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Electricity Markets

Appeals Court Issues Decision on PJM's Mandatory Capacity Market Construct

The U.S. Court of Appeals for the Third Circuit on Dec. 1 issued a decision that involves changes to the PJM Interconnection’s mandatory capacity construct that PJM filed with the Federal Energy Regulatory Commission in July 2021.

The tariff changes scale back the applicability of PJM’s minimum offer price rule, a form of “buyer-side” market power mitigation that the American Public Power Association has long criticized on the grounds that it can interfere with the ability of public power utilities to self-supply capacity in mandatory capacity constructs like the one used by PJM.

The proposed tariff changes went into effect by operation of law under section 205(d) of the Federal Power Act because the four FERC commissioners deadlocked 2-2 on the proposed changes.

Section 205(g) of the FPA – a provision added in 2018 – allows federal appellate courts to consider appeals of rate/tariff changes that go into effect by operation of law.

Several parties invoked section 205(g) and challenged the new PJM tariff provisions in the Third Circuit.

APPA supported PJM’s tariff changes at FERC, and APPA intervened in the appeal in support of the changes.

The Third Circuit’s opinion is the first federal court of appeals decision to interpret and apply FPA section 205(g).

As noted, the provision allows appeals of public utility tariff changes that go into effect by operation of law under FPA section 205(d) because of a 2-2 FERC deadlock or lack of a quorum.

Section 205(g) provides for such review by treating the agency’s inaction as an “order” for purposes of rehearing and appeal. Section 205(g) also requires each FERC commissioner to add a written statement to the record explaining the commissioner’s views with respect to the tariff change.

The standard of review that the court should apply in an appeal under section 205(g), and the function of the commissioners’ written statements, were major issues in the Third Circuit appeal.

On these issues, the court held: (1) that where there is a 2-2 deadlock on a FPA section 205 rate filing, the resulting “order” must comply with the same standards that would govern the court’s review of an order approved by a FERC majority; and (2) the court’s review encompasses the entire record, including the statements of the four commissioners.

The court agreed that Congress intended the Commissioners’ statements to play an integral role in the Court’s review.

The court also suggested that the court’s review should focus on the statements of the commissioners supporting the tariff change:

Because FERC must accept a Section 205 rate filing absent a finding that the existing rate was unlawful, “our thorough consideration of the entire record must ensure that the Commissioners who did not find the 2021 MOPR unlawful engaged in decisionmaking that was reasoned, principled, and based upon the record.”

The appeals court also rejected challenges to PJM’s tariff changes limiting the applicability of the MOPR.

Deferring to FERC’s policy judgment in rate design matters, the court found that the basis for accepting the tariff changes was adequately explained by the joint statement issued by the supporting commissioners.

The court also rejected arguments that FERC’s previous approval of a more expansive MOPR limited PJM’s right to propose a more focused MOPR, or required a stricter standard of review for the focused MOPR.

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