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December 18, 2014

FERC Rejects Market Monitor Objections to Cost Recovery for Reliability-Must-Run Units

In GenOn Power Midwest, LP, 149 FERC ¶ 61,218 (December 8, 2014), the Commission was faced with competing agreements to settle a dispute over compensation to GenOn Power Midwest (“GenOn”) for continuing to operate two generating units in PJM, needed for system reliability, past their planned deactivation dates for four months in 2012.

One agreement, supported by GenOn as well as utilities and industrial customers, reflected a negotiated black box settlement of $13.2 million, which was a reduction from the roughly $24 million GenOn had originally proposed in the litigation.

The alternative, put forward by the PJM Market Monitor and supported by two state commissions and one state consumer counsel (“public entities”), did not specify a recovery amount. Instead, it would have allowed GenOn to recover its actual incremental, avoidable costs of operating for the reliability must-run (“RMR”) period plus a ten percent incentive adder. Its intent was to preclude GenOn from recovering any embedded costs.

In support of its proposed settlement, GenOn showed that the agreed-upon $13.2 million fell between (a) the roughly $24 million that would have resulted from a full cost-of-service rate with a return of and on investment, and (b) the amount that would have resulted from cost-of-service recovery excluding any return, about $12.5 million. Trial Staff took GenOn’s side, noting that GenOn’s agreement was supported or unopposed by all parties obligated by or financially impacted by it and appeared to be just and reasonable. The Market Monitor and public entities, on the other hand, faulted GenOn for failing to show how the $13.2 settlement amount was derived and, in particular, for failing to ensure that the amount excluded recovery of embedded costs.

The Commission reviewed the competing settlements under the Trailblazer standards.[1] Under one of the Trailblazer options, even if some individual aspects of the settlement may be problematic, the Commission may still approve a contested settlement as a package if it finds the overall result to be just and reasonable. The Commission must include a finding under this approach that the contesting parties would be no worse position under the settlement than if the case were litigated.  The Commission also cited its policy, when evaluating competing proposals that are just and reasonable, of preferring the proposal put forward by a utility.[2]

Addressing the arguments of the Market Monitor and public entities, the Commission rejected as inconsistent with PJM’s tariff the assertion that owners of RMR units are limited to recovering incremental costs (which excludes embedded costs). It also rejected objections to the “black box” nature of the settlement amount, noting that it routinely approved black box settlements that provided just and reasonable outcomes to all parties to the proceedings. In this case, the Commission found, the fact that the settlement amount was substantially below the full cost of service rate, and slightly above a cost-of-service rate excluding a return of or on investment, showed that the amount was within the range of just and reasonable outcomes.

The Commission further held that the contesting parties would be in no worse position under the settlement than if the case were litigated because “the cost-of-service rate with no return of or on net plant supports the settlement,” by which it presumably meant that the settlement amount was only slightly higher than that cost-of-service rate. Finally, the Commission found that the overall result was just and reasonable when balancing the  benefits of the settlement against the costs and potential result of continued litigation.

GenOn is a significant victory for an owner of RMR units and an unusual setback for a Market Monitor. While decided in the context of the PJM tariff, parties to disputes over compensation for operating RMR units in other RTO regions are likely to take note.

[1] See Trailblazer Pipeline Co., 85 FERC ¶ 61,345 (1998), order on rehearing, 87 FERC ¶ 61,110, aff’d, 88 FERC ¶ 61,168 (1999).

[2] Whether it considered GenOn to be functionally equivalent to a utility in this context, or was influenced by the fact that utilities joined in the GenOn settlement agreement, is unclear.

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