FERC on Dec. 22 accepted revisions, effective Jan. 1, 2017, to PJM Interconnection’s open access transmission tariff to extend and update the rate mechanism to recover PJM’s administrative costs of serving as an RTO.
As noted in FERC’s order, a settlement agreement in 2006 established the current rate mechanism that allows PJM to recover its administrative costs through a stated rate. That settlement agreement approved an initial composite stated rate of 33 cents/MWh, and then specified three successive changed composite rates to become effective at varying times over the following five years. FERC added that the settlement agreement also established a financial reserve to ensure that PJM could continue to operate for limited periods in which revenues did not cover expenses. The settlement agreement capped the reserve at 6% of PJM’s annual revenues and provided for refunds to customers of all revenues in excess of actual expenses and amounts necessary to maintain a reasonable reserve, FERC said.
The settlement agreement further established a separate rate adder (AC2 Rider) to recover PJM’s actual capital and operating costs for its advanced second control center. The AC2 Rider, which will expire in November 2018, is a formula rate that varies monthly, recovering PJM’s actual advanced second control center costs each month that are over that month’s projected billing determinants.
FERC also said that PJM in 2008 filed an amendment to the settlement agreement to issue more timely refunds from the reserve. The calculation timeline was shortened from annually to quarterly, FERC said, adding that the refund payments timeline was shortened from a nine-month period to a three-month period. PJM in 2011 submitted an amendment to the 2006 settlement agreement to reduce the composite rate to 29 cents/MWh, FERC said, noting that the reduction was based on projected rate stability for customers and decreasing quarterly refunds. In sum, the stated rate plus the AC2 Rider results in the combined rate of 33 cents/MWh that is being recovered from customers.
In the instant filing, PJM said that the stated rates no longer cover its costs and that PJM will likely deplete the reserve in 1Q17. PJM proposed to increase the current combined rate of 33 cents/MWh to the composite rate of 36 cents/MWh to be effective during calendar years 2017 and 2018, and thereafter, PJM proposed to increase the composite stated rate of 2.5% each year on the first day of each of the next five calendar years, through 2023. FERC added that the ceiling on the stated rate in the proposed tariff revisions is 41 cents/MWh, which takes effect on Jan. 1, 2024, and will remain in place until PJM submits a superseding rate change filing.
PJM also proposed to eliminate the AC2 Rider before its presently scheduled 2018 termination.
FERC added that PJM maintains that the staged increase in stated rates over the next eight years is comparable to the long-term rate-setting practice that has been used since 2006, meets the needs of PJM and its stakeholders, and is accompanied by important ratepayer protections such as quarterly refunds and a robust information exchange.
Discussing pleadings, FERC noted that Public Citizen Inc., for instance, alleged that the PJM stakeholder process that reviewed the proposed tariff revisions failed to consider measures to control costs associated with employee compensation and that employee compensation costs are projected to rise during the period covered by the rate increase. Public Citizen also contends, for instance, that PJM has not provided sufficient detail of the compensation issues.
In its answer, PJM avers that its expense projection does not determine the charges that any customer will bear for PJM’s administrative costs, and explained that the stated rate levels balance the goals of recovering PJM’s costs, minimizing quarterly refund levels, and reducing the need for future rate change filings. FERC added that PJM also contends that it has carefully limited staffing increases over the past 10 years, despite experiencing higher increases in the scope of its responsibilities and in the level of demand for its services.
Public Citizen requested that the matter be set for hearing, FERC said.
FERC said that it finds that PJM has adequately supported the proposed tariff revisions, adding that based on audited 2015 financial data reported by PJM, the decrease in operating income and increase in operation expenses support PJM’s concerns that current stated rates are not sufficient to cover costs in the long-term. PJM’s claim that reserves have been depleting in recent years is also supported by financial information, FERC said.
FERC noted that PJM’s process ensures that the financial statements questioned by Public Citizen are subject to adequate independent review. Among other things, FERC said that PJM has implemented cost control measures, including reducing the number of full-time equivalent contractors, renegotiating telecommunications and utility contracts, expanding PJM’s vendor pool to increase supplier competition, increasing PJM employees’ share of medical insurance costs, and modifying PJM’s retirement benefits.