PSEG Energy Resources & Trade LLC v. Federal Energy Regulatory Commission (2011)

New England’s electricity market is structured as a “forward capacity market,” administered by ISO New England, Inc. and overseen by the Federal Energy Regulatory Commission (FERC). This means that rather than engaging in a traditional cost-based regulatory approach, New England sets utility rates by auction, in which electricity providers “purchase from generators options to buy quantities of energy three years in advance.” ISO New England manages the auction process, in which they set the initial prices that energy suppliers like PSEG Energy Resources & Trade LLC (PSEG) receive.

As Judge Garland described in his opinion for the majority, in the auction, suppliers would bid based on the capacity they would provide at the initial price. The amount of the bidding mutually descended until the ISO New England price and suppliers’ bids were equal at the minimum required level to maintain the reliability of the regional bulk electric system. However, the auction need not have reached this equilibrium: ISO New England imposed a price floor that closed the auction when that floor was met. To restore the price/capacity bid equilibrium, ISO New England used proration on both price and capacity.

In 2007, ISO New England submitted a new provision of their Proration Rule to FERC. Without a specific explanation, FERC approved the provision, which stated: “Any proration shall be subject to reliability review.” Because ISO New England interpreted the provision to mean that it could require a supplier to provide energy without capacity proration to meet minimum local electric needs—while also forcing the supplier to take the price proration—the supplier PSEG filed objections with FERC, challenging their approval of the auction results and their interpretation of the new proration provision. FERC rejected PSEG’s objection twice, but adopted the supplier’s position prospectively. PSEG appealed to the D.C. Circuit for review of FERC’s orders.

Judge Garland first addressed the provision interpretation issue. He applied a “Chevron-like” analysis, first considering de novo “whether the tariff unambiguously addresses the matter at issue.” As with Step One of Chevron, if the tariff’s language were clear, it would control. On the issue of clarity, FERC waffled. In handing down their own decisions to PSEG, they argued the text was clear, but on appeal, FERC conceded the tariff’s proration provision was ambiguous. Judge Garland agreed the provision was ambiguous, because, for example, it did not address how ISO New England reviewed “reliability” or what their next steps would be if there were a problem of meeting reliability. Judged Garland was especially concerned by FERC’s decision that the proration provision compelled the sanctity of the price floor.

Because FERC equivocated on the issue of the provision’s clarity, Judge Garland remanded to the agency, rather than proceeding to Step Two of the Chevron-like analysis. As FERC made their original decision on the assumption that the provision was clear, Judge Garland could not analyze whether FERC had reasonably interpreted an ambiguous provision. Judge Garland suggested FERC might reverse itself on remand, given their prior decision to reinterpret the proration provision prospectively. Judge Garland also remanded the matter on the grounds that FERC had not effectively responded to a number of PSEG’s legitimate objections.