The consolidated petitions for review challenge FERC’s approval of a comprehensive settlement that redesigned New England’s capacity market. The Maine Public Utilities Commission and the Attorneys General of Connecticut and Massachusetts assert that FERC’s approval of the settlement was arbitrary and capricious, contrary to law, and beyond the Commission’s jurisdiction. We reject most of these arguments, but we agree with the petitioners that the Commission has unlawfully deprived non-settling parties of their rights under the Federal Power Act.
I.
In a “capacity” market — as opposed to a wholesale electricity market — “the [transmission provider] compensates the generator for the
option
of buying a specified quantity of power irrespective of whether it ultimately buys the electricity.”
1
Keyspan-Ravenswood, LLC v. FERC,
For many years, New England’s capad-, ty market has been rife with problems. As the Commission explained in 2003, “existing generators needed for reliability are not earning sufficient revenues (and are in fact losing money), and [ ] additional infrastructure is needed soon to avoid violations of reliability criteria.”
Devon Power LLC,
FERC, the generators, the transmission providers, and the power customers have made several attempts to address these issues. In 2003, a group of generators sought to enter into “Reliability MusbRun” agreements with the New England Independent System Operator (“ISO”), *261 which operates the transmission system in New England. 2 Under a Must-Run agreement, a financially-troubled generator in an area with supply shortages may recover up to its full cost-of-service in order to remain in operation. Those agreements have several important drawbacks. As FERC explained:
[Must-Run] contracts suppress market-clearing prices, increase uplift payments, and make it difficult for new generators to profitably enter the market.... [Expensive generators under [Must-Run] contracts receive greater revenues than new entrants, who would receive lower revenues from the suppressed spot market price. In short, extensive use of [those] contracts undermines efficient market performance.
Devon Power LLC,
In its orders addressing the Must-Run agreements, the Commission simultaneously directed the ISO to develop a new market mechanism that would include a location requirement. Id. at 61,271. In a locational market, prices are set separately for various geographical sub-regions. Thus, prices would be highest in the regions with the most severe capacity shortages, which would encourage new entry.
In response to FERC’s directive, the ISO proposed a locational capacity market structure in March 2004. This proposed market mechanism included four sub-regions, each of which would have a monthly auction for capacity. The auctions would be based on an “administratively-determined demand curve” that would establish the price and quantity of capacity that must be procured within each sub-region.
3
Devon Power LLC,
In June 2005, the ALJ issued a 177-page order that largely accepted the ISO’s proposed demand curve.
Devon Power LLC,
After four months of negotiations involving 115 parties, a settlement was reached. As FERC has repeatedly reminded us, only eight of these parties opposed the final settlement.
The most contentious issue regarding the Forward Market is the set of “transition payments” that will be required from December 1, 2006 until June 1, 2010. As explained above, the Forward Market provides for a three-year lead time in the capacity auctions, in order to allow new entrants to bid in the auctions. However, this leaves a three-year gap between the first auction and the time when the capacity procured in this auction will be provided. The parties addressed this issue by negotiating a series of fixed payments that will be paid to generators during the transition period.
On June 16, 2006, FERC approved the settlement agreement, finding that “as a package, it presents a just and reasonable outcome for this proceeding consistent with the public interest.” Id. at 62,304. Most importantly, the Commission determined that the settlement would address the problems that had plagued New England’s capacity market:
The settlement package, including both the [Forward Market] and the interim transition mechanism, resolves the issues raised in this proceeding concerning the under-compensation of capacity resources in New England, and provides the appropriate market structure to ensure that generating resources are appropriately compensated based on their location and contribution to system reliability and provides incentives to attract new infrastructure where needed.
*263 Id. at 62,316. FERC conceded that the transition payments were not ideal “as a single market design element,” but concluded that they were a “reasonable transitory mechanism that enables the New England region to shift to the [Forward Market].” Id. at 62,319. In particular, the Commission determined that the transition payments “fall at the very low end” of the range of demand curves (prices) submitted by Maine and the ISO during the litigation over the ISO’s previous market structure proposal. Id. at 62,321. FERC also approved the agreement’s incorporation of the “public interest” standard of review because use of the more deferential standard in a limited number of circumstances would promote “rate stability.” Id. at 62,335.
After FERC denied rehearing, the Maine Public Utilities Commission and the Attorneys General of Connecticut and Massachusetts petitioned for review, arguing that the Commission’s approval of the settlement was arbitrary and capricious, contrary to law, and beyond the scope of FERC’s jurisdiction. 4 Specifically, petitioners assert that: (1) FERC’s acceptance of the transition payments was arbitrary and capricious because the record did not contain sufficient data about generators’ costs; (2) FERC unreasonably accepted the transition payments even though the payments did not include a locational pricing mechanism; (3) FERC unlawfully accepted a “Mobile-Sierra” provision that imposed the deferential “public interest” standard of review on rate challenges brought by non-settling parties; and (4) FERC lacks jurisdiction to approve the settlement agreement because the Forward Market will effectively force states to acquire a specific level of capacity. For the reasons set forth below, we grant the petition for review with respect to the Mobile-Sierra issue, but we deny the petition with respect to the other three issues.
II.
The petitioners argue that FERC’s approval of the settlement’s transition payments was arbitrary and capricious, in violation of the Administrative Procedure Act, 5 U.S.C. § 706(2)(A). To withstand review under that standard, FERC must have “examine[d] the relevant data and articulate[d] a satisfactory explanation for its action including a ‘rational connection between the facts found and the choice made.’ ”
Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co.,
In this case, after considering the merits of the settlement as a whole, FERC
*264
examined the record evidence and concluded that the transition payments fell within a “reasonable range of capacity prices.”
In challenging FERC’s decision to approve the transition payments, the petitioners argue that there was no record evidence of existing generators’ costs and that without such evidence FERC could not find that the payments fell within a reasonable range of capacity prices. In its early orders in
Devon Power,
however, FERC determined that reliance on individualized cost recovery proceedings was not a policy in the public interest and that, instead, capacity payments should be made to all suppliers with a single market-clearing price.
See, e.g., Devon Power LLC,
*265
Of course, FERC cannot pluck rates out of thin air; it must rely on record evidence to establish a reasonable range of rates. But contrary to the petitioners’ suggestion, FERC’s statement that “the transition payments are reasonable rates for existing generators until the [Forward Market] begins,”
In establishing the reasonable range of capacity prices, FERC first reviewed evidence introduced at the hearing on the locational installed capacity mechanism (which was later replaced by the Forward Market). FERC decided to look at projected prices for Maine and Northeastern Massachusetts under both the demand curve proposed by Maine and Vermont load representatives and the demand curve proposed by the ISO. The Commission acknowledged that these were not the only two demand curves proposed at the hearing, but, as it explained more fully in the order on rehearing, it chose to rely on these two curves because they came from two different sectors. Load representatives offered demand curves that projected low prices, while supplier representatives offered demand curves that projected high prices; thus, FERC noted that “[i]f the Commission relied only upon demand curves proposed by parties representing load, the transition payments may have appeared excessive; relying only on demand curves proposed by suppliers would imply that the transition payments were inadequate.”
The petitioners object that FERC improperly relied on the demand curves as a basis of comparison because FERC did not expressly find them to be just and reasonable. Since it never made that finding, the petitioners insist, FERC could not rely on the demand curves to find that the transition payments were reasonable. It is true that FERC may not use unexamined rates as a basis of comparison.
Cf. Laclede Gas Co. v. FERC,
The petitioners also object to FERC’s reliance on evidence of the estimated cost of new entry to determine a reasonable range of rates. The petitioners raise two concerns. First, they argue that cost of new entry represents the estimated costs of a new peaker, not those of an existing generator, and that the two may have different capital costs. The Commission determined, however, that new peakers have “capital costs [that] are lower than most, if not all, other plants.”
Second, the petitioners argue that cost of new entry is an arbitrary reference point for the transition period because, although cost of new entry provides a starting point for the Forward Market auction, the Forward Market does not exist during the transition period. But the fact that cost of new entry is used to kick off the auction does not mean that it is relevant oply for that purpose. If anything, the reliance on cost of new entry as a starting point of the Forward Market auction underscores its relevance to appropriate rates: it is used to commence the auction because it approximates reasonable compensation for existing as well as new generators.
See id.
at 62,326. FERC sets rates to ensure both that existing generators are adequately compensated and that prices support new entry when additional capacity is needed.
See, e.g.,
Recording of Oral Arg. at 1:02:34-1:03:01, 1:09:30-1:10:35. As FERC therefore noted, cost of new entry is “a key factor in determining appropriate rates for capacity” and was central to the demand curves ■under the locational installed capacity market as well as the Forward Market design.
Finally, the petitioners claim that FERC did not respond meaningfully to their objections to the transition payments.
See PPL Wallingford Energy LLC v. FERC,
III.
Petitioner Maine Public Utilities Commission (Maine PUC) argues that FERC’s acceptance of non-locational pricing during the transition period was arbitrary and capricious, attacking FERC’s decision on both general and specific grounds.
At a general level, Maine PUC contends that FERC acted arbitrarily in approving non-locational transition payments when FERC had previously insisted that a locational structure was necessary for New England. Maine PUC’s claim is that, by approving non-locational transition payments, FERC abandoned the core of the market reform it set out to implement, a mechanism that would “appropriately value capacity resources according to their location.” Pet’r Br. 48 (quoting
Devon Power LLC,
Maine PUC’s specific contention is that separate prices are warranted for Maine during the transition period because Maine has a capacity surplus and is export constrained (so that it would experience lower capacity prices in an actual market). It maintains that FERC refused to consider the evidence that it presented to support this contention. But FERC did consider Maine’s argument that it should pay lower transition payments because of its capacity surplus. The Commission offered two interrelated reasons for its conclusion that the transition payments should not have a locational component. First, FERC cited record evidence that projected “little to no variability in capacity prices across New England regions for the period covered by the transition mechanism.”
To be sure, Maine PUC offered some contradictory evidence about capacity price variability,
see, e.g.,
J.A. 1941-47 (Supplemental Affidavit of Thomas D. Austin), but FERC’s orders do “not lack substantial evidence simply because petitioners offered some contradictory evidence,”
Ariz. Corp. Comm’n v. FERC,
Maine PUC insists that FERC cannot rely on the rationale that price separation between Maine and the rest of New England was unsupported by the record. Although FERC did rely on this rationale in its initial order, Maine PUC claims that the Commission abandoned it in its order on rehearing. According to Maine PUC, on rehearing FERC refused to consider data presented by the petitioners and instead found that it was irrelevant whether Maine was export constrained. But .despite somewhat infelicitous language in its rehearing order, FERC did not abandon the findings and conclusions of its initial order. To the contrary, the rehearing order first discussed both the evidence presented by Maine PUC, including Dr. Austin’s affidavits, and the data and arguments in the record that contradicted this evidence.
See
Finally, Maine PUC challenges FERC’s denial of a motion that it filed on September 8, 2006, following the Commission’s initial June 16 order. By that motion, Maine PUC sought to lodge the Department of Energy’s National Electric Transmission Congestion Study, which Maine PUC argued supported its claim that the transition payments should be locational. We accord the Commission “broad discretion in fashioning hearing procedures,”
Mich. Consol. Gas Co. v. FERC,
Accordingly, we reject all of Maine PUC’s attacks on FERC’s decision to accept non-locational pricing during the transition period.
IV.
Section 4.C of the settlement agreement provides that the transition payments and the final prices from the Forward Market auctions will be reviewed under the “public interest” standard rather than the “just and reasonable” standard.
Under the
Mobile-Sierra
doctrine, “FERC may abrogate or modify freely negotiated private contracts that set firm rates or establish a specific methodology for setting the rates for service ... only if required by the public interest.”
Atl. City Elec. Co. v. FERC,
Section 206 of the Federal Power Act provides: “Whenever the Commission, after a hearing had upon its own motion or upon complaint, shall find that any rate, charge, or classification ... is' unjust, unreasonable, unduly discriminatory or preferential, the Commission shall determine the just and reasonable rate ... and shall fix the same by order.” 16 U.S.C. § 824e(a). In other words, when a party files a complaint against a rate or charge, FERC must adjudicate the challenge under the “just and reasonable” standard. The
Mobile-Sierra
doctrine carves out an exception to this rule based on the “familiar dictates of contract law.”
Lansdale,
Courts have rarely mentioned the
Mobile-Sierra
doctrine without reiterating that it is premised on the existence of a voluntary contract between the parties. In
Mobile,
the Supreme Court stated that “the relations
between the parties
” may be established by contract, subject only to “public interest” review.
United Gas Pipe Line Co. v. Mobile Gas Serv. Corp.,
This case is clearly outside the scope of the
Mobile-Sierra
doctrine. As
*271
we explained,
Mobile-Sierra
is invoked when “one party to a rate contract on file with FERC attempts to effect a unilateral rate change by asking FERC to relieve its obligations under a contract whose terms are no longer favorable to that party.”
Maine PUC,
In defense of the
Mobile-Sierra
provision, FERC argues that the “public interest” standard will only apply to future challenges to a narrow category of rates: the transition payments and the final auction clearing prices from the Forward Market.
FERC also argues that in other recent cases, the Commission has approved contracts that apply the “public interest” standard to non-contracting third parties.
V.
Petitioners also contend that FERC’s approval of the Forward Market exceeds the Commission’s jurisdiction because it forces utilities to purchase a specific amount of capacity. Petitioners assert that FERC lacks jurisdiction under the Federal Power Act, which provides that the Commission “shall not have jurisdiction ... over facilities used for the generation of electric energy.” 16 U.S.C. § 824(b)(1). In response, FERC argues that the settlement agreement only addresses prices, which are unquestionably within FERC’s jurisdiction. The Commission’s interpretation of the scope of its jurisdiction is entitled to
Chevron
deference. Ok
la. Natural Gas Co. v. FERC,
We agree with the Commission that the Forward Market itself does not exceed FERC’s jurisdiction. The Federal Power Act grants the Commission broad authority over “the sale of electric energy at wholesale in interstate commerce.” 16 U.S.C. § 824(b)(1). The protracted litigation over Must-Run agreements, the locational installed capacity market, and the Forward Market is fundamentally a dispute over the
rates
that will be paid to suppliers of capacity. The two key components of the settlement agreement — the transition payments and the Forward Market auctions — “establish a mechanism and market structure for the
purchase and sale
of installed capacity at wholesale ... [and] determine the
prices
for those sales.”
The deficiency charge ... must be deemed to be within the Commission’s jurisdiction because it [] represents a charge for the power and service the overloaded participant receives — or it is at least a rule or practice affecting the charge for these services.
Municipalities of Groton v. FERC,
In support of their jurisdictional argument, petitioners focus heavily upon the
*273
“installed capacity requirement,” which is “the total amount of capacity required by the system to meet peak load plus a reserve margin.”
VI.
For the aforementioned reasons, the consolidated petitions for review are granted with respect to the Mobile-Sierra issue, denied with respect to all other issues, and remanded to the Commission for further proceedings.
So ordered.
Notes
. It would have been helpful if the parties had actually defined "capacity” before delving into the intricacies of New England's capacity market. Also, the briefs would have been much easier to read if the parties had used fewer acronyms.
. An ISO is an independent company that has operational control, but not ownership, of the transmission facilities owned by member utilities. ISOs “provide open access to the regional transmission system to all electricity generators at rates established in a single, unbundled, grid-wide tariff____”
Midwest ISO Transmission Owners v. FERC,
. Although the parties refer to this as a "demand curve,” that term is misleading. Normally, a “demand curve” is a model of the relationship between prices and consumer preferences in a free market. In contrast, the "demand curve” proposed by the ISO is an entirely artificial construct that specifies the prices that must be paid for various quantities of capacity.
. The orders under review are
Devon Power LLC,
. The petitioners cite
NSTAR Electric & Gas Corp. v. FERC,
. The petitioners also argue that FERC acted arbitrarily and capriciously in ordering an overbroad remedy to the market problem it had identified. According to the petitioners, the ongoing use of Reliability Must-Run contracts during the transition period contravenes FERC's initial desire to implement a market structure to replace Must-Run contracts. This objection was not raised before the agency and is therefore waived. See 16 U.S.C. § 825Z(b) ("No objection to the order of the Commission shall be considered by the court unless such objection shall have been urged before the Commission in the application for rehearing unless there is reasonable ground for failure so to do.”).
. For the Forward Market, capacity is purchased three years in advance, so the full market design, including the locational element, cannot be implemented until 2010.
. As one commentator has noted, the Mobile-Sierra doctrine ‘‘recognize[s] that the existence of a contract infuses the rate with the attribute of reasonableness....” Carmen L. Gentile, The: Its Illustrious Past and Uncertain Future, 21 Energy L.J. 353, 357 (2000).
. FERC asserts that third parties' interests are adequately safeguarded because under
Mobile-Sierra,
the Commission "retains significant authority to protect non-parties to the settlement from harm.”