On August 26, 2014, the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) vacated and remanded a FERC decision that required a generator to pay network upgrade costs related to its interconnection in the PJM Interconnection, L.L.C. (“PJM”).  The D.C. Circuit held that FERC did not justify its reasoning when it departed from its own precedent and required West Deptford Energy, L.L.C. (“West Deptford”) to pay upgrade charges pursuant to cost-allocation provisions of a superseded PJM tariff, rather than pursuant to provisions of the currently-effective tariff.

The dispute arose after three generators submitted interconnection requests to PJM in 1998.  After receiving the requests, PJM determined that the three projects’ output would overload its system, and a $13 million upgrade was necessary to accommodate the requests.  PJM assigned the upgrade costs to two of the three projects.  Before the upgrade was completed, one of the cost-bearing upgrade projects withdrew its request, rendering the upgrade unnecessary.  PJM, however, determined that completing the upgrade was the least costly alternative, and therefore completed the project. 

In 2006, a year after the competed upgrades, West Deptford submitted an interconnection request to PJM.  Under PJM’s then-current tariff, PJM could recover upgrade costs if the new applicant (1) used the additional capacity created by the upgrade; (2) the cost of the upgrade was greater than $10 million; and (3) the upgrade was placed into service no more than five years prior to the applicants interconnection queue closing date.  However, eighteen months later, and while West Deptford’s interconnection request was pending, PJM proposed tariff revisions regarding the assignment of costs for prior upgrades.  Specifically, PJM proposed that it could only seek reimbursement for a period of five years from the execution date of the interconnection agreement that necessitated the upgrade.  FERC approved the tariff revisions in 2008, and in 2011 PJM submitted a draft interconnection agreement to West Deptford seeking to recover the previous upgrade costs pursuant to PJM’s superseded tariff.  After a dispute, FERC held that the superseded tariff provisions controlled and PJM could enforce its old cost-allocation rule.

On review by the D.C. Circuit, the court considered which of the filed rates governs when a utility has filed more than one rate with FERC during the time it was negotiating an agreement: the rate in effect at the time negotiations began or the rate in effect when the agreement was executed.  West Deptford argued that FERC precedent dictated that the rate on file when the agreement was executed controlled, while FERC argued that it may decide which rate to use on a case-by-case basis.

The D.C. Circuit agreed with West Deptford and vacated and remanded the matter back to FERC for additional explanation.  The D.C. Circuit held that “there appeared to be an unbroken Commission practice of holding that interconnection agreements filed after the designated effective date of an amended tariff are governed by the amended tariff, unless the amended tariff has a grandfathering provision.”  The D.C. Circuit further noted that since there was precedent for using the rate on file when the agreement is executed, FERC must provide a reasoned explanation for departing from that precedent, which FERC did not provide.

 A copy of the D.C. Circuit’s opinion is available here.