On July 7, 2017, the U.S. Court of Appeals for the District of Columbia Circuit rejected Federal Energy Regulatory Commission (FERC) actions modifying PJM’s Minimum Offer Price Rule filing. NRG Power Marketing, LLC, et al. v. FERC, No. 15-1452 (July 7, 2017). The court said FERC’s modifications violated FERC Section 205 of the Federal Power Act (FPA). The modifications were major — because they “transform[ed] the [PJM] proposal into an entirely new rate of FERC’s own making”¹ — and FERC cannot approve major modifications to an electric utility filing under Section 205 even if the filing party [PJM here] consents to FERC’s major modifications. The court’s decision will have significant ramifications, in particular by limiting FERC’s ability to significantly modify rate proposals by electric utilities under Section 205 as well as interstate pipelines under Section 4 of the Natural Gas Act.

PJM’s “Minimum Offer Price Rule” (MOPR) requires new generators to submit capacity auction bids at or above a price floor established by PJM. The rule is intended to prevent new generators (whose costs may be subsidized) from artificially depressing the auction’s “clearing price” and in turn sending inaccurate market signals.

Prior to 2012, PJM’s MOPR had two key features, (1) a unit specific review under which a generator could bid below the price floor if it could demonstrate that its costs were below the price floor; and (2) a one-year mitigation period if generator failed the unit specific review. In 2012, both generators and load serving entities agreed to get rid of the unit specific review, replacing it with only two categories of new generation that could bid below its costs, (i) competitive entry (generation either unsubsidized or subsidized through a process in which all could compete) and (ii) self-supply (load that meets a portion of their electricity by generating their own electricity.) Further, generator and load serving entities agreed to extend the mitigation period for generation that did not fit into these two categories from one year to three years.

PJM filed those changes, what the court referred to throughout as a “compromise”² at FERC. While FERC approved the compromise proposal, it also modified the compromise proposal. FERC approved the two categories but required PJM to retain the unit specific review. Further FERC rejected the three-year mitigation period, requiring the mitigation period for any generation subject to the MOPR unit to remain at one year. PJM agreed to the revisions. NRG Energy and others appealed. The court vacated³ FERC’s modifications with respect to “unit-specific review, the competitive entry exemption, the self-supply exemption, and the mitigation period”⁴ and remanded the matter to FERC.

To understand the court’s decision, one must understand the purpose of Section 205 of the FPA from a rate-payer perspective [in this case NRG, et. al.,] and FERC’s role in administering that section. Section 205 gives notice to ratepayers of a rate change by the filing utility and the opportunity for those affected to comment on that change. FERC plays a “passive and reactive role.”⁵ In that role, FERC may either accept or reject a proposal but FERC cannot make modifications to a proposal that are major, i.e., modifications that transform the proposal “into an entirely new rate of FERC’s own making.”⁶

In this case, FERC’s modifications were major, in part,⁷ because they went in the opposite direction than the compromise proposal filed by PJM. PJM’s proposal limited the MOPR exemptions to two categories, i.e., the MOPR would apply to all new generation unless the generation fell into one of those two categories, and required mitigation of units not falling into these two categories for three years, instead of one.

FERC, however, expanded the MOPR exemptions by (i) layering the unit-specific review on top of the two new categories and (ii) limiting the requirement to bid at the price floor to one year instead of three years. FERC’s modifications — what the court referred to as a “rejection-plus-proposal action by FERC”⁸ — removed FERC from the “passive and reactive role” envisioned by § 205.

These major modifications also deprived customers of “notice” of the modifications approved and the opportunity to comment on those proposals. As the court 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. They also did not have an adequate opportunity to comment on the request for rehearing.”⁹

PJM’s consent to those modifications did not insulate FERC from violating Section 205 or remedy the harm caused by depriving generators and load serving entities notice of FERC’s proposed modifications. Under Section 205, a utility can consent to minor changes because the original filing, with the addition of minor modifications, remains intact. But when FERC makes major modifications, proposes its “own original notion of a new form of rate,” the utility’s consent does not excuse a Section 205 violation because the customers are not notified in advance of those major modifications and cannot comment. As the court said:

In those circumstances [where FERC makes major modifications to a proposal], the utility’s consent is inadequate because consent does not cure the harms to the utility’s customers. Section 205 protects the utility’s customers by ensuring “early notice — in the rate proposal itself — of the sort of rate increase that is sought.” 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.¹⁰

Further PJM’s stakeholders “could not fully contest FERC’s modifications with new evidence on rehearing.¹¹Thus, the court concluded, “PJM’s stakeholders lacked the protections provided by Section 205. PJM’s consent did not restore those protections.”¹²

The court’s decision will have significant ramifications for market participants on a number of different levels.

First, the decision will affect FERC’s review of interstate pipeline filings under Section 4 of the Natural Gas Act (as well as Section 205 of the Federal Power Act.) Section 4 and Section 205 are drafted similarly — with the same passive and reactive role for FERC and notice and ability to comment for ratepayers — and decisions under Section 205 are equally applicable to Section 4 of the Natural Gas Act.¹³

Second, the decision will have a significant impact on FERC decision making. While the decision will stop FERC from significantly modifying a utility or pipeline proposals, it will likely result in FERC rejecting more proposals. If FERC can’t make major modifications to a utility or pipeline filing, even if the utility or pipeline might consent, then FERC will likely reject the proposal and at the same time tell the pipeline or utility that the proposal would be accepted if these changes were made. Further, FERC practitioners will likely argue over — and FERC will have to decide — whether FERC’s modifications were major, i.e., whether FERC imposed its “own original notion of a new form of rate” or minor, and thus whether or not the utility or pipeline can consent to those changes.

Third, there is the potential for rerunning or redoing the PJM capacity auctions previously held that were affected by the major modifications the court found violated Section 205. While market participants, including generators, are generally loathe to rerun/redo auctions after the fact, such a redo/rerun is a possibility here under two scenarios.

If a court finds that FERC acted illegally, FERC can put the parties back in the position they would have been but for the illegal FERC action.¹⁴ Applying that principle to the PJM capacity auctions, if an auction was held (i) in which a generator bid below the price floor either because it used the unit specific review or the one year mitigation had ended and (ii) generator’s bid affected the market clearing price, then on remand the FERC could require that the auction be rerun/redone without that generator’s bid.

Further, because the court vacated the commission’s orders, the net effect is that the orders never existed and the existing MOPR rules were reinstated.¹⁵ Thus there would be no self-supply exemption or competitive supply exemption — the only operative exemption from the MOPR would be the unit specific exemption. If a self-supply or competitive supply generator (i) would not pass the unit specific review and (ii) the generator’s bid affected the market clearing price, then on remand the FERC could require that the auction be rerun/redone without that generator’s bid.