By Kathy Larsen

The Federal Energy Regulatory Commission was within its rights to approve PJM’s controversial capacity market rule changes in 2011, a somewhat reluctant federal appeals court ruled Feb. 20, rejecting challenges from New Jersey, Maryland and others. The court also upheld FERC’s approval of changes opposed by the generator group PJM Power Providers.

The US Court of Appeals for the 3rd Circuit upheld FERC’s decision approving the elimination of an exemption for state-mandated resources from the capacity market’s minimum offer price rule (MOPR), but said it found the commission’s actions “more than mildly disturbing.”

By earlier endorsing PJM’s rules that included an exemption for state-mandated supplies, the court said, “FERC would allow sovereign states and private parties to be drawn into making complex and costly investments, only to later pull the rug out from under those who were persuaded that the exemption was somehow real. That FERC has done so based on little more than the claim that the agency had an ‘ah ha’ moment when foreseeable outcomes approached fruition only makes matters worse.”

Nevertheless, the court upheld FERC’s ruling, saying the standard needed to find FERC’s action arbitrary and capricious, “is a high bar indeed, and many agency actions worthy of condemnation are not so deficient that they can be said to cross it. Such is the case here.”

Judging by that standard, the court said, the commission advanced adequate rationale for its “about-face.” Speculation that states would structure contracts to substantially suppress prices “has become reality,” the judges ruled. “As such, it cannot be said that FERC acted without substantial evidence.”

The case, New Jersey BPU v. FERC (No. 11-4245, et al), arose after New Jersey and Maryland instituted programs to procure 2,000 MW and 1,800 MW, respectively, of new generation to be bid into PJM capacity market auction at prices below the Cost of New Entry (CONE).

PJM concluded the state initiatives interfered with the capacity market’s ability to send competitive price signals. New MOPR provisions were set that limited state-sponsored generation to certain characteristics, including that it did not give preference to new resources over existing ones or restrict the type of resource that could participate. The state programs had sought new gas-fired capacity, which PJM specifically said would not be exempt from the MOPR.

The states and consumer advocates protested, arguing states should have the right to select capacity based on fuel diversity, environmental benefits or economic development.

The court rejected the states’ argument that FERC was usurping their rights by eliminating the exemption for state-sponsored resources. “[W]hat FERC has actually done here is permit states to develop whatever capacity resources they wish,” the court said, “and to use those resources to any extent that they wish, while approving rules that prevent the state’s choices from adversely affecting wholesale capacity rates. Such action falls squarely within FERC’s jurisdiction.”

Regina Davis, spokeswoman for the Maryland Public Service Commission said the PSC was disappointed in the ruling and had not made a decision concerning an appeal.

Also challenging the FERC ruling was the American Public Power Association, but the court said its concerns were made moot by later PJM and FERC actions. In 2013, PJM parties worked out a plan, which FERC approved, that assuaged many concerns of load-serving entities like public power utilities that self-supply. It did not reinstate the previous guaranteed market clearing for self-supply resources, but it exempted self-supply from price mitigation subject to showings that the self-supply will not set the market-clearing price.

APPA was also dismayed by the ruling. The MOPR changes at PJM “partially redressed” public power’s problem, but the negotiated provisions are “not of the same quality” as the original MOPR and do not constitute “a done deal,” APPA Vice President Sue Kelly said yesterday.

The provisions are the subject of rehearing petitions at FERC, she said. To APPA, a fierce critic of the capacity market, the court’s handling of its issue illustrates how “nothing is ever safe” from “endless litigation” and “years of stakeholder process.”

The P3 group, which originally had challenged several MOPR revisions, had some of its concerns addressed later by further changes to the rule. Two of its concerns remained for the court, however: the policy of basing the calculation for energy and ancillary services offsets on the zone with the highest revenues, and the policy of exempting resources from the MOPR once they have cleared one capacity auction, instead of three auctions.

The court rejected the generators’ arguments. About the calculation issue, it said “FERC has articulated legitimate reasons for finding PJM’s preferred method for calculating energy and ancillary services offsets just and reasonable, and that is all it is required to do.”

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