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DC Circuit upholds FERC's fix to PJM's transmission right revenue deficiency

A federal appeals court June 12 rejected attacks by load-serving entities and others on the Federal Energy Regulatory Commission's attempt to remedy problems with PJM Interconnection's market for hedging transmission congestion costs.

At issue is a September 2016 FERC order addressing PJM's proposal (FERC docket EL16-6) to combat underfunding of financial transmission rights, which are financial instruments used to offset market participants’ transmission congestion costs in the day-ahead market.

Load-serving entities, two state utility commissions and PJM's independent market monitor argued that the order was laced with errors that would result in unjust rates and leave load "significantly worse off."

Only 69%-85% of FTRs were funded

For years, PJM has struggled to pay for FTRs that entitle their holders to a stream of revenue or charges based on the day-ahead price difference across a transmission path. The grid operator could fund between 69% and 85% of the payout due to FTR holders between 2010 and 2014, when electricity prices where energy was delivered were lower than where the energy was produced, according to court filings.

Market participants can buy FTRs in a PJM auction, or they can convert auction revenue rights, or ARRs, allocated to firm transmission customers for their investment in the grid to FTRs. Instead of converting ARRs to FTRs, companies that receive them may also hold onto them in order to receive revenue from the FTR auction. Because FTR payments were being reduced, ARRs were less valuable because FTRs were worth less at auction.

PJM previously determined that the over-allocation of ARRs was exacerbating the revenue inadequacy problem. The commission's 2016 order directed PJM to "develop a just and reasonable method of allocating Stage 1A ARRs based on source points that reflect actual system usage."

The consolidated lawsuit brought by the New Jersey Board of Public Utilities, Delaware Public Service Commission, Old Dominion Electric Cooperative, American Municipal Power Inc. and PJM's market monitor challenged three aspects of that order: the exclusion of the costs of balancing congestion from the definition and funding source of FTRs; the retention of netting each holder’s counterflow and prevailing-flow FTRs before awarding pro rata payment; and a requirement that PJM update its ARR-allocation methodology by excluding unused transmission paths.

Court ruling defers to FERC

"None of the petitioners’ challenges can overcome the deference we owe FERC," the court ruled in a June 12 memo. "As FERC’s orders make clear, the commission adequately considered and reasonably rejected each of the arguments that petitioners advance before our court."

FERC's 2016 order held that allowing the real-time cost of a congestion imbalance from the FTR settlement process — a cost not related to day-ahead congestion — to be included in the definition of FTRs "reduces the efficacy of FTRs as a hedge," and therefore PJM should "allocate balancing congestion to real-time load."

Petitioners, however, said this was in direct contradiction to a 2012 complaint proceeding in which FirstEnergy Solutions Corp.'s request to impose balancing congestion on end-users to correct FTR revenue inadequacy was rejected.

The D.C. Circuit found that "FERC distinguished its FirstEnergy cases on the grounds that changed circumstances had increased the need for PJM market reform." The court added that the commission "also sufficiently explained why it is reasonable to require the entire market, rather than FTR holders, to bear the costs of balancing congestion, because 'FTR holders do not cause and cannot predict the level of balancing congestion' and 'are not the sole beneficiaries of balancing congestion.'"

FERC's order rejected PJM's plan to eliminate the netting of positively and negatively valued FTR positions in a portfolio before determining payout ratios.

The court pointed out that "FERC doubted that 'the elimination of netting would improve FTR funding' because abolishing netting would simply 'reallocate FTR revenue inadequacy among various market participants without actually addressing the fundamental issues associated with FTR revenue inadequacy.'"

The D.C. Circuit said the commission's conclusions on the matter offered a reasonable basis for FERC’s decision.

FERC's judgment on unused transmission paths affirmed

FERC's order also tossed PJM's proposal to escalate ARR results using a zonal load forecast growth rate of +1.5% during the Stage 1A 10-year simultaneous feasibility process, finding that the "escalation factor would trigger unnecessary transmission enhancements based on a model that relies on historical (outdated) source and sink points."

The commission explained in the 2016 order that PJM's tariff directs the use of historical paths dating as far back to 1998, which necessitated "modeling dummy generators where the historic source points are no longer in service" as part of the Stage 1A ARR allocation process.

"This presents a disconnect between the Stage 1A ARR allocation and the actual system usage, which could result in infeasible Stage 1A ARRs, as some pathways may appear to be infeasible even though, in actual system usage, these lines are not overloaded," FERC said.

To address infeasible Stage 1A ARRs, FERC directed PJM "to revise its tariff to remove the use of historical generation resources for requested ARRs in Stage 1A of the allocation process if those resources are no longer in service and develop a just and reasonable method of allocating Stage 1A ARRs based on source points that reflect actual system usage."

The D.C. Circuit concluded it had "no cause to displace FERC’s considered policy judgment on this matter."

The per curiam judgment was issued by Judges Merrick Garland, Laurence Silberman, and Cornelia T.L. Pillard. New Jersey Board of Public Utilities v. FERC (No. 17-1101, et al.)

Jasmin Melvin is a reporter for S&P Global Platts, which, like S&P Global Market Intelligence, is owned by S&P Global Inc.