PJM Again Meddling in State Capacity Affairs; Questions Ohio Action on AEP Ohio Capacity Rate

Despite the clear and plain language of the PJM tariff, whose meaning has already been confirmed by FERC, PJM suggests that FERC has a role in determining the state compensation mechanism to price capacity provided by Fixed Resource Requirement entities to competitive retail suppliers.

PJM did not state a position with respect to the specific relief sought by AEP Ohio at FERC. However, PJM does suggest that FERC has the authority to review the specific rate established under a state compensation mechanism as the tariff exists currently -- outside of a section 206 complaint finding that the tariff is no longer just and reasonable.

PJM's Reliability Assurance Agreement, Schedule 8.1, Section D.8 unequivocally provides that: "In the case of load reflected in the FRR Capacity Plan that switches to an alternative retail LSE, where the state regulatory jurisdiction requires switching customers or the LSE to compensate the FRR Entity for its FRR capacity obligations, such state compensation mechanism will prevail."

Despite this clear statement that the state compensation mechanism "will prevail," PJM informed FERC, in supporting AEP Ohio's motion for an expedited ruling on an AEP Ohio rehearing request and complaint concerning Schedule 8.1, Section D.8, that:

"PJM believes the Commission should consider the question of whether the action taken to date by the PUCO in fact meets the requirement of Section D.8 of Schedule 8.1 of the RAA as a state compensation mechanism." [emphasis added].

PJM does not elaborate on this vague and bizarre statement, but the inescapable conclusion is that PJM is stating that the state regulators' authority to establish a state compensation is not absolute, and subject to FERC review.

However, Schedule 8.1, Section D.8 clearly provides that the state compensation mechanism "will prevail." There is no criteria for states in establishing such state compensation mechanisms, no list of "requirements" that must be met for a "valid" state compensation mechanism, and no provision that this mechanism may be challenged anywhere except before state regulators. Simply put, there is no "requirement" listed in Schedule 8.1, Section D.8, and thus, the state compensation mechanism cannot be reviewed by anyone other than state regulators.

Again, PJM does not expound on what "requirement" of Section D.8 of Schedule 8.1 FERC should consider, but PJM does add the following emphasis in quoting Section D.8 of Schedule 8.1:

"In the case of load reflected in the FRR Capacity Plan that switches to an alternative retail LSE, where the state regulatory jurisdiction requires switching customers or the LSE to compensate the FRR Entity for its FRR capacity obligations, such state compensation mechanism will prevail" [all emphasis by PJM]

While PJM does not explain its emphasis, clearly, the implication is that a state compensation mechanism which does not "compensate the FRR Entity for its FRR capacity obligations" is contrary to Section D.8 of Schedule 8.1.

This is key in that it suggests that FERC need not determine that Section D.8 of Schedule 8.1 is unjust or unreasonable in and of itself in order to alter the state compensation mechanism (a burden needed to sustain a section 206 complaint); rather, PJM appears to say that FERC retains authority to reject specific outcomes of the state compensation mechanism, if these outcomes do not meet Section D.8 of Schedule 8.1.

Indeed even AEP Ohio is not arguing this, per se. AEP Ohio argues, on rehearing, that is retains a right to file for an alternative cost-based capacity rate under section 205 independent of the state compensation mechanism (not because of an invalid state compensation mechanism that fails the "requirement" of Section D.8 of Schedule 8.1), and AEP Ohio argues in its section 206 complaint that FERC's interpretation of Section D.8 of Schedule 8.1 makes the tariff unjust and reasonable. Nowhere does AEP Ohio argue that FERC retains the authority to change the state compensation mechanism outside of a section 205 filing (which FERC has ruled is precluded if a state compensation mechanism exists) or a section 206 complaint that finds Section D.8 of Schedule 8.1 to be unjust or unreasonable (and under which FERC adopts new tariff language to explicitly provide that FERC sets the compensation rate).

Although AEP Ohio does argue that a state compensation mechanism cannot preempt FERC's exclusive authority to set wholesale rates, even under this argument, AEP Ohio is contending that FERC may set the capacity rate due to its plenary powers under the Federal Power Act, not because of some specific "requirement" under Section D.8 of Schedule 8.1 that allows FERC to alter or reject the state compensation rate if its "requirement" has not been met, which appears to be what PJM is arguing.

Returning to what, if any, "requirement" must be satisfied under Section D.8 of Schedule 8.1 to establish a state compensation mechanism, it is notable that the term compensate is not defined in Section D.8 of Schedule 8.1, nor does Section D.8 of Schedule 8.1 say anything such as "fully compensate" or "compensate at cost." Compensation under the state compensation mechanism is clearly with the state's purview alone, and a second bite of the apple at FERC, or anywhere else, is not provided within the tariff.

While AEP Ohio is certainly within its rights to file a section 206 complaint over Section D.8 of Schedule 8.1 at FERC, under the argument that the section is not just and reasonable, what PJM is implying here is that such a complaint is not necessary for AEP Ohio's requested relief, because FERC has authority, outside of a section 206 complaint proceeding, to review whether the "requirement" of Section D.8 of Schedule 8.1 has been met in establishing the state compensation mechanism.

FERC already ruled in January 2011 that the, "state compensation mechanism will prevail," and noted that, "the Ohio Commission has adopted such a state mechanism."

Even if PJM were correct that there is some requirement which must be met under Section D.8 of Schedule 8.1, FERC's January 2011 acknowledgement that the Ohio Commission has adopted "such" a state mechanism is clear that FERC found the Ohio state compensation mechanism to be valid under Section D.8 of Schedule 8.1 and controlling. While the state compensation mechanism has changed since January 2011, nothing distinguishes the current mechanism (which limits RPM pricing) from the mechanism FERC previously recognized as controlling under Section D.8 of Schedule 8.1 (which was all capacity to retail suppliers priced at RPM).