United States: D.C. Circuit Affirms Denial Of Recovery Of Gas Purchase Costs During 2014 Polar Vortex

Last Updated: July 6 2018
Article by Russell Kooistra and Thomas S. DeVita

On June 15, 2018, in separate opinions, the U.S. Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") affirmed two FERC rulings that denied utilities' requests to be made whole for purchasing natural gas at inflated prices to comply with their PJM Interconnection, L.L.C. ("PJM") capacity resource obligations during the 2014 Polar Vortex.  Specifically, the D.C. Circuit upheld FERC's holdings that (1) permitting the utility in one case to recover costs retroactively would violate the filed rate doctrine and the rule prohibiting retroactive ratemaking and (2) the utility in the second case was not entitled to indemnification for its losses resulting from PJM requesting the utility to comply with its capacity resource obligations.

In January 2014, a Polar Vortex resulted in extremely cold temperatures in various regions of the United States, including PJM, which triggered an increase in electricity demand.  This increase in demand, in turn, caused an increase in natural gas prices to fuel electricity generators.  In the first case, PJM asked Old Dominion Electric Cooperative ("ODEC") to ensure that certain of its capacity resources would be available to run at full capacity for these spikes in demand, in accordance with capacity resources' obligation to run when called upon by PJM.  In response, ODEC purchased high-priced natural gas, which caused ODEC's marginal costs to increase to $1,200/megawatt-hour – above the $1,000/megawatt-hour cap on capacity resources' bids in the energy markets.

Due to the excessive marginal costs faced by generators, on January 21, 2014, PJM posted on its website that it would seek a retroactive waiver of the $1,000/megawatt-hour cost cap.  On January 23, 2014, PJM filed two waiver requests: one that would permit generators to recover their actual costs above the cost cap, effective January 24, 2014 ("Make Whole Waiver"), and one that would allow generators to submit bids above the cap on a prospective basis.  FERC granted both waiver requests.  However, PJM overestimated the amount of energy required on some days during the Polar Vortex, and thus PJM reduced or cancelled some of its orders for capacity resources to run.  Ultimately, ODEC incurred losses in the amount of (1) actual costs in excess of the $1,000/megawatt-hour cap that pre-dated the January 24, 2014 effective date of PJM's waiver; (2) start-up costs resulting from PJM's cancelled orders for capacity resources to run; and (3) costs arising when units ordered by PJM to generate were instructed to cease operations earlier than anticipated.

ODEC requested that FERC extend the date of PJM's Make Whole Waiver back to January 23, 2014, when the waiver request was filed, and waive provisions of the PJM Tariff and Operating Agreement regarding retroactive rate charges so that ODEC could recover costs of its unused generation when PJM cancelled or curtailed orders for service.  FERC denied ODEC's requests, concluding that granting ODEC's waiver would violate the filed rate doctrine and the rule against retroactive ratemaking.

On review, ODEC argued, among other things, that recovering its full costs would not violate the filed rate doctrine because customers were on notice that the market rate for electricity set by the PJM Tariff was altered by the Polar Vortex.  Alternatively, ODEC argued that PJM's post on its website gave customers the required prospective notice of increased rates.  In rejecting ODEC's arguments, the D.C. Circuit first found that ODEC failed to identify any PJM Tariff provision that specified a market-variable cost component that would have given customers notice of increased rates, similar to how formula rates provide notice of true-ups based on actual costs.  Second, the D.C. Circuit held that the website post did not provide adequate notice because it was not filed with FERC, and the ultimate waiver granted by FERC was prospective-only.  Accordingly, the D.C. Circuit denied ODEC's petition for review.

In the second case, Duke Energy Corporation ("Duke") similarly faced increased natural gas costs to fuel its PJM capacity resources.  Specifically, a Duke employee spoke with a PJM dispatcher during the 2014 Polar Vortex regarding an emergency notice issued by PJM asking capacity resources to be fully available.  In their conversations, the Duke employee expressed the difficulty of acquiring gas for Duke's resource given the inflated prices, and the PJM dispatcher reiterated that PJM needed the resource "to be able to come on" and that it was not "an economic decision" but rather was "a reliability issue[.]"  Duke ultimately purchased expensive gas for a majority of its capacity resource's units, but PJM never dispatched any of the units, leaving Duke with $9.8 million in losses.  As a result, Duke requested that FERC find that PJM's Tariff required PJM to indemnify Duke for its losses due to its actions in compliance with PJM's directives.  FERC rejected Duke's request, holding that Duke did not act pursuant to a PJM directive because its capacity resource was already obligated to be available.  Duke subsequently petitioned the D.C. Circuit for review, arguing that even if PJM did not direct it to comply with its capacity resource obligations, the PJM dispatcher effectively directed Duke to purchase expensive gas.

The D.C. Circuit affirmed FERC's holding.  In doing so, the D.C. Circuit deferred to FERC's factual finding that in the instances in which the PJM dispatcher referenced gas purchases, such references were in service of the dispatcher's instruction for Duke to comply with its capacity resource obligation under the PJM Tariff.

A copy of the D.C. Circuit's opinions can be found here and here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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