FERC modifications to PJM’s capacity market proposal violate Section 205. On July 7, 2017, the D.C. Circuit Court of Appeals concluded that FERC exceeded its authority under Section 205 of the Federal Power Act (FPA) because its modifications to PJM’s proposal resulted in an entirely different rate design than both PJM’s initial proposal and its prior rate design in NRG Power Marketing et al. v. FERC, Case No. 15-1452 (D.C. Cir. Jul. 7, 2017). This petition has its genesis in a perpetually discussed topic—PJM’s capacity market.
PJM Interconnection (PJM) is a Regional Transmission Organization (RTO) and therefore operates the electric grid in the mid-Atlantic region of the country, and manages the largest competitive wholesale electricity market in the country. See further discussion regarding PJM’s market in U.S. Supreme Court Blasts Maryland for Distorting PJM’s Capacity Market, FERCBlog (Apr. 19, 2016). To this end, PJM runs “capacity auctions” to set the price of wholesale electricity three years into the future, in which the goal is ensuring an adequate long-term supply of electricity. Generators bid their prices into the capacity auction; PJM accepts bids starting with the lowest and ascends higher until supply meets forecasted demand. The highest bid price accepted becomes the auction “clearing price” and every generator that clears under such price is paid the clearing price. For instance, if the lowest bid resembles a unit of energy at $100 and supply does not meet demand until bid prices have reached $200, each auction participant is paid the clearing price of $200 – whether a participant bid in at $101 or $199 makes no difference, all participants receive the clearing price of $200.
The problem is that some generators have incentives to bid below their actual cost of generating electricity, which may artificially depress the clearing price in the auction. To address concerns associated with such below-cost bidding, PJM established its Minimum Offer Price Rule (MOPR), which requires new generators to bid at or above a certain price floor. In 2012, PJM market participants explored possible changes to the MOPR with respect to two key features: (1) the “unit-specific review” exemption from the MOPR for new generators, and (2) the time which the MOPR is applicable to generators not exempt.
After months of negotiations amongst PJM market participants, agreement was reached as to a MOPR reform proposal which had two key components: (1) it narrowed the exemption from the MOPR, and (2) extended from one to three years the time which the MOPR is applicable. PJM filed its proposal with FERC pursuant to Section 205, whereupon FERC suggested modifications to the proposal, and PJM consented to such.
Electric generators petitioned for review to restore the compromise reached during PJM’s stakeholder process. The intent of the market rule changes was to broaden the applicability of PJM’s MOPR and make it more difficult for new market entrants to submit below cost bids. Generators advocated that previous MOPR exemptions available to new entrants failed to protect the integrity of the market, and proposed changes that would help preserve such integrity and promote more accurate price signals. More stringent eligibility criteria for exempted treatment under the MOPR was the primary purpose for the market rule changes. At issue before the court was whether FERC exceeded its authority under Section 205 of the FPA when it significantly modified the market rules proposed.
PJM’s Open Access Transmission Tariff is the filed rate for all FERC jurisdictional facilities located in the control area, including but not limited to wholesale sales made by electric generating facilities into the capacity market. Tariff rules governing the applicability of the MOPR are referred to as rate design. In order to make changes to its rate design, PJM must make a Section 205 filing at FERC. Under Section 205, FERC reviews the proposed rate design and determines whether the proposal is just and reasonable. See 16 U.S.C. Sec. 824d(a); 18 C.F.R. Sec. 35.34(j)(1)(iii). The statute puts FERC in a “passive and reactive role.” Advanced Energy Mgmt. Alliance v. FERC, No. 16-1234, at 10 (D.C. Cir. Jun. 20, 2017). FERC may accept or reject the proposed rate. Here, FERC did neither, it proposed a new rate. FERC suggested that PJM maintain the unit specific review (which stakeholders compromised to eliminate) and also adopt the new MOPR exemption criteria. PJM consented to FERC’s suggested modification, thus eviscerating the intent of the proposed market rule changes. The effect of such modification is to broaden the availability of MOPR exemptions, rather than broadening the applicability of the MOPR – making it easier to submit below cost bids.
The court confided in the wisdom of Justice Scalia, referencing his opinion in City of Winnfield v. FERC, where the court held that FERC has some authority to propose modifications to a utility’s proposed rate if the effect of such modifications result in “a system of rates similar to that previously in effect, and the utility acquiesces.” 744 F.2d 871, 876 (D.C. Cir. 1984). Notably, Justice Scalia recognized that FERC would violate Section 205 if “the Commission proposal accepted by the utility involved the Commission’s own original notion of a new form of rate” or an “entirely new rate scheme.” Id. at 876. City of Winnfield went no further and did not elucidate on what constitutes an “entirely new rate scheme.” The court enlightened FERC nine years later in Western Resources, Inc. v. FERC, where it concluded that FERC may not go “beyond approval or rejection” of a proposed rate to “adoption of an entirely different rate design” than the one proposed. 9 F.3d 1568 (D.C. Cir. 1993).
In this case, the court identified that FERC had modified the proposed rate in a way that created an entirely different rate design, thus violating Section 205. FERC failed to adhere to its permissible “passive and reactive” role and took on a more active role, which is permissible under Section 206, although not applicable here (where FERC first reviews whether a rate is unjust and unreasonable and if concluding so, produces a new just and reasonable rate). Even though PJM consented to the modifications of its proposed rate design, the court ruled that “consent is inadequate because consent does not cure the harms to the utility’s customers.” NRG Power Marketing, LLC., at 15. “When FERC ‘imposes an entirely new rate scheme’ in response to a utility’s proposal, the utility’s customers do not have adequate notice of the proposed rate changes or an adequate opportunity to comment on [or protest] the proposed changes.” Id. Such was the case here, FERC made electric generator participants who relied on the PJM stakeholder compromise victim to unlawful changes to the filed rate. The court ruled that “PJM’s stakeholders lacked protections provided by Section 205” because FERC exceeded its authority. Id. at 16.
Accordingly, FERC’s Order was vacated, and the matter remanded back to FERC. Even if certain modifications would, in FERC’s view, make a Section 205 proposal just and reasonable, “Section 205 does not allow FERC to make modifications to a proposal that transform the proposal into an entirely new rate of FERC’s own making.” Id. at 3.