Untitled design
On July 7, 2017, the U.S. Court of Appeals for the District of Columbia Circuit issued an important opinion on the scope of the Federal Energy Regulatory Commission’s (“FERC”) authority under Section 205 of the Federal Power Act. Specifically, the D.C. Circuit in NRG Power Marketing, LLC v. FERC found that FERC exceeded its Section 205 authority when it directed modifications to a PJM Interconnection, L.L.C. (“PJM”)—a Regional Transmission Organization—proposal impacting its generation capacity auctions.

For background, in 2012, PJM submitted to FERC a proposed reform to its Minimum Offer Price Rule intended to prevent new wholesale market entrants from entering artificially low bids into its capacity auctions, which would have depressed clearing prices in the auction. PJM’s proposal set forth two new exceptions to the Minimum Offer Price Rule: (1) a competitive entry exemption; and (2) a self-supply exemption. In addition, PJM’s proposal sought to extend the duration of the Minimum Offer Price Rule for new generators from one to three years. 

In 2013, FERC found that certain parts of PJM’s proposal were not “just and reasonable” under Section 205 and proposed several modifications to the proposal to make it “just and reasonable.” To rectify the components of the proposal that were not “just and reasonable,” FERC accepted the proposal subject to PJM’s submittal of a compliance filing revising the components of the proposal that FERC found were not “just and reasonable.” Summarized briefly, FERC directed PJM to re-instate a previous exemption to the Minimum Offer Price Rule and to revise the duration of the rule from three years, back to one year. PJM complied with FERC’s directives, but a number of generators ultimately appealed the FERC decision. 

On appeal, the D.C. Circuit determined that FERC’s action on the PJM proposal exceeded FERC’s Section 205 authority because FERC’s required modifications went too far, resulting in an “entirely different rate design” than what PJM originally proposed. The D.C. Circuit also found that PJM’s consent with FERC’s order was inadequate to cure the harm that resulted to PJM’s customers, as they were deprived of notice of the new rate scheme and an adequate opportunity to comment on it.

The D.C. Circuit decision reinforces that FERC’s role under Section 205 is passive and reactive, and that if FERC finds that a proposal is not “just and reasonable,” then FERC should reject the filing, rather than condition the filing into an “entirely different rate design.” As a result, going forward FERC may reduce some of its practice of conditionally accepting filings under Section 205 subject to modifications, choosing instead to reject the filings outright. This result would place greater burdens on filing parties to ensure their proposals are “just and reasonable,” or else risk that FERC will reject their filings.

The D.C. Circuit’s opinion is available here.

For more information on the ramifications of this decision, please contact Thomas Rudebusch, Jason Gray, or Tyler Mansholt.