Court Rejects FERC Decision on PJM Pricing Rule

A federal appeals court has ruled the Federal Energy Regulatory Commission (FERC) should not have denied a 2012 proposal by PJM in which the regional power operator sought to revise its minimum offer price rule (MOPR).

The D.C. Circuit Court of Appeals on July 7 said FERC went beyond its "passive and reactive role" under Section 205 of the Federal Power Act when it ruled against PJM's proposal. PJM had reached a stakeholder compromise on its market power rules; while FERC denied that compromise, it suggested other revisions to the MOPR that FERC said it would accept. The court said FERC overstepped its role because Section 205 requires the agency to accept proposed rate changes that are just and reasonable, and to suggest only "minor" changes.

"Section 205 does not allow FERC to suggest modifications that result in an entirely different rate design than the utility's original proposal or the utility's prior rate scheme," said the opinion written by Judge Brett Kavanaugh. The court ordered FERC to review its decisions.

PJM's original proposal would have replaced its unit-specific MOPR exemption with two new ones. It also would have extended the mitigation period from one to three years before a unit could bid below the price floor.

The change was prompted after power producers expressed concerns about the unit-specific review, specifically because it allowed units to prove confidentially to PJM that its costs were below the required minimum offer. Generators said that process lacked transparency and allowed below-cost bids.

In the compromise, the load-serving entities-in exchange for eliminating the unit-specific exemption-brokered a deal for two new exemptions: a competitive-entry exemption for unsubsidized units, or for units subsidized in a state-sponsored, non-discriminatory procurement process; and a self-supply exemption, intended for units that would meet a portion of a load-serving entity's needs.

Support for the Compromise

PJM said the compromise proposal received widespread support from stakeholders. The court noted that it was the first time a large MOPR revision had garnered at least two-thirds of a sector-weighted vote.

FERC, however, said the proposal discouraged new entry into the market because the exemptions were too narrow and the migration period was too long. It rejected the proposal in May 2013. The agency said it would accept the proposal if the unit-specific portion was kept in place, and the original mitigation period of one year was retained. PJM agreed to FERC's recommendations.

Several stakeholders, including NRG Energy, FirstEnergy, the PJM Power Providers Group (P3), and consumer advocates from PJM's territory, asked for a rehearing. FERC declined, and
NRG Power Marketing, GenOn Energy Management, and P3 petitioned the D.C. Circuit to review the order. A spokesman for NRG said the company was pleased with the court's ruling.

"We're happy [with the decision]," NRG spokesman David Gaier told POWER on July 10. "Our general view is that fair and equitable electricity markets are best for ratepayers and for generators." Gaier said it's important that any new rules "level the playing field and support fair and equitable electricity markets for all generating resources."

FERC 'Exceeded Its Authority'

Kavanaugh, writing for the court, said FERC "largely eviscerated" the compromise that PJM had reached through the stakeholder process, and that FERC "exceeded its authority."

"PJM's proposal would have narrowed the availability of exemptions to the price floor for some generators that, in the view of some of PJM's stakeholders, posed a high risk of price suppression," Kavanaugh wrote. "But FERC's proposed modifications went in the opposite direction. FERC's modifications expanded the exemptions by layering the two new exemptions on top of unit-specific review and by exempting certain new generators from the price floor after one year instead of after three years. Indeed, FERC's modifications expanded the scope of the exemptions not just beyond PJM's original filing, but beyond the scope of the exemptions as they had stood before PJM's filing.

"Because of FERC's modifications, some generators can now claim exemptions from the price floor even if they cannot demonstrate that their costs fall below the price floor," he continued. "In other words, due to FERC's modifications, PJM's previous case-by-case methodology no longer controls."

The court said that though PJM agreed to changes after FERC's suggestions, that "does not cure the harms" to its stakeholders.

"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 the proposed changes," Kavanaugh wrote. "Generators and load-serving entities had an opportunity to comment on the original compromise proposal submitted by PJM. But they did not have an opportunity to comment on FERC's modifications before FERC issued its decision."

-Darrell Proctor is a POWER associate editor (@DarrellProctor1, @POWERmagazine)

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