On March 12, 2024, the U.S. Court of Appeals for the Third Circuit upheld a prospective rule change to PJM Interconnection, L.L.C.’s (“PJM”) annual capacity auction but struck down attempts by PJM and FERC to apply the rule change to the ongoing auction held in December 2022.  Although the rule change permits PJM to adjust the Locational Deliverability Area (“LDA”) Reliability Requirement downward to reflect the lack of participation in the December 2022 auction by certain resources to correct for distortions to the auction results, the Third Circuit held that FERC could not permit the change to go into effect in the middle of an ongoing auction.

As background, PJM conducts an annual capacity auction to ensure there is a sufficient supply of electricity in a future period.  Prior to the auction, PJM calculates and posts the LDA Reliability Requirement, which indicates the amount of capacity to be procured and forms a part of the demand curve in the algorithm PJM uses to optimize the auction.  PJM then solicits confidential supply offers during an offer window.  After the offer window closed in December 2022 for the period of June 2024-May 2025, PJM identified that the clearing price might be four times higher than it otherwise would have been because certain resources, whose participation in the auction was an assumption that PJM used to calculate the LDA Reliability Requirement, did not participate in the auction.  PJM suspended the auction to seek FERC approval to amend its tariff, giving it permission to adjust the LDA Reliability Requirement downward to reflect the lack of participation by certain resources.

While FERC held that PJM’s proposed rule change could go into effect without violating the filed-rate doctrine, the Third Circuit reversed.  The Third Circuit held that attempts by PJM and FERC to implement the rule change after binding offers were submitted in the auction constituted retroactive ratemaking, which is impermissible under the doctrine.  Accordingly, PJM only had the powers given to it by its tariff at the time the auction commenced.  Prior to the rule change, PJM’s tariff contained limited and enumerated circumstances pursuant to which PJM could alter the LDA Reliability Requirement, however the Third Circuit held that these were not broad enough to permit PJM’s change, especially in light of FERC’s admission that the prior tariff language did not confer PJM authority to adjust the LDA Reliability Requirement downward after binding offers were submitted in the auction.

The Third Circuit explained that PJM’s change of the LDA Reliability Requirement mid-auction was retroactive because it “nullified a legal consequence attached to a past action taken in the Auction.”  The court went on to explain the important role the filed-rate doctrine plays in ensuring predictability and finality of rates.  The Third Circuit concluded that FERC’s order permitting PJM to implement the change mid-auction could ultimately harm consumers by eroding confidence in the PJM market.  Thus, the court permitted PJM’s rule change to go into effect, but only prospectively.

A copy of the Third Circuit’s opinion can be found here.