By Rory D. Sweeney

A federal appeals court Friday slapped down FERC for overstepping its authority in a ruling forcing PJM to abandon a stakeholder compromise on market power rules.

The D.C. Circuit Court of Appeals decision remanding FERC’s order eliminates portions of PJM’s minimum offer price rule that have been in place since 2013 and orders the commission to review its decisions on the topic (15-1452).

The court determined that FERC exceeded its “passive and reactive role” under Section 205 of the Federal Power Act when it denied a 2012 proposal by PJM to revise its MOPR provisions but suggested additional revisions that it would accept.

Section 205 requires FERC to accept proposed rate changes as long as they are just and reasonable, allowing the commission to suggest only “minor” changes, the court said in an opinion written by Judge Brett Kavanaugh. “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.”

PJM’s proposal would have replaced the unit-specific MOPR exemption with two new ones and extended the mitigation period from one to three years before a unit could bid below the price floor. The change was prompted by generators’ concerns that the unit-specific review, which allowed units to prove confidentially to PJM that its costs were below the required minimum offer, lacked transparency and allowed below-cost bids.

In exchange for eliminating the exemption, load-serving entities won an agreement for two new exemptions: a competitive-entry exemption for units that are unsubsidized or subsidized through a non-discriminatory, state-sponsored procurement process and a self-supply exemption for units intended to meet a portion of an LSE’s needs.

Widely Supported

The compromise proposal was widely supported by PJM stakeholders — the first time that a significant MOPR revision had won a two-thirds sector-weighted vote, the court noted.

Nevertheless, FERC rejected the proposal in May 2013, saying it discouraged new entry because the exemptions were too narrow and the mitigation period was too long (ER13-535). However, it indicated it would accept the proposal if the unit-specific review were retained and the mitigation period remained unchanged. PJM agreed in a compliance filing adopting FERC’s changes. (See FERC OKs PJM MOPR Exemptions; Rejects End to Unit-Specific Review.)

A dozen stakeholders requested rehearing: NRG Energy, FirstEnergy, the PJM Power Providers Group (P3), Calpine, Exelon, PPL, Public Service Enterprise Group, the Illinois Commerce Commission and consumer advocates from New Jersey, Maryland, Delaware and D.C. (See FERC won’t Rehear PJM MOPR Ruling.)

When FERC declined rehearing, NRG Power Marketing, GenOn Energy Management and P3 petitioned the D.C. Circuit to review the order. On Friday, the court agreed that FERC “exceeded its authority” by suggesting the modifications that it would approve, even though PJM agreed to them, because that proposed an “entirely new rate scheme.”

Compromise ‘Eviscerated’

Additionally, the court said FERC “largely eviscerated” the compromise that had gotten the original proposal through PJM’s stakeholder process. The court noted that PJM asked FERC to approve the filing “not as a list of discrete Tariff changes, but as a hard-fought compromise package.”

“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.”

PJM Agreement Irrelevant

The fact that PJM agreed to FERC’s suggestions “does not cure the harms” to its stakeholders, the court said.

“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,” it said. “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.”

NRG was pleased with the ruling.

“This decision effectively calls for a rewrite of market rules that effectively allowed new entrants to distort the energy and capacity markets by subsiding new entry,” spokesman David Gaier said. “We’re hopeful that any new rules will level the playing field and support fair and equitable electricity markets for all generating resources.”