On December 1, 2023, the United States Third Circuit Court of Appeals (“Third Circuit”) upheld PJM Interconnection, L.L.C.’s (“PJM”) latest minimum offer price rule (the “Focused MOPR”), denying challenges to both the substance of the rule and FERC’s “constructive” approval of the rule, which went into effect after the Commissioners deadlocked two-to-two and failed to issue a timely order accepting or denying the Focused MOPR. The Third Circuit held that a court’s review of FERC’s “action,” whether actual or constructive, proceeds under the same deferential standards set forth in the Federal Power Act (“FPA”) and the Administrative Procedure Act (“APA”), and encompasses the Commissioners’ mandatory statements setting forth their reasoning for approving or denying the filing. On the merits, the Third Circuit held that FERC’s acceptance of PJM’s Focused MOPR policy was not arbitrary and capricious pointing to arguments laid out in then-Chairman Glick’s and Commissioner Clements’ Joint Statement supporting the Focused MOPR.

The Third Circuit’s order is the latest development in proceedings over PJM’s Focused MOPR that, as articulated by the Third Circuit, mitigates the exercise of buyer-side market power in two situations: (1) where a capacity resource has the ability and incentive to exercise buyer-side market power; and (2) where a capacity resource receives state subsidies under a state program that is likely preempted by the FPA (see October 29, 2021 edition of the WER for more detail on the Focused MOPR). The Focused MOPR replaced the previously-applicable “Expanded MOPR,” which was adopted in 2019 (see December 20, 2019, April 22, 2020, October 22, 2020, and February 26, 2021 editions of the WER for more detail on the Expanded MOPR). The Focused MOPR took effect on September 29, 2021, by operation of law, after the Commission failed to act on PJM’s filing within the 60-day statutory deadline. Consistent with FPA section 205(g), each Commissioner also issued a statement explaining his or her view on the Focused MOPR proposal.

On November 29, 2021, requests for rehearing of the Focused MOPR were deemed denied by operation of law (see November 30, 2021 edition of the WER for more detail on the rehearing requests). PJM Power Providers Group, Electric Power Supply Association, Pennsylvania Public Utility Commission, and Public Utilities Commission of Ohio filed petitions for appellate review. More than two dozen intervenors and amici also filed briefs in the Third Circuit proceedings.

At issue on appeal was: (1) the applicable standard and scope of judicial review under FPA section 205(g) of a FERC order that takes effect by operation of law; and (2) whether FERC’s acceptance of the Focused MOPR policy was arbitrary and capricious under the Administrative Procedure Act (“APA”).  On the first issue, the court declined to exercise de novo review, holding that where a quorum of FERC Commissioners deadlocks two-to-two on a section 205 rate filing, the court’s review of the resulting order must adhere to the same standards under the APA that would govern the review of an order approved by a FERC majority, and that Congress intended the Commissioners’ statements to play an integral part in the Court’s review.  Thus, the Third Circuit explained, it was required to ensure that the Commissioners who issued the Joint Statement engaged in decision making that was reasoned, principled, and based on the record.

The court held that the rationale set forward in the Joint Statement approving the Focused MOPR was not arbitrary and capricious, but was rather supported by substantial evidence. The court acknowledged that the Focused MOPR reflected a change in policy from the 2019 Expanded MOPR, but held that the Joint Statement adequately identified the reasons for finding the change to be just and reasonable. The court explained that the Joint Statement identified specific policy concerns and changes in circumstances to support the Focused MOPR, including:

• Conclusions that the 2019 Expanded MOPR allowed for an “artificially inflated price [that] will falsely signal that new entry is needed or that existing resources should forestall retirement” with “potentially detrimental effects on PJM’s energy and ancillary service markets;”

• Recent state policy changes that could “support the entry of more than 44,000 MW” into PJM’s capacity market and that failing to account for the contributions of these resource to capacity could cost consumers $3.4 billion by 2030;

• Analysis of PJM’s 2019 capacity auction (the first to apply the previously-applicable Expanded MOPR) showing that a generating station in the ComEd zone receiving a zero-emission credit failed to clear, and that “capacity prices likely increased by over $10/MW-day, or an additional $90 million in the ComEd zone, as a result;” and

• Evidence that “several states have considered abandoning the capacity market altogether rather than have the resources needed to meet their public policy goals be subjected to mitigation.”

Next, the Third Circuit rejected arguments that the Joint Statement failed to consider the “many billions of dollars” invested into constructing new power plants “all in reliance on the existence of PJM market mechanisms that ensure a competitive market place.” The court explained that while it was not unsympathetic to the investors’ concerns, it found no fault with FERC’s ability to, and reasons for, constructively approving a new policy.

Finally, the Third Circuit rejected arguments that the Focused MOPR fails to ensure that buyers and sellers in the PJM capacity market cannot exercise market power. Rather, the court deferred to the Joint Statement’s conclusion that the Focused MOPR is sufficient to mitigate anti-competitive offers while “appropriately balancing the risk of over- and under-mitigation.”  The Third Circuit concluded that that FERC’s authority to determine whether wholesale rates are just and reasonable is exclusive, and that FERC’s constructive acceptance of the Focused MOPR was neither arbitrary nor capricious and was supported by substantial evidence in the record. 

A copy of the opinion can be found here.