D.C. Circuit Upholds PJM Capacity Market CONE

On January 26, 2018 the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) rejected a challenge to FERC’s approval of tariff revisions from the PJM Interconnection, L.L.C. (“PJM”) regarding the so-called cost-of-new-entry (“CONE”), or the anticipated revenues required to recover costs in PJM’s wholesale capacity market. A coalition of generators challenged PJM’s CONE as too low, which they argued undercut their own recovery in the capacity market. In a brief opinion, the D.C. Circuit held that petitioners’ claims failed to overcome the deferential standard of review applied to factual challenges to agency orders.

PJM first submitted its tariff revisions in September 2014, proposing, among other things, a new CONE value, which serves as a key input into the cost curve establishing the clearing price for PJM’s wholesale capacity auctions (see, e.g. December 5, 2014 edition of the WER). In support of its revised CONE, PJM presented cost analyses from various experts and external consultants who had concluded that certain CONE variables, such as labor costs and the cost of capital, required updating. FERC approved PJM’s proposal in November 2014, and affirmed its approval on rehearing in October 2015, precipitating the present petition for review to the D.C. Circuit.

On review, the D.C. Circuit noted that the petitioners raised “purely factual issues” in their challenges to FERC’s orders. Specifically, petitioners argued that FERC lacked enough evidence to approve the labor and cost of capital values in PJM’s updated CONE value. According to petitioners, the expert affidavits, analyses, and studies proffered by PJM provided insufficient support as compared to evidence that petitioners raised to justify a higher value.

The D.C. Circuit rejected petitioners’ arguments, holding that they did not present enough evidence to overturn the substantial evidence supporting FERC’s approval of PJM’s CONE. As the court noted, in light of this deferential standard of review, it was insufficient for petitioners to merely argue that they had a better method for analyzing PJM’s proposal.

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

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

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