DC Circuit Vacates FERC Order on PJM's Capacity Market
In an opinion issued on July 7, 2017, the U.S. Court of Appeals for the District of Columbia Circuit held that Section 205 of the Federal Power Act "does not allow FERC to make modifications to a proposal that transform the proposal into an entirely new rate of FERC's own making." Although FERC may make minor modifications to a rate proposal, the DC Circuit found in NRG Power Marketing, LLC, et al. v. FERC that FERC changed too much, even though the rate proponent consented to the changes. In essence, FERC's unilateral changes prevented interested parties that had previously supported the rate proposal from having a meaningful opportunity to comment. As such, the court vacated the FERC's order. The court’s decision significantly limits FERC's ability to modify rate proposals by electric utilities and interstate natural gas pipelines.
In December 2012, PJM Interconnection, L.L.C., a Regional Transmission Organization or (RTO) filed with FERC a modification to the way its conducts generation capacity auctions, which set the price for future wholesales of electricity. The proposal changed PJM's "Minimum Offer Price Rule," which requires new generators to submit capacity auction bids at a or above a price floor established by PJM. The rule is intended to prevent new generators whose costs may be subsidized, from depressing the auction's "clearing price" and in turn sending market signals, which over time could result in the development of fewer new generation projects and inadequate generation capacity to meet demand.
PJM's proposal was a compromise resulting from months of negotiations among a group of PJM generators and load serving entities (LSEs, i.e., utilities); it addressed new generator exemptions from the Minimum Offer Price Rule. Specifically, the existing generation-unit specific, case-by-case exemption was replaced with two transparent and relatively narrow exemptions. And, the duration of the minimum offer price rule to new generators was extended from one to three years. The PJM stakeholders voted on and overwhelmingly supported the proposal.
In May 2013, FERC determined that parts of PJM's proposal were not "just and reasonable" (the standard under FPA Section 205) and proposed several modifications. First, FERC stated it would allow the exemptions identified above, but only if the unit specific exemption was also reinstated. Second, FERC would not allow the Minimum Offer Price Rule to be extended from one to three years. PJM agreed. On rehearing the generators who argued that they would no longer receive the benefit of their bargain objected. FERC denied rehearing, and the generators appealed. The DC Circuit agreed with the generators.
When confronted with an FPA Section 205 tariff filing, FERC, as a general matter, has two options - accept or reject the filing. FERC can also suggest modest changes, similar to those in effect and only if the filer consents. This exception is very limited because "the power to initiate change through such rejection-plus-proposal removes the Commission from an essentially passive and reactive role envisioned by § 205." It also deprives customers of "early notice" of the proposal itself. And, "the imposition by the Commission of only half of a proposed rate is not permissible." Applying these principles, the DC Circuit found that "FERC's modifications resulted in a reate design entirely different from both PJM's proposal and PJM's prior rate scheme." Under these circumstances, PJM's consent was inadequate to cure the harm to PJM's customers, which were deprived of early notice of the rate change. Further, because FERC does not allow parties to present new evidence at the rehearing stage of a proceeding, the objecting generators were also denied a meaningful opportunity to comment and present evidence on the FERC-revised proposal during the rehearing stage of the proceeding.
The court's decision – that FERC's modifications to a rate proposal were so significant as to constitute a new, impermissible FERC proposal – will impact both the electric utility and interstate natural gas pipeline industries. But the greatest impact may be to protect the interests of stakeholders that participate in a process to develop an RTO filing. For example, the next time an RTO files a carefully balanced proposal supported by the membership committee, but which does not pass muster, FERC will have two options: (1) make minor modifications (with the approval of the RTO) or (2) reject the filing, thereby sending all parties back to the "drawing board." But FERC is still likely to modify some tariff proposals, leaving to the courts further determinations on the line of demarcation between a minor and major modification.
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