D.C. Circuit Rejects FERC’s use of FPA Section 205 to Revise PJM Minimum Offer Price Rule

On July 7, 2017, the U.S. Court of Appeals for the D.C. Circuit (“D.C. Circuit”) vacated and remanded a set of FERC orders in 2013 and 2015 that revised the minimum offer price rule (“MOPR”) of the PJM Interconnection, LLC (“PJM”).  The D.C. Circuit held that FERC exceeded its role under Federal Power Act (“FPA”) Section 205 by imposing changes that amounted to an “entirely new rate scheme” for PJM.

In July 2012, an ad hoc group of PJM generators began discussing potential reforms to PJM’s MOPR—a rule designed to curb the impact of out-of-market subsidies by placing bidding restrictions on certain new generators. The reform efforts focused on various features of the MOPR, including “unit-specific review,” which at the time, allowed a new generator to bid below the MOPR’s price floor if it could show that its actual costs were below the floor. Arguing that unit-specific review lacked sufficient transparency and depressed capacity market clearing prices through below-cost bids from certain generators, the stakeholders proposed reforms to this and other MOPR aspects. Among other reforms, the final proposal sought to replace unit-specific review with two broad, categorical self-supply and competitive entry exemptions. The proposal garnered support from a majority of PJM stakeholder and PJM submitted it for FERC’s approval through a FPA Section 205 filing.

In a May 2013 order, FERC approved various revisions in the PJM proposal, but concluded that the unit-specific review reforms were not “just and reasonable” because they would unreasonably narrow the exemptions to the MOPR. In that order, FERC also proposed various modifications to make PJM’s filing just and reasonable, which included a requirement that unit-specific review be preserved alongside the two new proposed exemptions.  PJM acquiesced to FERC’s proposed modifications, but a group of generators requested rehearing. FERC denied the rehearing request in October 2015, prompting the generators to seek review from the D.C. Circuit.

On review, the D.C. Circuit held that FERC’s proposed modifications to PJM’s tariff exceeded the Commission’s authority under FPA Section 205. In the court’s estimation, FERC’s modifications resulted in an “entirely different rate design” than what PJM proposed, and its stakeholders “overwhelmingly” supported. According to the court, FERC is supposed to assume a “passive and reactive role” in considering utility rates under FPA Section 205, in contrast to FERC’s ability to impose new rate schemes under FPA Section 206—authority that all parties agreed was not invoked by FERC in its orders.  Although “minor deviations” from a proposal are permissible under Section 205, the D.C. Circuit held that “the imposition by the Commission of only half of a proposed rate” was not permissible.

The court rejected FERC’s argument that PJM’s ultimate consent cured any overreach, stating that proposing “its own notion of a new form of rate” did not excuse the violation because it deprived PJM’s stakeholders of the “early notice” guaranteed by the Section 205 process. The D.C. Circuit vacated and remanded FERC’s order.

The D.C. Circuit’s opinion can be found here.

A version of this blog post first appeared on the Washington Energy Report, hosted by Troutman Sanders, LLP.

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