Duke Energy Corporation v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 24, 2017 Decided June 15, 2018
No. 16-1133
DUKE ENERGY C ORPORATION , ET AL.,
P ETITIONERS
v.
FEDERAL ENERGY R EGULATORY C OMMISSION,
R ESPONDENT
PJM INTERCONNECTION, L.L.C.,
INTERVENOR
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
Matthew Allen Fitzgerald argued the cause for petitioners.
With him on the briefs were Noel H. Symons and Katlyn A.
Farrell.
Elizabeth E. Rylander, Attorney, Federal Energy
Regulatory Commission, argued the cause for respondent.
With her on the brief were Robert H. Solomon, Solicitor, and
Susanna Y. Chu, Attorney.
Jeffrey W. Mayes argued the cause for intervenor PJM
Interconnection, L.L.C., and amicus curiae Independent
Market Monitor for PJM. With him on the brief were Michael

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J. Thompson and Paul M. Flynn. Ryan J. Collins entered an
appearance.
Before: TATEL, GRIFFITH , and M ILLETT, Circuit Judges.
Opinion for the Court filed by Circuit Judge TATEL.
TATEL, Circuit Judge: To prepare for a bitterly cold day
during the January 2014 “polar vortex,” Duke Energy
Corporation, a generator of electricity, purchased exceptionally
expensive natural gas, which it ended up not needing. Claiming
that its regional transmission organization, PJM
Interconnection, had directed it to purchase the gas and that the
governing tariff provided for indemnification, Duke sought
reimbursement for its losses. PJM rejected Duke’s claim, as did
the Federal Energy Regulatory Commission (FERC). For the
reasons set forth in this opinion, we deny Duke’s petition for
review.
I.
The United States electrical grid has been described as “the
most complex machine ever made.” Phillip F. Schewe, The
Grid: A Journey Through the Heart of Our Electrified World 1
(2007). Fortunately, only a few details are necessary to
understand this case.
PJM Interconnection, L.L.C., Intervenor here, a regional
transmission organization, operates the transmission system
spanning all or part of thirteen mid-Atlantic and Midwestern
states. PJM also manages the markets in which electricity is
bought and sold within this territory.
Most electricity is traded in PJM’s “day-ahead market.”
Generators offer electricity into that market by noon each day,

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including in their offers not only the price, but also the amount
of notice they will need to provide the electricity. Based on
predicted demand, PJM then derives a market-clearing price
for all sales to be made the next day and, by 4 P.M., notifies
generators whether and when they are scheduled to run. Even
if a generator is scheduled to run, however, PJM may or may
not call on it to provide energy, depending on demand and other
variables.
PJM also manages a yearly “capacity market.” “The
capacity market is designed to ensure sufficient resources are
available to maintain the reliability of the system.” Duke
Energy Corp. v. PJM Interconnection, L.L.C., 151 FERC
¶ 61,206, 62,279 (2015) (Initial Order). Generators bid into that
market to become Generation Capacity Resources—generators
paid to offer all of their available capacity into the day-ahead
market and to operate if called upon by PJM. As FERC
explained while interpreting a similar tariff, “economic
considerations are irrelevant to determining whether a unit is
physically available.” New England Power Generators
Association, Inc. v. ISO New England Inc., 144 FERC
¶ 61,157, 67,902–03 (2013) (internal quotation marks omitted).
Petitioners, Duke Energy Corporation and various other
related corporate entities (“Duke”), are members of the PJM
Tariff, a contract between PJM and the member utilities. Duke
operates the Lee Facility, located 90 miles west of Chicago,
which has eight eighty-megawatt natural-gas-fired combustion
turbines. In 2014, the year at issue here, Duke’s Lee Facility
functioned as a Generation Capacity Resource.
In January of 2014, extreme cold temperatures and wintry
conditions affected much of the Eastern United States,
resulting in a dramatic increase in demand for electricity.

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Coupled with a pipeline explosion in Canada, this “polar
vortex” caused natural gas prices to spike. Duke normally
obtained its gas through an agreement with Natural Gas
Pipeline Company (NGPL), under which it could take gas as
needed throughout the day. During the polar vortex, however,
NGPL instituted several restrictions that made gas purchases
both riskier and less convenient. No longer able to take gas as
needed, Duke had to reserve it well in advance. This situation,
combined with the extreme weather, created a perfect storm for
generators like Duke.
The events at issue here took place on January 27, 2014,
when PJM projected that energy demand for the next day
would be 140,000 megawatts, well above previous record
peaks. Such an extreme demand posed a serious risk of power
outages during subzero temperatures. At 8:45 A.M., PJM
issued an emergency announcement to generators, informing
them of the projected emergency and issuing what the Tariff
calls a “maximum emergency generation alert.” Transcript of
Automated Call from Kevin Etch, PJM, to Brian Murrell, Duke
(Jan. 27, 2014, 08:45 EPT), Joint Appendix (J.A.) 140. Under
the Tariff, that alert obliged all generators, including Duke, to
“comply with all directions from [PJM] for the purpose of
managing, alleviating, or ending an Emergency.” PJM Tariff,
Att. K § 1.7.11(a), J.A. 380.
Upon hearing the alert, Duke’s Managing Director of
Generation and Dispatch, Greg Cecil, faced a difficult choice:
he could buy gas before noon, when it was cheapest, though he
would risk losing money if the Lee units never needed to run;
alternatively, he could postpone purchasing gas until he knew
whether the Lee units were scheduled to run, though in that
case he would risk paying more for gas. Seeking advice, Cecil
called PJM’s dispatch desk and spoke to Master Dispatcher

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Nathan Marr to discuss whether Duke should pre-purchase gas.
This was the first of three back-to-back conversations that lie
at the heart of the dispute before us.
In the first conversation, Cecil informed Marr that “gas is
very difficult” at the Lee facility, “[b]ut, I might be able to buy
some day ahead and have it scheduled ratably for tomorrow.”
Transcript of Telephone Call from Greg Cecil, Duke, to Nathan
Marr, PJM (Jan. 27, 2014, 08:53 EPT), J.A. 141 (First
Conversation). Cecil emphasized, however, that if he did
purchase the gas, he needed “to be able to come on”; that is, he
needed PJM to call on the Lee units to provide power. Id. Marr
replied that he “[could not] anticipate what is going to be the
situation,” but explained that, given the emergency situation,
“more than likely, your units will be running. . . . I can’t
guarantee 100% that you will be on. 99.9% you will run
though.” Id., J.A. 142.
In response, Cecil explained that because gas was very
expensive, “I may be able to [pre-purchase gas] for some of the
[Lee units] but probably not all of them.” Id. Marr replied that
“[w]e want all units available for tomorrow.” Id. And though
Cecil objected that “[g]as is my limiting factor,” Marr spoke
over him: “If you can secure gas, we would advise you to
secure gas for your units. We want all units available for
tomorrow.” Id. Cecil repeated that “I don’t know that I’d be
able to do it for all of [the units],” but Marr cut him off with an
“Alright?” to which Cecil responded, “Okay.” Id.
A few minutes later, Marr called Cecil back, but because
Cecil had stepped away, Marr relayed his message to another
Duke employee:

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We want your units available. . . . If [Cecil is] not
securing gas based on an economic decision – this is
not an economic decision. This is a reliability issue,
so all units must be available. . . . And if there is any
other further issues with that, he can call me back and
I can talk to him or he can talk to my manager.
Transcript of Telephone Call from Nathan Marr, PJM, to Brian
Murrell, Duke (Jan. 27, 2014, 08:56 EPT), J.A. 143–44
(Second Conversation).
Cecil then returned Marr’s call, asking him to confirm that
PJM was facing a “reliability issue.” Transcript of Telephone
Call from Greg Cecil, Duke, to Nathan Marr, PJM (Jan. 27,
2014, 08:59 EPT), J.A. 145 (Third Conversation). Marr
reiterated that “[PJM is] anticipating reliability issues, so all
units need to be available, it is not an economic decision.” Id.
Thanking Marr for the information, Cecil again explained that
gas was difficult to procure and “this is the information I will
hopefully be able to use with [NGPL].” Id., J.A. 145–46.
Following these conversations, Duke purchased enough
gas—$12.5 million worth—to run five of the eight Lee units.
This allowed Duke to bid those units into the day-ahead market
with short notification times, meaning PJM could call on these
units with little warning. The other three units were bid in with
longer notification times. PJM, however, never dispatched any
of the Lee units, leaving Duke, after mitigation efforts, with a
$9.8 million loss.
Duke then requested compensation from PJM. Relying on
Section 10.3 of the Tariff, which provides for indemnification
from any damages “arising out of or resulting from . . . a
Generation Owner’s [] acting in good faith to implement or

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comply with the directives of the Transmission Provider,”
Duke argued that PJM was required to reimburse Duke for its
losses. Letter from Noel Symons, Attorney for Duke, to
Jacqulynn B. Hugee, PJM Assistant General Counsel (Apr. 2,
2014), J.A. 186. PJM denied indemnification, maintaining that
it had issued no directive and that, regardless, the
indemnification clause was inapplicable to the situation.
Duke then took its case to FERC, filing a complaint against
PJM pursuant to Section 306 of the Federal Power Act (FPA),
16 U.S.C § 825e (“Any . . . electric utility . . . complaining of
anything done or omitted to be done by any . . . transmitting
utility . . . in contravention of the provisions of this chapter may
apply to the Commission by petition . . . .”), alleging that PJM
had failed to fulfill its obligations under Section 10.3 of the
Tariff. In the alternative, Duke sought a one-time limited
waiver of certain provisions of the Tariff, which would also
have allowed Duke to recover its losses.
FERC denied Duke’s complaint on both grounds, with one
member dissenting on the latter issue, which Duke has not
appealed. The Commission rejected Duke’s indemnification
claim for two reasons. First, it held that Section 10.3 “should
not be interpreted to guarantee reimbursement of a generator’s
losses on gas purchases incurred in meeting its capacity
resource obligations in PJM.” Initial Order at ¶ 62,279. Second,
having reviewed the conversations between Cecil and Marr, it
found that “Duke [did not] act[] pursuant to a directive from
PJM that might entitle it to the reimbursement it seeks.” Id.
These two rulings centered on a single fact: “As a Generation
Capacity Resource, Duke was already obligated to be
available.” Id. ¶ 62,280. FERC denied Duke’s request for
rehearing, and this petition followed.

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II.
Challenging both of FERC’s rationales, Duke insists that
PJM did issue a directive to buy gas and that the Tariff does
provide for indemnification for losses sustained as a result of
such a directive. As Duke acknowledges, it can succeed here
only by prevailing on both arguments.
We begin with the first question—did PJM issue a
directive to Duke to buy gas?—keeping in mind our deferential
standard of review. The FPA provides that “[t]he finding of
[FERC] as to the facts, if supported by substantial evidence,
shall be conclusive.” 16 U.S.C § 825l(b). Substantial evidence
is “such relevant evidence as a reasonable mind might accept
as adequate to support a conclusion.” Butler v. Barnhart, 353
F.3d 992, 999 (D.C. Cir. 2004) (quoting Richardson v. Perales,
402 U.S. 389, 401 (1971)). “The test ‘requires more than a
scintilla, but can be satisfied by something less than a
preponderance of the evidence.’” Id. (quoting Florida
Municipal Power Agency v. FERC, 315 F.3d 362, 365–66
(D.C. Cir. 2003)).
Duke concedes that “it is not a ‘directive’ to tell someone
to do something they already must do,” Pet’rs’ Br. 28, and that,
as a Generation Capacity Resource, the Lee facility was
obliged to run if called upon. Accordingly, as Duke recognizes,
PJM issued no directive when it instructed Duke to make the
Lee units available. Instead, Duke argues that PJM directed it
to purchase gas.
Marr mentions gas only twice. During the first
conversation, he “advises” Cecil to procure gas, immediately
reiterating that all units must be available. First Conversation,
J.A. 142. In the second conversation, Marr reminds Cecil that

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the situation is “a reliability issue, not [an] economic [decision]
concerning gas.” Second Conversation, J.A. 143.
Duke never argues, and properly so, that Marr’s two
statements amounted to a direct order to Cecil to purchase gas.
Instead, Duke contends that the full context of the morning
makes clear that “PJM intruded on Duke’s normal economic
gas-buying decision and instructed it to act.” Pet’rs’ Br. 28.
Given that PJM announced an emergency and that Marr took
the trouble to call Cecil back after the first conversation, Duke
argues, PJM clearly meant to issue a directive. “No one who
listens to the tapes or reads the transcripts of these
conversations could reasonably interpret PJM as taking the
trouble to call Duke back to say” that Duke may hold off on
buying gas and offer the Lee units with high prices and long
notification windows. Id. at 34. According to Duke, it makes
no difference that Cecil and Marr discussed neither notification
windows nor prices because such matters “were understood.”
Id. Urging us to listen to audio recordings of the phone
conversations, Duke maintains that “the tone of the
conversations further emphasizes the urgency of the situation
and the directive that PJM was giving to Duke.” Id. at 34 n.4.
Duke also maintains that Marr’s repeated statement that the
decision was not economic indicates that PJM was taking the
reins because Cecil and Marr both understood that economic
decisions were Duke’s to make. Oral Arg. Rec. 24:20–25:30
(Duke’s attorney pointing to Marr’s statement that “this is not
an economic decision” as the best evidence in the transcripts of
PJM’s directive); Pet’rs’ Br. 32 (“Both PJM and Duke
understood what they were discussing. PJM understood that . . .
Duke’s normal economic judgment would cut against
purchasing gas right away. But . . . PJM did not want Duke to
make decisions based on the price of gas.”).

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By reading between the lines, Duke assures us, we too will
understand that “this is not an economic decision” was a code
that both Cecil and Marr understood to mean that PJM was
issuing a directive. But we are not here to find facts. Instead,
we are required to defer to FERC’s factual findings, which, “if
supported by substantial evidence . . . [are] conclusive.” 16
U.S.C § 825l(b). This deference recognizes that the
Commission, given its expertise in these matters, is far better
suited than this court to know what the parties “understood.”
See Marsh v. Oregon Natural Resources Council, 490 U.S.
360, 377 (1989) (holding that courts must defer to the
“informed discretion” of federal agencies where the agencies’
decisions require “a high level of technical expertise” (internal
quotation marks omitted) (quoting Kleppe v. Sierra Club, 427
U.S. 390, 412 (1976))).
After reviewing the conversations between Marr and
Cecil, FERC found that PJM never directed Duke to buy gas.
Duke Energy Corp. v. PJM Interconnection, L.L.C., 154 FERC
¶ 61,156, at 13 (2016), J.A. 54. “Contrary to Duke’s view, Mr.
Marr’s statements to Mr. Cecil on the morning of January 27
were not a specific order to Duke to take actions that went
beyond Duke’s pre-existing contractual requirements.” Id. The
Commission explained, “Marr said nothing about when to
purchase natural gas, at what price to purchase the gas, how to
bid into the market, or to take any action beyond that which
Duke is otherwise obligated to take under the tariff: to purchase
natural gas to be prepared to run its units.” Id. at 15, J.A. 56.
Duke argues that FERC was mistaken. Asserting that it
need not have purchased gas on the 27th in order to run its units
on the 28th, Duke argues that Marr’s statements went beyond
reminding the company of its Tariff obligation (to be available
when called upon) and directed it to purchase gas. But FERC,

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reading Marr’s two gas-related statements together with the
rest of the conversations—including Marr’s insistence that all
units be available, which he repeated four times—concluded
that both mentions of gas were entirely in service of Marr’s
instruction to do whatever needed to be done to fulfill its Tariff
obligation to make the Lee units available. “[Marr] was
responding to a request as to whether these units would choose
not to run for economic reasons, and responded to that
request. . . . Marr’s statement that economics is not a factor
merely reflects Duke’s Tariff obligation to be prepared to run
its units.” Id.
Moreover, as FERC observed, given the maximum
generation emergency and the problems Duke was facing as a
result of the constraints imposed by NGPL, its gas supplier, it
seems likely that declining to purchase gas on the 27th would
have left Duke unable to run the Lee units on the 28th, “a risk
[neither] sanctioned [n]or permitted under the tariff.” Id. at 15
n.54, J.A. 56. And to the extent Duke had other options, “the
conversation [between Marr and Cecil] reflected none of these
considerations. As far as [Marr] knew, Duke was
contemplating taking the gamble not to buy gas so the units
would not be available, and [Marr] was informing Duke that
PJM believed it needed those units to be prepared to run – as
Duke is obligated under the tariff to do.” Id. at 16, J.A. 57.
To be sure, the record may well be subject to other
interpretations—Duke’s preferred interpretation perhaps
among them. But our task is not to assess whether Duke’s
interpretation of the record is fair. Just the opposite: we must
accept FERC’s interpretation unless unsupported by
substantial evidence. 16 U.S.C § 825l(b). And Duke has given
us no basis for believing that a “reasonable mind” would not
find the evidence here “adequate to support [FERC’s]

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conclusion.” Butler, 353 F.3d at 999 (quoting Richardson, 402
U.S. at 401).
III.
Because we conclude that the Commission’s finding that
PJM never directed Duke to buy gas is supported by substantial
record evidence, we have no need to address Duke’s argument
that, had such a directive been issued, the Tariff would have
authorized indemnification. The petition for review is denied.
So ordered.

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