Ari Peskoe is director of Harvard Law School’s Electricity Law Initiative.
The surge in data-center energy demand and related power price increases has put the spotlight on PJM Interconnection processes that can culminate in market-rule changes or can reinforce the status quo.
In this piece, I discuss the Federal Energy Regulatory Commission’s legal authority to approve or order changes to PJM’s governance and conclude that FERC’s jurisdiction over transmission governance allows it to modify filing-rights allocations and adjust PJM’s nominating committee. In addition, utilities have no authority to impose conditions on any filing rights transfer over the regional planning protocol.
FERC’s oversight of regional transmission organization governance is rooted in its duty to define, detect and eliminate unduly discriminatory conduct. The commission has connected governance of multi-utility transmission agreements to undue discrimination since at least the 1970s. In 1987, the D.C. Circuit summarized that FERC’s prior regulation of regional transmission governance was a “proper exercise of its power to prevent undue discrimination.”
PJM’s current governance was designed to address undue discrimination by utilities. In 1996, FERC recognized that its open-access transmission mandate that aimed at countering utilities’ incentives to stymie competition would be of limited value if utilities continued to operate transmission themselves. It therefore encouraged utilities to cede control over their transmission networks to system operators who had no financial stake in the markets.
To receive FERC’s approval to operate transmission, FERC required newly created RTOs to show that their governance would prevent “control, and appearance of control, of decision-making by any class of participants” or individual companies. Based on this Independence Rule, FERC rejected the then-PJM utilities’ initial PJM proposals because they provided the utilities with “ultimate control” over regional decisions.
The RTO Independence Rule is a remedy for undue discrimination. The D.C. Circuit recently confirmed that FERC must enforce RTO independence. Governance reforms anchored to the RTO independence rule should not be legally controversial.
Governance reforms might also be justified if they are tied to evidence about unjust and unreasonable wholesale or transmission rates. For instance, at the FERC technical conference in July on PJM governance reform, parties blamed slow decisionmaking processes for high prices. FERC might conclude that reforms aiming to break through any bureaucratic morass at PJM could cure unjust and unreasonable rates.
Reforms that can boost the scale and pace of infrastructure development might also remedy unjust and unreasonable rates. PJM has been plagued by a surge in demand, which is driving up prices. Any infrastructure buildout to meet the surge requires state support.
State engagement, consultation and decisionmaking authority do not threaten PJM’s independence, as Constellation claims. The seminal orders on RTO independence and the codified RTO Independence Rule are explicitly about market participants and not state regulators or policymakers. PJM implements the Independence Rule through its Bylaws, Operating Agreement and personnel policies that likewise prohibit connections between its employees and officers with market participants.
PJM market participants’ legal arguments against states’ involvement threaten to disrupt productive arrangements in other RTOs. FERC should use this proceeding to reiterate that state engagement, consultation and decisionmaking authority are consistent with the Federal Power Act’s collaborative federalism framework.
FERC may approve proposals that provide states with filing opportunities ...
... and FERC has said that it can add filing rights over utility objections.
Filing rights are at the heart of regional governance. FERC may order changes to existing arrangements, including providing new filing privileges to states or removing privileges enjoyed by non-utility entities.
The D.C. Circuit has established one prohibition on FERC’s regulation of filing rights. In Atlantic City Electric, the D.C. Circuit held that while an owner or operator of property providing jurisdictional service may voluntarily share its right with other entities or cede it entirely, FERC may not order an owner or operator to surrender its filing right.
The Members Committee’s filing privileges are center stage in discussions at FERC. PJM has proposed to take for itself the members’ filing privileges over energy market and transmission planning rules. Utilities unanimously endorse this approach. OPSI and the region’s governors support it too, on the condition that states gain certain filing privileges.
Removing the Members Committee’s filing privileges does not trip over the D.C. Circuit’s prohibition on filing rights. The Members Committee is not itself a “public utility” under federal law because it does not engage in FERC-jurisdictional transactions. The Committee has no rights.
States similarly have no “rights” to file tariff amendments, but FERC could demand that PJM file state-approved rule changes. When states act through PJM filings, they are not themselves filing under section 205 of the FPA.
Utilities who argue that FERC has no authority to so order PJM are seeking to expand the D.C. Circuit’s lone filing-rights prohibition. FERC itself reads Atlantic City narrowly. Nothing in the decision, FERC concluded, prevents it from conferring filing rights on additional parties over utility objections. Supplementing the utilities’ rights over regional cost allocation or PJM’s rights over capacity with new privileges for states would not force any party to surrender its rights, as Atlantic City prohibits.
Because the utilities would surely litigate, FERC would face some legal risk if it ordered PJM or the utilities to provide filing privileges to the states. Since Atlantic City, the utilities have sought to enlarge their monopoly power by pushing ahistoric theories about section 205.
Section 205 codifies the FPA’s core consumer protection safeguards, including requiring that rates be just and reasonable, demanding that utilities publish rates and charge only that rate, and empowering FERC to hold rate cases, suspend a new rate’s effectiveness, and order refunds. FERC and federal courts have repeatedly rejected the utilities’ attempts to recast section 205 as a vehicle for their control over regional transmission.
Alternatively, FERC could approve a proposal filed by PJM to “voluntarily give up, by contract, some of its rate-filing freedom under section 205,” as the D.C. Circuit put it in Atlantic City. PJM might, for instance, adapt ISO New England’s jump-ball approach to provide states with filing privileges over resource adequacy.
State filing privileges in PJM would be enshrined in PJM’s tariff and would supplement existing filing rights, leaving PJM's and the utilities’ section 205 rights intact. Those two features answer the objections a 1984 federal appeals court raised to state-compelled filings.
In that case, a state commission acting pursuant to state law directed the utility to amend its FERC-regulated tariff. The court worried that such state orders would leave FERC choosing among competing state directives about a single transmission tariff, would let state authority reach a filed federal rate and would displace the utility’s own judgment about its rates. According to the court, section 205 “allows the utility the choice among various reasonable rate practices.”
None of those consequences could follow from tariff-based state privileges. A properly structured tariff would specify how states may act and would not allow states to file competing proposals under their own sovereign power. The filed rate doctrine prevents states from regulating transmission tariffs, but it does not prevent FERC from approving tariff-based procedures for state engagement, consultation or decisionmaking.
Tariff-based state privileges would allow PJM and the utilities to continue to file under section 205 whatever they choose and whenever they choose. States’ privileges could be conditioned on PJM or the utilities making their own concurrent section 205 filing. Concurrent filings are required for Midcontinent Independent System Operator state regulators and ISO-NE market participants acting through the jump-ball option to exercise their filing privileges. In these regions, a non-utility proposal reaches FERC alongside a utility’s filing rather than instead of it.
Structured that way, neither a voluntary concession by PJM nor a FERC mandate to add filing privileges would deprive anyone of the “choice” the court described.
FERC may order changes to PJM’s board nominating process
PJM’s Operating Agreement empowers a committee consisting of one representative from each of the Members Committee’s sectors and three PJM Board members to nominate potential Board members. FERC reviewed and approved a prior iteration of this structure in 1997 and reviewed and approved the current structure in 2002.
Unlike private utility companies whose governance is beyond FERC’s reach, RTOs were created and are maintained through FERC-jurisdictional contracts. To ensure those contracts are just and reasonable and not unduly discriminatory, FERC reviews RTO procedures for choosing board members. To comply with its own governance procedures, PJM has requested waivers from FERC to deviate from its own nominating process.
Threats made in this proceeding to FERC’s jurisdiction over RTO nominating committees overread a D.C. Circuit decision. For instance, utility PPL claims that a 2004 D.C. Circuit decision about the California ISO bars FERC from “reaching into the internal governance” of RTOs. Such a sweeping interpretation of the case would undermine 30 years of RTO oversight and at least five decades of FERC orders reviewing regional transmission governance.
CAISO is a narrow decision. In that 2004 case, the D.C. Circuit overturned a FERC order that directed the California ISO to replace its state-appointed board with new directors. The panel concluded that FERC’s order amounted to an “unprecedented invasion of internal corporate governance” that could not be sustained by FERC’s limited jurisdiction over utility practices that “directly affect the rate.”
FERC has not broadened that holding. As recently as 2019, FERC reiterated that membership rules for RTO stakeholder groups “directly affect” FERC filings and therefore directly affect rates and fall under FERC’s jurisdiction. For the same reason, RTO procedures for selecting board members are also within FERC’s control. FERC’s oversight of these aspects of RTO governance prevents undue discrimination and support compliance with the RTO Independence Rule.
The utilities do not enjoy special control over PJM’s transmission planning
The utilities unanimously support replacing the Members Committee’s filing privileges over the regional planning protocol with exclusive control by the PJM Board. The utilities claim that this change requires their approval and may demand governance concessions in their favor.
I filed a comment urging the Commission to reject these claims. Thirty years ago, the transmission owners voluntarily provided the Members Committee with filing privileges over the planning protocol. Whether the PJM Board may have exclusive authority over the planning protocol is up to PJM, the Members Committee and FERC. The Members Committee could agree to disempower itself through a section 205 filing or be disempowered under section 206.
