On October 11, 2016, FERC issued an order on the refund liability of Midwest Generation, LLC (“Midwest”) for violating FERC-approved settlement agreement terms regarding reactive supply and voltage control service. Of note, although FERC approved Midwest’s total refund obligation calculation of over $3.6 million, it declined to exercise its primary jurisdiction over whether Midwest should be responsible to pay the portion of this obligation that accrued before the utility’s debts were discharged in an April 2014 bankruptcy proceeding. Instead, FERC directed Midwest to pay the refund amounts that accrued following the bankruptcy proceeding, which totaled around $1.7 million.

The settlement agreement at issue, between Midwest and PJM Interconnection, L.L.C. (“PJM”), was originally approved by FERC in 2004 (“2004 Settlement Agreement”). In general, the 2004 Settlement Agreement set out a reactive service revenue requirement for Midwest’s facilities and an obligation on the utility to provide notice and seek amendment if any of its generation units became suspended. As noted by FERC in a previous order on June 21, 2016, Midwest had continued to receive the full revenue requirement despite the fact that some of its units were deactivated. FERC determined that this prompted the need for refunds, and thus, FERC required Midwest to calculate such refunds in a follow-up compliance filing.

In its compliance filing, Midwest calculated its total refund obligation for violating the 2004 Settlement Agreement at over $3.6 million. The utility argued, however, that it should not be responsible to refund the amounts that accrued before April 1, 2014—the date on which an Illinois bankruptcy court confirmed a reorganization plan for Midwest and discharged all the utility’s debts.

In its October 11 order, FERC approved Midwest’s calculations for its roughly $3.6 million total refund obligation and reiterated that, ordinarily, the Federal Power Act enables FERC to enforce the terms of a filed rate and order refunds for past violations. As FERC noted further, even in instances of intervening court orders, FERC may still exercise its primary jurisdiction over such rate issues pursuant to the so-called “Arkla” Factors. Under this analysis, FERC will defer to proceedings in other courts, unless three factors are present: “(1) whether the Commission possesses some special expertise which makes the case peculiarly appropriate for Commission decision; (2) whether there is a need for uniformity of interpretation of the type of question raised by the dispute; and (3) whether the case is important in relation to the regulatory responsibilities of the Commission.”

FERC ultimately declined to exercise its primary jurisdiction on the discharged debt issue, concluding that the issue primarily involved interpretation of bankruptcy law, that no special need for interpretive uniformity existed, and that the matter was not significant to FERC’s regulatory responsibilities. Instead, FERC directed Midwest to pay PJM only the refund amounts that accrued after the bankruptcy discharge date. And although FERC determined that Midwest had a refund obligation for the period prior to the bankruptcy discharge, it concluded that “PJM and those parties owed refunds may choose to pursue the refunds in the bankruptcy proceeding if they believe they can be recovered despite the discharge.”

A copy of the October 11 order can be found here.