FERC Revises Policy Against Retroactive Collection of Surcharges For Changes in Cost Allocation or Rate Design

In a change of policy, the Federal Energy Regulatory Commission (FERC) has acknowledged in Black Oak Energy, LLC that the broad remedial authority granted to it in Section 309 of the Federal Power Act (FPA) includes the authority to order public utilities to impose retroactive surcharges to implement changes in cost allocation or rate design in an equitable manner.

In cases in which the FERC finds that a public utility has over-charged its customers, the FERC generally orders the public utility to refund any revenues it has collected in excess of amounts determined to be just and reasonable. These orders are intended to put the parties in the position they would have occupied if the utility’s revenues had been just and reasonable in the first instance. However, under long-standing policy, the FERC has refrained from ordering retroactive adjustments for over-charges resulting from FERC-ordered changes in cost allocation or rate design.

Changes in cost allocation or rate design may have the effect of shifting cost responsibility among customers without affecting the utility’s overall revenue requirement. The FERC has been concerned that a utility that pays refunds in cases involving changes in cost allocation may be barred by the principle against retroactive ratemaking from collecting surcharges from customers that were under-charged. Under such circumstances, retroactive implementation of changes in rate design or cost allocation might result in under-recovery of costs by the utility. In addition, the FERC recognized that retroactive surcharges may economically injure customers who based their decisions on the cost allocations or rate design in effect at the time and are unable to undo those decisions.

Black Oak Energy involved the allocation of excess revenues collected by PJM Interconnection, LLC (PJM) to compensate for transmission line losses through credits back to its customers. PJM initially gave such credits only to load-serving entities using its system. The FERC subsequently ruled that virtual traders identified as Financial Marketers should also have received a portion of the credits. However, the FERC declined to order PJM to award credits retroactively to the Financial Marketers. The FERC was concerned that retroactive credits would result in PJM being unable to offset such credits by increasing charges to certain customers retroactively to recover credits previously given to load-serving entities, and therefore PJM would incur a revenue shortfall.

In Black Oak Energy, the FERC reviewed a number of recent decisions in which appellate courts stressed the broad scope of remedial authority granted to the FERC in Section 309 of the FPA. Based on that review, the FERC revised its policy under which changes in rate design and cost allocation would only be made effective prospectively:

…the Commission will consider whether to require refunds in cost allocation and rate design cases based on the specific facts and equities of each case, even where such refunds must be funded through surcharges on certain parties. The Commission has an obligation under section 206(b) of the FPA to weigh the equities and provide refunds where appropriate to restore the just and reasonable rate in cost allocation and rate design cases. Indeed, the legislative intent behind passage of section 206(b) of the FPA was to correct an inequity under the statute in which customers did not receive the same refund protection when initiating a complaint as they did under section 205 rate filings by the utility.

In Black Oak Energy, the FERC ruled that “in assessing the equities here, we find that PJM must pay refunds of misallocated marginal line loss over-collection amounts in excess of those that would have been paid under the just and reasonable rate.” Significantly, in order to protect PJM against a revenue shortfall, the FERC also concluded that “PJM has the authority to collect such refunds from the parties that received an overpayment of the line loss credit.”

The FERC emphasized in its order that Black Oak Energy was not a case “in which ordering refunds would pull the economic rug out from under firms that had made operational decisions in reliance on one set of rates and that would be unable to undo those transactions retroactively in light of the new, corrected rates” (inner punctuation omitted). For that reason, it is not clear whether the FERC might order changes in rate design or cost allocation to be made effective retroactively in cases in which parties had made certain decisions in reliance on the rate design in effect at the time. Nevertheless, the decision in Black Oak Energy affirms that if the FERC concludes that it would be equitable to provide for retroactive implementation of changes in cost allocation or rate design, it has ample authority to order a public utility to make refunds and collect surcharges in order to do so.