D.C. Circuit Rejects Challenges to PJM’s Capacity Market Rules, Including Year-Round Requirement Impacting Renewable Energy Generators

On June 20, 2017, the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit” or “the court”) rejected petitions for review challenging FERC’s approval of capacity market rules set by the PJM Interconnection, LLC (“PJM”) in 2014.  The D.C. Circuit held that FERC’s approval of the rules was adequately explained and within its statutory authority under the Federal Power Act.  In particular, the D.C. Circuit rejected assertions from various environmental, clean energy, and public utility petitioners that the new capacity market rules unduly discriminated against variable energy resources like solar and wind power.

Prompted by reliability concerns generally, and especially following the January 2014 “polar vortex” in the Northeast, PJM submitted revised capacity market rules to FERC in December 2014.  As PJM explained in its tariff filing, it considered the then-existing rules to insufficiently incent generators to keep their capacity commitments, causing reliability problems.  As part of the new capacity market rules, PJM proposed to require participating resources to be capable of delivering their committed level of electricity at any time for the entire delivery year (the “year-round” requirement).   PJM’s new market rules would allow non-year-round resources—i.e.  variable energy resources like solar and wind power—to aggregate their respective performance capabilities into a single capacity offer.

The revised market rules were challenged on a variety of grounds, most notably, by renewable energy advocates who argued that the year-round requirement unduly discriminated against non-year-round resources, and that the aggregation option did not mitigate this harm because it would impose additional “transaction costs” that must be absorbed.  FERC rejected these arguments, and explained that the differentiation between year-round and non-year-round resources was not unreasonable due to their different operational characteristics and that “non-year-round resources do not provide equivalent service as year-round resources.” FERC denied rehearing of its decision in 2016, prompting the challengers to file petitions for review to the D.C.  Circuit.

On review, the petitioners raised eight challenges to FERC’s approval of PJM’s new capacity market rules, including that FERC did not adequately consider the costs and benefits of the rules, that PJM’s penalty rate for non-performance was too high, and that the year-round requirement was unduly discriminatory against non-year-round resources.  The D.C. Circuit dispatched with each of the challenges in short order, primarily relying on the sufficiency of the record evidence, FERC’s explanations in its order, and the deference normally afforded agencies when interpreting their own statutory authority or when making policy choices.

On the issue of whether the year-round requirement was unduly discriminatory, the D.C. Circuit similarly upheld FERC’s reasoning.  According to the D.C. Circuit, the year-round capacity requirement is the core of the new rules and of PJM’s expectations for capacity resources going forward.  In the court’s estimation, the reliability problems that PJM experienced in winter 2014 confirmed the value of having capacity available any time of the year.  The D.C. Circuit acknowledged the different treatment between year-round and non-year-round resources, but stated “[t]he law provides no basis to claim the Commission cannot approve uniform performance requirements simply because those requirements will be easier to satisfy for some generators than for others.”  Because the resources have different operating characteristics, the court noted, they were not similarly-situated such that their disparate treatment could be considered unduly discriminatory.

Moreover, the D.C. Circuit noted, the aggregation accommodation for non-year-round resources would allow them to still participate in the capacity market auctions.  The court was unmoved by the petitioners’ retort that aggregation imposed “transaction costs,” as those costs were not supported by record evidence.  Even assuming such costs to be true, the D.C. Circuit stated, “[n]othing in applicable law requires a rate standard to result in no disparate impact on any power resource whatsoever.”

The D.C. Circuit’s decision rejecting the petitions for review can be found here.

This article first appeared on the Washington Energy Report, hosted by Troutman Sanders LLP.

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