On July 7, 2017, the U.S. Court of Appeals for the D.C. Circuit (“D.C. Circuit”) vacated and remanded a set of FERC orders that revised the minimum offer price rule (“MOPR”) of PJM Interconnection, L.L.C. (“PJM”).  The D.C. Circuit held that FERC exceeded its role under Federal Power Act (“FPA”) Section 205 by imposing changes that amounted to an “entirely new rate scheme” for PJM.

In July 2012, an ad hoc group of PJM generators began discussing potential reforms to PJM’s MOPR—a rule designed to curb the ability of new generators to artificially depress capacity auction clearing prices by submitting below-cost bids.  The reform efforts focused on various features of the MOPR, including “unit-specific review,” which at the time allowed PJM to exempt certain generators from the MOPR if they could demonstrate that their actual costs were below the floor.  Arguing that unit-specific review lacked sufficient transparency and depressed capacity market clearing prices through below-cost bids from certain generators, the ad hoc group of generators proposed reforms to this and other MOPR aspects.  Among other reforms, the final proposal sought to replace unit-specific review with two broad, categorical “self-supply” and “competitive entry” exemptions.  Additionally, the ad hoc generators’ proposal sought to extend the mitigation period—the period that the MOPR applies—from one year to three years.  The proposal garnered support from a majority of PJM stakeholders and, in late 2012, PJM submitted it for FERC’s approval through a FPA Section 205 filing.

In a May 2013 order, FERC approved various revisions in the PJM proposal, but concluded that the unit-specific review reforms were not “just and reasonable” because they would unreasonably narrow the exemptions to the MOPR.  Similarly, FERC determined that the three-year mitigation period would subject generators to the MOPR for too long and, as a result, could discourage new generators from entering the market.  In that order, FERC also proposed various modifications to make PJM’s filing just and reasonable, which included a requirement that unit-specific review be preserved alongside the two new proposed exemptions.  PJM accepted FERC’s proposed modifications, but a group of generators requested rehearing of the May 2013 order.  FERC denied the rehearing request in October 2015, prompting the generators to seek review from the D.C. Circuit.

On review, the D.C. Circuit held that FERC’s proposed modifications to PJM’s tariff exceeded FERC’s authority under FPA Section 205.  In the court’s view, FERC’s modifications resulted in an “entirely different rate design” than what PJM proposed, and its stakeholders “overwhelmingly” supported.  According to the court, FERC is supposed to assume a “passive and reactive role” in considering utility rate proposals under FPA Section 205, in contrast to FERC’s ability to impose new rate schemes under FPA Section 206—authority that all parties agreed was not invoked by FERC in its orders.  The D.C. Circuit also noted that, although “minor deviations” from a rate proposal are permissible under Section 205, the “the imposition by the Commission of only half of a proposed rate” was not permissible.

The court rejected FERC’s argument that PJM’s ultimate consent cured any overreach, stating that proposing “its own notion of a new form of rate” did not excuse the violation because it deprived PJM’s stakeholders of the “early notice” guaranteed by the Section 205 process.  The D.C. Circuit vacated and remanded FERC’s orders.

The D.C. Circuit’s opinion can be found here.