On February 11, 2011, the United States Court of Appeals for the District of Columbia Circuit (“DC Circuit”) vacated FERC orders that approved the Midwest Independent Transmission System Operator, Inc.’s (“Midwest ISO’s”) Schedule 2-A (“Schedule 2-A”) of the region’s Open Access Transmission and Energy Markets Tariff (“tariff”) for being unduly discriminatory.

Prior to the approval of Schedule 2-A, all generators in the Midwest ISO were paid cost-based rates for reactive power.  In October 2007, some transmission owners proposed changes to the Midwest ISO’s tariff that would create Schedule 2-A.  Schedule 2-A allowed any transmission owner to not pay for any reactive power within a “deadband” range.  Thus, transmission owners were responsible for anything outside of the deadband range.  Whatever compensation method a transmission owner selected would determine the payments from all generators within the zone, regardless of whether the generators were affiliated or not. 

Dynegy Midwest Generation, Inc. (“Dynegy Midwest”) challenged FERC’s orders as being unduly discriminatory, as generators in different zones will be compensated differently.  Dynegy Midwest also argued that transmission owners were not authorized to file the new tariff under section 205 of the Federal Power Act (“FPA”); however, the DC Circuit rejected that petition for review.  In approving Schedule 2-A, FERC rejected the claim that giving transmission owners a right to choose would violate FERC’s comparability requirement that allows for unaffiliated generator to be paid similarly to an affiliated generator.  FERC treated this merely as a claim that some generators might be economically disadvantaged.  FERC also dismissed the claim that allowing Schedule 2-A to pass would be unduly discriminatory, a violation of section 205(b) of the FPA. 

The DC Circuit first dismissed the Commission’s assertion that their orders were not challenged in a timely fashion by stating a reasonable petition would not have perceived the risks posed by FERC’s orders and that the issue under consideration was new.  After tossing aside this procedural objection, turning to the merits, the DC Circuit sided against FERC and said “equal treatment of generators’ costs of supplying reactive power is critical to giving meaning to the zonal rate system’s apparent intent to assure competitive equality to generators.”  Additionally, the DC Circuit found that if a generator raised its power sales rates, it could risk being undersold by generators in zones where reactive power costs are compensated.

The full DC Circuit opinion is available here.