Following a devastating cold snap in February 2021 that left millions without power, the Midcontinent Independent System Operator (MISO) proposed overhauling its capacity market to better ensure grid reliability. MISO sought to shift from an annual capacity auction to a seasonal model, calculating capacity commitments for each of the four seasons rather than just the summer peak. The proposal also included a new accreditation methodology that weights a resource's actual performance during the 65 tightest hours of each season more heavily than its projected capacity, and new rules requiring generators to replace capacity if they are offline for more than 31 days in a season or to provide 120 days' notice for planned outages. The Federal Energy Regulatory Commission (FERC) approved these changes, but Entergy and a group of intervenors petitioned for review, arguing the rules were arbitrary and capricious. The D.C. Circuit consolidated the petitions to address whether FERC acted within its statutory authority under the Federal Power Act.
Circuit Judge Millett wrote for the panel, applying the Administrative Procedure Act's arbitrary and capricious standard of review. The court first addressed Entergy's challenge to the new accreditation methodology, which weights the 65 hours of highest demand (Tier 2 hours) at 80% of the capacity value. Entergy argued this reliance on a small subset of hours created volatility and failed to predict future performance. The court rejected this, noting that FERC relied on a study showing the new methodology was significantly more accurate than the old one, with estimates off by only 1% compared to the old method's 8% to 22% error rate. Regarding Entergy's claim that the methodology would cause intolerable volatility, the court found FERC reasonably explained that systemwide volatility would be low and that market participants with diverse portfolios would not face significant financial risk. The court also dismissed arguments regarding the study's sample size and conversion calculations because Entergy failed to raise them specifically during the rehearing process before FERC, violating the strict exhaustion requirements of the Federal Power Act. Next, the court addressed the 31-day capacity replacement rule. Entergy argued the rule unduly burdened resources needing extended maintenance and was unnecessary for reliability. The court found FERC reasonably balanced the interests by offering generators four options: shorten maintenance, acquire replacement capacity, opt out of the market, or schedule maintenance across two seasons. The court also upheld the 120-day notice requirement, accepting FERC's explanation that advance notice is necessary for MISO to plan and mitigate reliability issues before a season starts, independent of the maintenance margin. Finally, the court declined to reach several arguments raised by the intervenors because they were not properly preserved in the rehearing requests or were not raised by the primary petitioner, Entergy.
The decision allows MISO's revised seasonal capacity market rules to proceed without judicial intervention. Generators must now adhere to the new accreditation calculations based on seasonal performance and the 31-day replacement rule, while distributors will purchase capacity commitments on a seasonal basis. The ruling clarifies that FERC has the authority to implement market mechanisms designed to address extreme weather risks, provided the agency offers a reasoned explanation for its choices. The decision leaves open questions regarding the specific implementation timeline for these changes, as the court declined to review intervenor arguments on that specific issue.
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