Commissioner James Danly Dissent Regarding PJM Interconnection, L.L.C.

Commissioner James Danly Statement
February 21, 2023
Docket Nos. ER23-729-000, et al.

I dissent from this facially unlawful order[1] approving a public utility’s violation of its filed rate in order to reject a capacity auction result and manufacture a rate approximately four times lower.[2]  That public utility, PJM Interconnection, L.L.C. (PJM), seeks to invalidate and reset 2024/2025 Base Residual Auction clearing prices in the zone covering southern Delaware.  PJM also proposes a prospective Federal Power Act (FPA) section 205 rate change[3] that would allow it to adjust fundamental auction parameters during the running of future auctions.  I would:

reject PJM’s section 205 rate proposal for failing to meet the required  showing that it is just and reasonable;

reject PJM’s illegal attempt to retroactively apply its rate proposal to the auction already run as a plain violation of the filed rate doctrine and the rule against retroactive ratemaking;[4] and

require PJM to show cause pursuant to FPA section 206 as to how the Reliability Pricing Model and PJM’s administration of it are just and reasonable.[5] 

The majority does none of this.  Instead, despite what former FERC Chairman Joseph T. Kelliher warns in the record, the majority “not only ignore[s] the limits that the FPA places upon it but also upwards of 100 years of court precedent” by approving a plainly retroactive rate change that will almost certainly be overturned by the appellate courts in “a stinging and embarrassing court defeat that would eclipse the debacle of Atlantic City I and II.”[6]

If anything, Chairman Kelliher understates the damage.  The precedent that the majority’s order sets will undermine confidence in all FERC-jurisdictional markets—not merely the PJM capacity market[7]—and the entire market-based rate regime.  Formula rates are also now in jeopardy as any part of the formula apparently can be deemed an “input” subject to retroactive revision.

Taken at its word, the majority’s order is a misguided attempt to protect consumers.  This attempt, however, will cause more harm to consumers than had the majority left the auction results in place.  Consumers reap the benefits of market efficiency and competitive pricing.  Those benefits become costs when the markets cease functioning because market participants—and investors—have lost confidence in them.[8]

The Commission Has No Power to Accept a Retroactive Rate Change

The filed rate violation in this case is straightforward.[9]  “The filed rate doctrine and the rule against retroactive ratemaking leave the Commission no discretion to waive the operation of a filed rate or to retroactively change or adjust a rate for good cause or for any other equitable considerations.”[10]  I am dismayed how the court’s repeated declaration that we have “no discretion” continues to be misinterpreted by my colleagues, but I will restate what I have explained in numerous dissents to the Commission’s issuance of unlawful retroactive waivers,[11]

Unambiguous, uninterrupted and controlling judicial precedent holds that a utility can only charge the rate on file.  This is called the filed rate doctrine.[12]  It is a core tenet of utility regulation.  The Commission also has no authority to permit utilities to charge rates other than those on file unless there is advance notice that the rate may change or the Commission has approved a tariff allowing the utility to charge different rates prospectively.  This is called the rule against retroactive ratemaking.[13]  This rule is also a core tenet of utility regulation and is a necessary adjunct to the filed rate doctrine.  There would be little point in having rates on file if rate changes can be retroactively applied.  Both the filed rate doctrine and the rule against retroactive ratemaking also apply to non-rate terms and conditions in filed tariffs.[14]

The PJM tariff—the rate on file—includes scores of rules to run a Base Residual Auction to purchase capacity.  One “key planning parameter” is the “[Locational Deliverability Area] Reliability Requirement,” which the tariff requires PJM to post with “other planning parameters ‘for a Delivery Year prior to conducting the Base Residual Auction for such Delivery Year.”[15]

More specifically, for the three Base Residual Auctions starting with the 2024/2025 [Base Residual Auction], PJM received Commission approval to post the planning parameters 100 days “prior to the relevant [Base Residual Auction].”  With respect to the Reliability Requirement parameters, the [PJM] Tariff expressly provides that PJM “shall determine the PJM Region Reliability Requirement and the [Locational Deliverability Area] Reliability Requirement for each [Locational Deliverability Area] for which a Variable Resource Requirement Curve has been established for such Base Residual Auction . . . prior to the conduct of the Base Residual Auction . . . .[16]

No one disputes that the Locational Deliverability Area Reliability Requirement “is an anchor point of the Variable Resource Requirement Curve.”[17]  This seems unassailable since the point of the capacity auction is to ensure sufficient supply in the Locational Deliverability Area to meet that Resource Requirement.

To recap and put the filed rate at issue in this case in simple terms that anyone can understand, the PJM tariff requires that it post the reliability requirement for each area before the auction.  There is nothing in the PJM tariff providing notice that this provision is tentative or subject to later adjustment, nor any provision in the tariff that indicates any retroactive change to this rate provision will be permitted.[18]  The majority writes this requirement out of the tariff with retroactive effect.  That is the filed rate violation.  The majority’s rationale to the contrary fails.

To put this case in context, imagine a game of blackjack at the only casino in the territory—the Federal Energy Regulatory Casino.  Players win if the total of their cards is higher than the dealer’s hand but not exceeding 21.  The cards are dealt.  Everyone places their bets.  The dealer draws 17.  Even though 17 is a predictable—and even likely—hand, the dealer announces it is “anomalous” and makes up a new rule on the spot:  17 is the new blackjack.  No one is allowed to draw again or change their bets.  The house wins, but most of the players are now losers—except, perhaps, those who never understood the rules in the first place.  The house saves a bit of money on one hand, but no one ever plays blackjack at the Federal Energy Regulatory Casino again.  That is this case.  The only difference is that the capacity market is not a game but rather the mechanism by which we ensure sufficient generation resources are built and maintained to keep the lights on.

The Majority Distorts the Filed Rate

The majority correctly states that “for the purposes of the filed rate doctrine, the rate on file with the Commission is the [Base Residual Auction] procedures.”[19]  Then they go off the rails.  Notwithstanding all the plain tariff provisions establishing the key Locational Deliverability Area Resource Requirement planning parameter “prior” to the Base Residual Auction—which seem to me to be about as clear as any tariff provisions can be—the majority announces that the filed rate is not fixed “if the capacity supply obligations and the corresponding rights and obligations—including the right to a particular capacity price—have not yet actually been awarded.”[20]  They then double down on that point by “find[ing] that the requirements of FPA section 205(c) and 206(a) can be satisfied—meaning that a change in those procedures would not be retroactive—at least up until that point at which the obligation is actually incurred.”[21]

This determination promises to be nothing short of a revelation to all of the participants in every FERC-approved auction process.  Until today the filed rate was all the rules in the tariffs that stakeholders in each region spent thousands of hours negotiating and that the Commission previously approved in lengthy orders, often after several rounds of litigation, compliance, and extensive settlement proceedings.  Nope.  None of those provisions are the filed rate until PJM or another Regional Transmission Organization (RTO) or Independent System Operator (ISO) decides it has poked around the “preliminary” auction results and found a price it likes enough to conclude the auction and declare the winners.[22]

Worse yet, the majority signals that rates may not be final until even later by highlighting that “at the time PJM filed its proposed Tariff revisions . . . no capacity commitments had yet been secured, no transaction had yet been consummated, meaning that neither PJM nor any supplier had the attendant rights or obligations, no capacity had been delivered pursuant to such commitments, and no charges had been billed or collected.”[23]  I struggle to understand what possible use a forward capacity market could have if auction rates are subject to change until “capacity has been delivered” and “charges . . . billed or collected.”  A forward capacity auction establishes a clearing price based on seller offers.  The clearing price tells the sellers whether their unit will be needed in three years.  If the price is not final until after the three years, there is no such thing as a forward capacity auction except as an illusory exercise or sophisticated entrapment.

The biggest problem with the majority’s new interpretation of the tariff is that there is nothing in the tariff that supports it.  The provision that “PJM is only required to post the auction results ‘as soon thereafter as possible’—after ‘conducting the Reliability Pricing Model Auctions’”[24] does not open a window for PJM to throw out every other auction rule in the tariff.  A requirement not to delay posting auction results is not a license to change the Locational Deliverability Area Reliability Requirement any time PJM feels like it, and it is specious to so claim.[25]  The fact that PJM has run numerous auctions by this point and never previously interpreted its tariff to allow it to change the rules up until winners were announced also suggests that no such right exists.

The Majority Distorts Precedent

The majority cites a lot of cases on various points related to the filed rate doctrine, and not one of them supports its new interpretation that filed auction rules can be freely changed up until contracts “have actually been awarded.”  But of course they cannot, there are no such cases.  The majority creates this new exception to the filed rate on its own initiative, despite having “no discretion” to do so.[26]  And it is widely understood—including by every trinket seller on eBay—that auctions must have clear rules or chaos ensues.

Indeed, the Commission’s own precedent is to the contrary:  “Changing the rules governing an already-commenced auction is a significant step that affects both the outcome of that particular auction as well as parties’ confidence in the rules governing future proceedings.”[27]  In that case, the Commission denied PJM’s attempt to change the rules during an auction after the default of a large Financial Transmission Rights trader.  The majority explains away its contrary precedent by asserting that it “may, depending on the facts and circumstances in a particular case, prevent public utilities from implementing changes—even ones that may well lead to better results—on the basis that they would disrupt settled expectations.”[28]  As discussed further below, there is no “settled expectations” test to determine whether the rate on file must be honored.[29]  If it is the rate on file, it is the rate on file.  The end.

The Majority Distorts Time

Lacking any precedent for their new filed rate interpretation, the majority asserts that adjusting a key planning parameter after the auction has run is not “genuinely retroactive,”[30] and that “[t]o accept PJM’s section 205 proposal and apply it to the 2024/2025 BRA we need not determine the precise point in time at which a change to those procedures would be retroactive.”[31]  I do not know how to distinguish “genuine” and “disingenuous” retroactivity and I confess to no more than an enthusiastic layman’s understanding of general relativity,[32] but even I know that if an event has already happened, it is in the past.  If it has yet to happen, it is in the future.  The event in the PJM tariff that must happen “prior” to the auction—establishing the Local Deliverability Area Reliability Requirement—already happened, as did the running of the auction.  The majority, however, keeps its own time.[33]

By way of another hypothetical that anyone can understand:  If I eat cake contrary to my diet, I have broken my diet.  I can change my diet, but I cannot change the fact that I ate cake.  Even if I feel better believing cake was always on my diet, it is a lie.  Either way, I gain weight.

The majority routinely engages in the same time jumping in the scores of cases where it grants retroactive waivers of tariff deadlines that already have passed.[34]  Unfortunately, the parties that relied on the Local Deliverability Area Reliability Requirement back when it was established, submitting binding capacity offers and entering into bilateral transactions, do not have the same ability to go back in time and undo the actions they took.

How do we know parties acted in reliance on the posted auction parameters back when they had the opportunity to do so?  First, because it is obvious.  The bulk power markets are among the most sophisticated markets in the world with critical infrastructure and billions of dollars at stake, not the neighborhood bake sale.  Do we really think sophisticated participants do not know how to hedge the strong likelihood of high prices in a small zone?

Second, because they told us so. Record evidence from one generator, for example, confirms that it “lost business because it reasonably priced capacity in its bilateral retail offers based on its reliance on the PJM tariff.  Ironically, the losers would also include other entities that relied on the posted parameters and the auction rules and made prudent decisions about bilateral contracting and hedging consistent with such reliance.”[35]  Unlike the Commission and PJM in today’s order, these parties cannot retroactively undo what they have already done.

There is no record evidence of any parties that did not rely on PJM’s posted auction planning parameters, and any party that lacks this basic level of market competency ought to reconsider its participation in the markets.[36]  By resetting auction results, the majority almost certainly awards an unexpected windfall to parties who failed to hedge—at the expense of parties who did.[37]  So we are almost certainly rewarding the market participants that were the least capable back at the time the planning parameters were established (or, possibly, we are rewarding the participants taking the most risks).  Again, the point is that none of these parties can go back in time—like PJM and the majority—to change their behavior.

The absurdity of the majority’s interpretation of time is fully exposed when we also recognize that it only applies to certain favored parties—in this case RTOs or ISOs:  consider whether the majority would allow generator sellers to revise their capacity offers after the auction had been run but before results were posted like it allows PJM to change the reliability requirement.[38]  Of course not.[39]  Only the majority’s friends get to time travel.

The Majority Distorts Space

The majority not only attempts to distort time but space:

Simply because one section of the Tariff requires PJM to take a particular action at one stage of the auction process, such as posting the LDA Reliability Requirement by a particular date, does not preclude PJM from prospectively updating the manner in which that LDA Reliability Requirement is incorporated into a later phase of the auction process pursuant to a separate section of the Tariff that requires PJM to consider the auction inputs and calculate a clearing result to minimize the cost of satisfying the reliability requirement.[40]

The argument here is that a set of provisions in one part of the tariff may no longer be part of the filed rate after new sections of the tariff have also started being applied.  If that were the case, the tariff would say so.  Absent an express provision permitting tariff provisions to be superseded in defined circumstances, the Commission must honor the entire rate on file, no matter where the section is placed in the tariff (space), or when it is operable (time).

The Majority Distorts the Principle that “Parts Comprise the Whole”

The majority next claims that “treating each input to the running of the auction, and process for establishing such input, as a distinct non-rate term would be inconsistent with Commission precedent recognizing that the rate on file is the set of market rules governing the capacity auction.”[41]  This is another distortion—this time of the basic principle that parts comprise the whole.  “Inputs” that are part of the filed rate are not exempt from the filed rate doctrine.  Again, there would have to be an express tariff provision identifying which “inputs” in the filed rate can be ignored.

The Majority Distorts “Settled Expectations”

After eviscerating the filed rate doctrine, the majority replaces it with a new test where the Commission will “consider disruptions to parties’ ‘settled expectations’ in determining whether a proposal is just and reasonable.”[42]  To be clear, the “proposal” in question is whether the Commission will change the filed rate with retroactive effect, specifically whether “‘settled expectations’ justify rejection of PJM’s filing as applied to the 2024/2025 [Base Residual Auction]”—the auction that already happened.[43]  The majority concludes that once we do some “‘balancing of interests’ or ‘balancing of equities’ in determining the appropriate outcome,” it is clear that the auction must be reset.[44]

There are many problems with this argument.  I highlight three.  First, the majority’s new “settled expectations” test is no substitute for the filed rate doctrine and rule against retroactive ratemaking that the majority leaves in tatters.  To replace the filed rate doctrine would require legislation or overturning a century of binding judicial precedent.[45]

Second, the new “settled expectations test” unfairly diminishes generators’—and all participants’—actual expectations, which are that the auction rules in the tariff will be followed.[46]  The majority asserts that it “carefully consider[ed] settled expectations concerns, especially claims that market participants relied on expected auction rules in order to engage in other market activity such as bilateral supply sales and retail hedging arrangements.”[47]  But the majority finds no “detrimental reliance concern” arising out of “market participants’ purported reliance on a single input” in the “expected auction rules.”[48]  If substantial record evidence of parties entering into “bilateral supply sales and retail hedging arrangements”—all binding financial commitments—does not raise “detrimental reliance concern[s],”[49] what does?  And why would anyone rely on a silly thing like the rules when entering into such arrangements?

Third, the new “settled expectations test” misapprehends the Commission’s role.  The Commission is not a court of equity.[50]  “As a federal agency, FERC is a ‘creature of statute,’ having ‘no constitutional or common law existence or authority, but only those authorities conferred upon it by Congress.’”[51]  The Commission does not balance anything to determine the filed rate.  It is a good thing, too, because the majority is not very good at it—entirely failing to appreciate the untold economic harm undermining all FERC-jurisdictional markets has versus a high clearing price in one zone, in one auction.

The Majority Distorts Markets

The majority intends to benefit consumers with this order.  They extol the “significant benefits that would result from applying the proposed Tariff revisions [retroactively] to the 2024/2025 BRA, in particular preventing consumers from being charged unnecessarily high capacity prices that do not reflect actual reliability needs or supply and demand fundamentals.”[52]  This certainly sounds like a great thing.  Except “saving consumers money” is an incomplete description of what the Commission is tasked to do.  Our job is to ensure just and reasonable rates.  And market rates are not just and reasonable if no one trusts the market.

There is overwhelming record evidence of the damage the majority’s retroactive change to the auction rules will impose.[53]  But “[t]he one thing we do not do is re-run auctions,” even as a remedy when there are fundamental problems with how an auction was run.[54]

Rerunning an auction is apparently too destabilizing to consider.  Yet here the majority does something arguably worse:  rather than rerun the auction, they simply reset the price.  The majority knows its decision will not withstand judicial review, but they also know that the Commission does not rerun auctions as a form of relief.  So if today’s action is deemed unlawful by the courts, there will be no effective remedy.  In such circumstances—where no auction outcome can be trusted—it would be better if we scrapped the markets altogether and returned to traditional cost-of-service ratemaking.

It appears the Commission is headed down that path whether it realizes it or not.  In a concurrence I issued last week, I quoted P3—a coalition representing generators in PJM—about the current situation of the PJM market:

While capacity markets were established in PJM as a tool to ensure resource adequacy in future delivery years, a series of recent regulatory, policy and other changes counter any notion that the capacity market will send a signal to current investors seeking to invest at risk capital in assets that will deliver reliability at least cost.  Changes to the Market Seller Offer Cap . . . have removed any independent judgement of asset owners to make decisions about the viability of their assets going forward.  Changes to the Minimum Offer Price Rule . . . have effectively eliminated protections against the exercise of buyer market power, while the so-called protections against seller market power have gone to the extreme of having capacity offers effectively set by the PJM Independent Market Monitor.  Other decisions related to the [Operating Reserves Demand Curves] and the removal of the 10% adder from capacity market offers have served to compound the problem.  The proposed changes [in this proceeding] continue a pattern of complete devaluation and corruption of a market established to compensate investment in long-term capacity resources.[55]

As of today, we can add to this list the resetting of prices after capacity auctions have been run.

In the same concurrence, I further warned that:

there appears to be an implicit but prevailing view shared by many consumers and regulators that “regulatory, policy and other changes”[56] to the PJM capacity market and mitigation construct are always justified if they lower prices, so much so that it appears to me that the only evidence that could be brought to bear that would finally convince them that prices are actually confiscatory would be the impending financial collapse of the entire existing generation fleet.  It may come to this.  However, for obvious reasons, generators generally are not in a position—and likely never will be—to publicly predict and support with data their own potential bankruptcies.  Generators have investors.

We thus should carefully listen when groups like P3 routinely warn us about “a pattern of complete devaluation and corruption of a market established to compensate investment in long-term capacity resources.”[57]  We should also remember that evidence of imminent collapse is not the required statutory showing.  Under foundational precedent, regulated utilities are entitled to an opportunity to recover their prudently-incurred costs.[58]

It is true that the filed rate doctrine can produce harsh results, particularly in an auction in a small area with less supply than it needs.  But that is how markets work.  The good is low rates in surplus conditions.  The flip side is high rates in shortfall conditions.  And there is a solution to “high” rates that does not involve the Commission taking the law into its own hands and interfering with markets.  All that a public utility like PJM has to do is file a clear tariff revision that provides notice for when “anomalous”[59] market outcomes can be revisited before posting auction results.[60]  The one thing we cannot do is change the score after the game so that our favorite team wins.

The Commission Should Reject PJM’s Section 205 Filing

I further dissent on the majority’s decision to accept the prospective application of PJM’s proposal to adjust the Local Deliverability Area Reliability Requirement during the auction.  By “prospective,” I mean in the traditional sense of applying this rule change to future auctions—not the one already run.  While the Commission “need only find that the [FPA section 205] proposal is just and reasonable, not that it is the only or even the most just and reasonable proposal,”[61] PJM has failed that burden in this case.

I agree with the extensive analysis in the protests that PJM’s proposal “would effectively make the Locational Deliverability Area Reliability Requirement a moving target, thereby disrupting the expectations of market participants.”[62]  I am persuaded that a “moving target” during an auction is a bad idea.

While the Commission’s role is not to determine whether a proposal is the “most just and reasonable,” it is useful to know whether there are alternatives to the proposed rate that lack its infirmities.  There is record evidence of such alternatives in this case.  Rather than an “intervention into the middle of a Tariff approved process,”[63]  PJM could “change the timeline on which both existing and planned Capacity Resources with options to offer into [the Base Residual Auction] must exercise that option.”[64]  This could be accomplished by changing the option deadline “from the actual [Base Residual Auction] to 30 days before the Planning Parameters are posted.”[65]  It thus appears that solutions may be available that do not disrupt auction processes.  I would reject PJM’s proposal.[66]

The Commission Should Pursue Remedies Against PJM

The most disturbing aspect of this case is the damage it inflicts that probably cannot be remedied.  As I discuss above, rerunning the auction or restoring the original prices likely would be as destabilizing as today’s order.[67]  I am concerned about the long-term implications for the markets administered not only by PJM but in other regions.  There is significant evidence—particularly increasing reliability risk throughout the country—that the FERC-jurisdictional power markets are sick and dying, and it is the Commission’s fault.

The Commission announces it will convene a forum to review the health of the PJM capacity market.[68]  I do not object to a forum, but when the house is burning down, consulting with the Homeowners Association is insufficient.  You put out the fire.  I would institute an FPA section 206 proceeding regarding the PJM capacity market, specifically investigating whether the existing PJM capacity construct is just and reasonable.  I would target at least the following issues:

• Buyer-side manipulation of capacity market prices by offering below cost;
• Over-mitigation of sellers to the point that all offers are essentially set by the Independent Market Monitor;
• Elimination of any assessment of risk from seller offers;
• Changes to the demand curve to reduce prices when there is surplus supply and increase volatility as supply decreases; and
• Resetting auction prices after the auction is run.

I welcome additional feedback on potential topics, whether at the forum, in this proceeding, or elsewhere.  I particularly welcome proposed solutions to identified problems.

For these reasons, I respectfully dissent.