On Thursday, January 31, 2013, FERC approved a contested settlement agreement regarding PJM Interconnection, L.L.C.’s (“PJM”) Cost of New Entry (“CONE”) values that are used in PJM’s Reliability Price Model (“RPM”).  Despite being contested by the Independent Market Monitor (“IMM”) and the Maryland Public Service Commission (“Maryland PSC”), FERC approved the settlement agreement, finding that “as a package, it presents an overall just and reasonable outcome for this proceeding.”

Through a series of auctions for delivery in a future year, the RPM procures capacity resources for future demand in the PJM region, providing forward pricing signals to encourage retention of existing resources and development of new resources.  RPM is the mechanism through which PJM tries to make certain that sufficient electric capacity is committed to reliably serve the peak needs of PJM loads, particularly in the capacity-constrained areas within PJM’s footprint.  The RPM model is intended to work in conjunction with PJM’s Regional Transmission Expansion Planning process in order to ensure the reliability of the PJM region into the future.

Under PJM’s RPM structure, Gross CONE values represent an administrative estimate of the cost of building a new combustion turbine generating unit within the PJM area and adding that capacity to the grid.  PJM’s Open Access Transmission Tariff (“OATT”) establishes a Gross CONE value for the entire PJM Region, as well as individual Gross CONE values for each of five subsets of the PJM Region, also referred to as “CONE Areas.”  Recognizing regional differences in the cost to build and operate a new power plant, the CONE Areas are assigned Gross CONE values that reflect regional distinctions.  Gross CONE, and the energy and ancillary services revenue that a new power plant would be expected to earn, is used to determine the net CONE, an input into PJM’s capacity market demand curve (the Variable Resource Requirement), which assists in establishing RPM clearing prices.  Additionally, Gross CONE values are used to help screen for attempts to exercise buyer market power under PJM’s minimum offer price rule.

In December 2011 PJM filed with FERC proposed changes to its OATT relating to the RPM.  Although FERC accepted the majority of the requested changes in an issued on January 30, 2012, it found that the intervenors had raised material issues of disputed fact as to the proper calculation of the Gross CONE values.  Accordingly, FERC set PJM’s proposed Gross CONE values for PJM’s five CONE Areas and the Gross CONE for the PJM Region as a whole for hearing, directing the parties to attempt to first settle the case.  In November, 2012, PJM filed the current contested settlement with FERC, resolving all outstanding issues set for hearing, and setting the 2015 Gross CONE values for all five CONE Areas and the PJM Region.  The settlement marked an agreement among most of the parties with regard to the Gross CONE values, but not on any of the data or calculations underlying those values.

The IMM and Maryland PSC protested the settlement, arguing that because the information underlying the values were not agreed upon by the parties, the values themselves were not properly supported, and that FERC should utilize the PJM’s December 2011 CONE values for the purposes of the May 2013 auction.  The parties further argued that the PJM region-wide CONE should always be equal with the lowest CONE area value.  Citing precedent, FERC explained that even if individual aspects of a settlement may be problematic, FERC may still approve a contested settlement as a package if the overall result of the settlement is just and reasonable.  In doing so, FERC need only find that the settlement rate falls within a range of reasonableness and that the contesting party would be in no worse a position under the settlement agreement than if the case were litigated.   Additionally, FERC may consider whether the settlement has a broad level of support.  Here FERC found the settlement to be reasonable, that both the IMM and Maryland PSC were in no worse of a position under the settlement agreement, and that the settlement agreement had a broad level of support.

For a copy of the order, click here.