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FERC Reverses Refund Order Regarding Marginal Loss Cost Allocation at PJM

July 22, 2011
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FERC ruled in favor of Integrys Energy Services and, on rehearing, found that refunds originally ordered to be paid to parties engaged in certain virtual transactions in PJM, due to a change in the allocation of marginal line loss surpluses, shall now no longer be paid to such virtual traders (EL08-14 et. al.).

The case dates back to FERC's original exclusion of all virtual transactions from sharing in the surplus created by the use of marginal transmission losses in LMP pricing. On rehearing, FERC later concluded that certain virtual transactions -- specifically, those which pay charges which contribute to the fixed costs of the transmission system -- are entitled to a share of the surplus created through the use of marginal loss pricing.

In that prior order, in addition to ordering a revised allocation for marginal loss surpluses going forward, FERC ordered refunds to virtual traders for the shares of marginal losses they should have been paid. This refund, however, required PJM to charge, for prior periods, other market participants in order to fund the refund. One of the sources for such refund revenue was to re-allocate marginal loss surpluses previously paid to participants exporting energy, requiring such participants to repay these surpluses back to PJM. This prompted a rehearing request from Integrys Energy Services.

Integrys Energy Services argued that PJM should not be permitted to reclaim any of the credits paid to exporters of energy from PJM to the Midwest ISO in order to pay for the refunds to the virtual traders. Integrys Energy Services argued that it would be unjust and unreasonable to retroactively require load-serving entities who received distributions from the marginal line loss surpluses in the past to pay back those amounts to PJM for re-allocation.

FERC was persuaded, and on rehearing ordered that there shall be no refunds to re-allocate the previously paid marginal loss surpluses.

FERC said that its precedent regarding refunds differentiates two distinct scenarios. When a case involves a company over-collecting revenues to which the company was not entitled, the Commission generally holds that the excess revenues should be refunded to customers.

However, in a case where the company (or RTO) collected the proper level of revenues, but FERC later determines that those revenues should have been allocated differently, the Commission traditionally has declined to order refunds. FERC said that the marginal loss surplus issue fits this precedent.

FERC's decision only relates to the previously ordered refund, and does not alter the treatment of marginal loss surpluses going forward.

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