D.C. Appeals Decision; Ups Ante on PJM Stakeholder Agreement
Back on July 7, 2017, the D.C. Circuit Court of Appeals rejected FERC’s order revising PJM Interconnection’s “Minimum Offer Price Rule” (MOPR), saying FERC exceeded its Section 205 authority under the Federal Power Act by commanding an entirely different approach to the MOPR than what PJM’s stakeholders agreed upon.
So, what implications does this have on PJM’s stakeholder process? Below is a brief, non-lawyer background on the case, followed by implications for the stakeholder process.
Background on MOPR Decision
In 2012, a coalition of generator interests in PJM began promoting reforms to the MOPR – a floor price on supply bids into capacity market auctions – in response to concerns about new generation units bidding below-cost bids into the market (e.g. as a result of subsidies) leading to suppressed market prices.
By the end of 2012, PJM stakeholders reached rare sector-weighted vote supermajority agreement on MOPR reforms that included, for example, extending application of the MOPR from one to three years, eliminating the “unit-specific” exemption, and instead establishing a “self-supply” exemption (e.g. for public power entities) and a “competitive entry” exemption (e.g. for unsubsidized units).
PJM subsequently filed the proposal with FERC under Section 205 of the Federal Power Act, which requires FERC to approve the changes if they are deemed to be just and reasonable.
In May 2013, FERC found the two new exemptions and the three-year application period to be unjust and unreasonable, fearing new market entry would be discouraged. FERC suggested adding back the unit-specific exemption and bringing the application period back down to one year in order to make the proposal acceptable. PJM agreed to the modifications and the new MOPR was implemented.
Several generators filed suit, claiming that under a Section 205 filing FERC should have either accepted the proposed MOPR reform, or rejected the proposal and sent it back to PJM and PJM stakeholders for modifications rather than impose a new policy design.
The July 2017 D.C. Circuit decision agreed with the generators, finding there are limits on FERC’s authority to propose modifications. Specifically, FERC cannot adopt “an entirely different rate design” than what was proposed or previously in effect, or accept “only half of a proposed rate”. Even more specifically, FERC cannot employ a rate design that follows “a completely different strategy” than or is “methodologically distinct” from the proposed rate.
The D.C. Circuit found that PJM’s stakeholder-endorsed proposal sought to narrow the availability of exemptions, while FERC’s changes went in the opposite direction and expanded exemptions. The court also found FERC’s changes to be inconsistent with the previous unit-specific MOPR, because some generators could secure exemptions without proving their costs were below the price floor.
Rather than implementing a compromise reached by stakeholders, the court found FERC’s modifications had the result of addressing some PJM stakeholder concerns (i.e. load serving entities), but ignoring others (i.e. generators). And, PJM’s consent of the entirely new rate scheme was inadequate because PJM’s stakeholders did not receive adequate notice or opportunity to comment on the changes. For these reasons, the court rejected and remanded the MOPR rule back to FERC.
There are many legal opinions on the impacts of this decision, writ large, including implications for past capacity auctions. But, what does all this mean for the PJM stakeholder process going forward?
Implications for Stakeholder Process?
- Raises Stakes on Stakeholder Agreement. The decision seems largely procedural. Substantively, however, it does re-emphasize the power of stakeholder agreement. As market make-or-break decisions loom at the commission, it seems the greatest potential for creative progress may be vested in the stakeholders, not FERC. In other words, the stock price on ‘stakeholder agreement’ just skyrocketed.
- Increases Importance of FERC Requiring Governance Evaluations and Reforms. PJM’s stakeholder process is extremely effective when issues are not contentious. But, like many multi-stakeholder processes, it is less effective when issues get contentious. What isn’t clear is if the process is optimally designed to navigate contention. FERC hasn’t issued anything significant on RTO/ISO governance since Order 719 in 2008 (they had a technical conference in 2010, too). Since then, technologies, markets, comparative economics, operations, and politics have all evolved. Since governance outcomes just got more meaningful – and it’s been a while since there was a critical review – now would be a good time for the regulator to have a look-see.
- Will Increase GOTV Efforts and Swing Vote Lobbying. There are approximately 530 PJM members permitted to vote in high-level, senior standing committees (another ~500 affiliates who can only vote in lower level committees). However, on average, only about one fifth of these senior voting members cast votes in high-level committees (see sample voting results here). As a result of the MOPR decision, I’d expect that active PJM voting members will be stepping up efforts to increase participation from non-active PJM voting members. Specifically, trying to recruit sympathetic members to increase participation (get-out-the-vote), or strike quid-pro-quo deals with swing voters – those who typically only vote on niche issues (e.g. banks and financial traders).
- When stakeholders don’t agree, power shifts to PJM. When stakeholder supermajority agreement is not achieved, PJM and the PJM Board will still have to make decisions about what is filed with FERC. In absence of stakeholder reform efforts, or stakeholder GOTV/swing vote lobbying, greater deference will be placed on PJM for the substance of FERC filings.
