On December 7, 2020, FERC issued an order on rehearing sustaining its previous order in which it: found that PJM Interconnection, L.L.C.’s (“PJM”) uplift allocation rules were unjust, unreasonable, and unduly preferential as they did not allocate uplift to Up-to-Congestion (“UTC”) transactions; and directed PJM to update its rate. FERC disagreed with comments provided by XO Energy MA, LP (“XO Energy”) that FERC’s previous order was inconsistent with cost causation principles, since the record in the proceedings did not support a finding that UTCs are the cause of capacity-related costs that would be passed through as uplift.

PJM’s tariff contemplates three types of virtual transactions: Incremental Offers (“INCs”), or offers to sell energy at a specified source location in the day-ahead market; Decrement Bids (“DECs”), or bids to purchase energy at a specified sink location in the day-ahead market; and UTC transactions, or bids to buy congestion and losses between two points in the day-ahead market. In addition, PJM provides “uplift payments” to market participants to ensure that they recover their costs when market revenues are insufficient or when actual dispatch instructions diverge from the market participants’ dispatch schedules.

In August 2014, FERC instituted an investigation under section 206 of the Federal Power Act (“FPA”) in order to determine how uplift charges should be allocated to all virtual transactions in PJM. Following this, on October 17, 2019, FERC issued an order requiring PJM to provide additional briefing and to update the record (see October 30, 2019 edition of the WER). In response to the October order, PJM filed a brief stating that its tariff was unjust and unreasonable as the tariff did not allocate uplift to UTCs, and therefore was not treating UTCs comparably to INCs or DECs.

On July 16, 2020, FERC issued an order agreeing with PJM’s assessment that its uplift allocation rules were unjust, unreasonable and unduly preferential. FERC directed PJM to submit a replacement rate to revise PJM’s uplift allocation rules to treat a UTC, for uplift allocation purposes, as if the UTC were equivalent to a DEC at the sink point of the UTC. In response to FERCs order, XO Energy filed a request for rehearing, arguing that FERC’s findings were inconsistent with the principles of cost causation. In its response, XO Energy stated that UTCs are not the cause of capacity-related uplift costs, and, to be consistent with the principles of cost causation, uplift costs should only be allocated to UTCs if those UTCs actually cause uplift costs. XO Energy also disagreed with FERC’s direction that PJM update its rate to treat UTCs as equivalent to DECs at the sink point of the UTC, stating that the directive disregards that UTCs are distinct from DECs.

In its December 2020 order, FERC agreed with its previous determinations in the July 2020 order, finding that the cost causation principle does not require PJM to “allocate costs with exacting precision,” but instead, only requires FERC to have “an articulable and plausible reason” to believe that benefits match the costs. FERC further found that the record supported the finding that UTCs, as a class, can cause uplift, and therefore not treating UTCs similarly to comparable INCs and DECs with respect to uplift constitutes undue preference. FERC also sustained its directive to PJM, finding that it would be just and reasonable to allocate uplift costs to the UTCs by treating UTCs as if they are equivalent to a DEC at the sink point of the UTC.

FERC’s December 2020 order is available here.