On February 20, 2014, the United States Court of Appeals for the Third Circuit denied several petitions for review challenging a series of 2011 orders from the Federal Energy Regulatory Commission (the Commission or FERC). The Commission orders involved the PJM Interconnection, L.L.C. (PJM) Minimum Offer Price Rule (MOPR), a complex market rule designed to prevent certain uncompetitive market behavior.

The MOPR was first established as part of the settlement agreement instituting PJM’s capacity market, known as the Reliability Pricing Model (RPM). The purpose of the MOPR was to prevent the exercise of buyer-side market power. Conceptually, buyer market power in capacity markets occurs when an entity engages in behavior intended to lower market clearing prices below a competitive level. Because some market participants are both buyers and sellers of capacity in RPM, an entity that is substantially “net short” on capacity—that is, an entity that buys more capacity than it sells—may have a rational economic incentive to lower prices. The MOPR seeks to ensure that a new market entrant offers into the capacity auction at a competitive price that reflects the resource’s costs (and not an artificially low price aimed at ensuring that the resource clears the auction).

In 2011, a coalition of generators filed a complaint with the Commission arguing that the then-existing MOPR was inadequate. Shortly thereafter, PJM filed a related proposal to revise certain aspects of the MOPR. Both the complaint and PJM’s tariff proposal were motivated in large part, if not entirely, by state-sponsored proposals to subsidize new generation units in New Jersey and Maryland. The coalition of generators, PJM, and others argued to the Commission that the New Jersey and Maryland initiatives would destroy the ability of RPM to produce competitive prices for capacity. In a series of orders, the Commission ultimately made several changes to the MOPR, including eliminating a then-existing exemption from the MOPR for state-mandated resources. The Commission also clarified that resources designated as new “self-supply,” i.e. new resources offered into the market by a load serving entity to serve its own load, would be subject to the MOPR. Both the New Jersey and Maryland state initiatives were recently invalidated by federal district courts for violating the Supremacy Clause because they sought to regulate wholesale prices for energy in interstate commerce, a field that is occupied exclusively by the Commission. 

Maryland and New Jersey challenged several of the Commission’s findings before the Third Circuit. They argued, among other things, that the Commission exceeded its statutory authority under the Federal Power Act when it eliminated the exemption for state-mandated resources and that the Commission’s decision to eliminate this exemption was arbitrary and capricious.  Various entities also challenged the Commission’s decision to apply the MOPR to new self-supply resources. Petitioners, including the coalition of generators, made several other challenges to the Commission’s orders as well. 

The Third Circuit denied all petitions challenging the 2011 Commission orders. On the issue of whether the Commission exceeded its jurisdiction in eliminating the exemption for state-mandated resources, the court held that the Commission’s rationale for eliminating the state-mandated exemption related directly to its duty of ensuring just and reasonable wholesale rates—which is exclusively the jurisdiction of the Commission. In response to state arguments that the Commission interfered with state efforts to sponsor new capacity, the court held that “[W]hat FERC has actually done here is permit states to develop whatever capacity resources they wish, 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.”   

While expressing some concern about the manner in which the Commission required PJM to subject new self-supply to the MOPR, the Third Circuit dismissed challenges on this matter as moot. In a subsequent MOPR proceeding, the Commission accepted further revisions to the MOPR that now allowed for an exemption for new self-supply so long as the resources fit within certain established “net-short” and “net-long” thresholds. ¹

Despite denying all petitions challenging the 2011 Commission orders, the Third Circuit was highly critical of the Commission for failing to consider the economic harm that could result from the state-mandated exemption when it first approved the MOPR in 2006. The Third Circuit stated:

It is more than mildly disturbing that, by endorsing a state-mandated exemption with perfectly predictable incentives, 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 were persuaded that the exemption was somehow real.  That FERC has done so based on little more than an “ah ha” moment when foreseeable outcomes approached fruition only makes matters worse.  Our power to rein in bureaucratic behavior like this is, however, constrained. 

As mentioned above, the PJM MOPR has gone through further, substantial changes since the 2011 order, and these changes have rendered some of the challenges to the 2011 orders moot.  Nevertheless, the Third Circuit’s decision establishes important precedent on various issues, including the often difficult jurisdictional balance between state authority over local generation and resource adequacy and the Commission’s statutory duty to ensure just and reasonable rates in the wholesale markets.  

Please click here to review the Third Circuit decision.