 97 F.E.R.C. at 61,677.

Schedule 4 of the Services Tariff, Section 6.0, provides:

‘‘Transactions may be entered into to provide for Self-Supply

of Operating Reserves. Customers seeking to Self-Supply

Operating Reserves must place the Generator(s) supplying

any one of the Operating Reserves under ISO control. The

Generator(s) must meet ISO rules for acceptability.’’ Ser-

vices Tariff, J.A. at 745. Contrary to the LSEs’ assertion,

this language is hardly ‘‘clear and unconditional.’’ Petition-

ers’ Br. at 48. Although the language requires NYISO to

permit self-supply, it can be read in one of two ways: either

that generators must bid into the ISO market, or that they

may sell directly to the utility as long as they meet ISO rules

for acceptability. Given this ambiguity, we must defer to

FERC’s interpretation so long as it is reasonable. Since the

LSEs provide no basis for concluding that FERC’s interpre-

tation is unreasonable, we will deny the petition for review

with respect to this claim.

V.

We have considered petitioners’ remaining arguments and

found them to be without merit. The petitions for review are

denied in part and granted in part, and this case is remanded

to FERC for further proceedings consistent with this opinion.

So ordered.