On June 20, 2019, FERC issued an Order on Voluntary Remand from the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) directing PJM Interconnection, L.L.C. (“PJM”) to refund certain line loss over-collection amounts to certain virtual traders.  Upon re-examining its refund authority in light of recent court precedent, FERC determined that it has greater discretion to order refunds in cost allocation and rate design proceedings than it previously had determined.

In December 2007, Black Oak Energy, L.L.C., EPIC Merchant Energy, L.L.P., and SESCO Enterprises, L.L.C., and other interested financial marketers (collectively, “Financial Marketers”) filed a complaint at FERC challenging PJM’s collection of charges for transmission line losses and the disbursement of the over-collection of these charges that resulted from setting the locational marginal price (“LMP”) based on marginal line losses (“Complaint”).  FERC denied the Complaint and found that the Financial Marketers should not be assigned marginal line losses as part of their LMP price, nor should they receive a proportionate share of the marginal line loss credit.  In 2009, FERC granted rehearing, reversed its determination, and required PJM to pay refunds to the Financial Marketers, finding that the Financial Marketers had paid transmission charges and thus were due a share of the marginal line loss credits (“2009 Refund Order”).  Two parties sought rehearing of the 2009 Refund Order, arguing that PJM inappropriately imposed a retroactive surcharge in order to collect the funds to pay the refunds FERC had directed PJM to pay the Financial Marketers.  FERC subsequently directed PJM to provide additional information on how it calculated the refunds, and whether it used a surcharge to obtain the refund amounts.  PJM confirmed that it imposed surcharges to collect the funds to pay for the refunds.  In 2011, FERC granted rehearing and reversed its determination that PJM should pay refunds to the Financial Marketers.  FERC interpreted City of Anaheim v. FERC, 558 F.3d 521 (D.C. Cir. 2009) (“City of Anaheim”) as indicating that Federal Power Act (“FPA”) section 206(b) authorizes only retroactive refunds (i.e., rate decreases), not retroactive rate increases.  In light of City of Anaheim and its general no-refund policy in cost allocation and rate design proceedings, FERC did not require PJM to pay refunds.  FERC affirmed its 2011 order on rehearing.

In 2013, on appeal, the D.C. Circuit affirmed FERC’s determination regarding line loss crediting but remanded the issue of refunds.  The court found that FERC did not sufficiently distinguish between denying refunds in the first instance and ordering recoupment after such refunds already had been paid to the Financial Marketers.  In 2015, on remand, FERC affirmed its prior finding that PJM should be able to recoup the refunds from the Financial Marketers (“2015 Remand Order”).  In response to requests for rehearing of the 2015 Remand Order, FERC reaffirmed its denial of refunds based on its long-standing no-refund policy in cost allocation and rate design proceedings, and held that PJM would be unable to surcharge customers to cover the cost of the refunds under FPA section 206(b) (“2016 Rehearing Order”).  Both the 2015 Remand Order and 2016 Rehearing Order were appealed to the D.C. Circuit, challenging FERC’s decisions related to the recoupment of refunds.  During briefing, FERC sought a voluntary remand in light of a case, Pub. Serv. Comm’n of Wisc. v. Midcontinent Indep. Sys. Operator, Inc., 156 FERC ¶ 61,205 (2016) (“MISO”), it decided after issuing the challenged rehearing orders.  In MISO, FERC held that its remedial authority allows it to require surcharges to fund refunds in certain circumstances.  In November 2016, the D.C. Circuit granted FERC’s request for a voluntary remand.  Subsequently, on July 31, 2018, the D.C. Circuit upheld FERC’s MISO order in Verso Corp. v. FERC, 898 F.3d 1 (D.C. Cir. 2018) (“Verso”).

In the Order on Voluntary Remand, FERC reversed its refund determinations in the prior rehearing orders.  Despite its general no-refund policy in cost allocation and rate design cases, FERC found that it possesses greater discretion to require refunds under FPA sections 309 and 206(b) than it had previously determined.  FERC found that it is not barred from ordering PJM to pay refunds of misallocated marginal line loss over-collection amounts to Financial Marketers, or authorizing PJM to surcharge the parties that received an overpayment of the line loss credit in order to fund those refunds.  Among other cases, FERC relied on the D.C. Circuit’s recent Verso decision, which concluded that FERC’s use of surcharges to effectuate a rate reallocation was squarely within its FPA section 309 remedial authority.  In Verso, the court recognized that, without the ability to retroactively surcharge, the refund provision of FPA section 206(b) would not serve as a protection for customers, essentially nullifying this critical feature of the statute.  In addition to finding that refunds and surcharges are appropriate to ensure that the Financial Marketers receive the proper amount of credit for the refund period, FERC also required that PJM’s refund and surcharge calculations account for the circumstances of energy exporters to MISO, whom PJM originally determined were not eligible for refunds.  According to FERC, this would achieve the most equitable result.  Going forward, FERC stated that it would consider whether to require refunds in cost allocation and rate design cases based on the specific facts and equities of each case.

A copy of FERC’s order is available here.