A federal appeals court on Tuesday vacated the Federal Energy Regulatory Commission’s decision to allow the PJM Interconnection to change its capacity market rules in the middle of its last auction, saying the rule change was illegal retroactive ratemaking.
FERC in February voted 3-1 to allow PJM adopt a new rule to change a capacity market parameter — called the Locational Deliverability Area, or LDA, Reliability Requirement — that initially led to anomalous high capacity prices in one part of its footprint.
After PJM ran its early December capacity auction and before it released the results, the grid operator’s staff found that a “confluence of events” produced exceptionally high capacity prices in Delmarva Power South, a zone that covers part of Delaware, Maryland and Virginia. With FERC’s decision in hand, the grid operator changed the LDA for that area, reducing potential capacity revenue for generators for the 2024/25 capacity year by more than $100 million, according to the court.
FERC’s decision was challenged by the PJM Power Providers Group, Constellation Energy Generation, the Electric Power Supply Association and NRG Business Marketing. They were supported by Vistra, Advanced Energy United, American Clean Power Association and the Solar Energy Industries Association.
The U.S. Court of Appeals for the Third Circuit agreed with the generators and trade groups that changing the LDA parameter after PJM started the auction violated the filed-rate doctrine, which bars after-the-fact rate changes.
“The tariff amendment thus altered the legal consequence attached to PJM’s [original] calculation and posting of the LDA Reliability Requirement,” the court said. “For that reason, it is retroactive.”
The decision doesn’t affect future auctions, the court said.
The consideration of “equities” plays no role in assessing whether the filed-rate doctrine has been violated, according to the court. In its decision, FERC said the benefits of changing the LDA for the Delmarva Power South zone outweighed the harms.
“This bright-line rule could potentially produce a harsh result in this case, but it advances a central purpose of the filed rate doctrine: predictability,” the court said.
Citing former FERC Commissioner James Danly’s dissent from the agency’s decision, the court said FERC’s disregard for the filed-rate doctrine creates market unpredictability.
“Auction rules would become, at best, a ‘moving target,’” the court said. “By eroding confidence in the markets, FERC may ultimately harm consumers who buy electricity in those markets.”
The court’s decision likely means PJM will revert back to the original auction results for the Delmarva Power South zone, but the results could be challenged by a complaint at FERC by state ratepayer advocates and others, with the revenue subject to a possible refund, according to ClearView Energy Partners.
“We view yesterday’s decision as underscoring that rate challenges are subject to the evidence-based procedures and requirements of [the Federal Power Act section] 206, even when that means an adverse outcome for some market participants — in this case consumers — would not be avoided,” the research firm said in a client note.
Looking ahead, market operators would be “well served” to run their operations in line with their tariffs, according to EPSA President and CEO Todd Snitchler.
“If changes are needed, market operators should apply them prospectively as has been the practice for decades and as the filed rate doctrine requires,” he said. “Doing so will only help to ensure participants’ confidence in the market’s operation.”
PJM is reviewing the court’s decision, according to Susan Buehler, a spokeswoman for the grid operator. American Clean Power didn’t have any comment on the court’s decision.
PJM runs the grid and wholesale power market in 13 Mid-Atlantic and Midwest states, plus the District of Columbia.
