• FERC Denies Merchant Transmission Provider’s Contract Complaint
  • May 16, 2013 | Authors: Peter S. Glaser; Kevin C. Greene; Daniel L. Larcamp; Clifford S. Sikora; Lara L. Skidmore
  • Law Firms: Troutman Sanders LLP - Washington Office ; Troutman Sanders LLP - Atlanta Office ; Troutman Sanders LLP - Washington Office ; Troutman Sanders LLP - Portland Office
  • On May 8, 2013, FERC denied Linden VFT, LLC’s (“Linden”) complaint against two power marketers, Brookfield Energy Marketing, L.P. (“Brookfield”) and Cargill Power Markets, LLC (“Cargill”), for failure to pay pass-through charges related to PJM Interconnection, LLC (“PJM”) transmission upgrades. In denying the complaint, FERC determined that Linden lacked the contractual authority to charge for the additional costs.

    Linden operates as a merchant transmission provider, and in 2007, signed Transmission Scheduling Rights Purchase (“TSR”) Agreements with Brookfield and Cargill for transmission rights on its line. The TSR agreements contained the price per kilowatt month and all non-price terms and conditions. However, prior to the execution of the TSR agreements, PJM Transmission Owners filed proposed tariff revisions to allocate costs of transmission upgrades to merchant transmission providers. Then, in 2009, Linden filed tariff provisions that allowed Linden to charge holders of firm transmission rights any transmission upgrade costs that PJM allocated to Linden. Following FERC approval of these tariff revisions, Linden began charging Cargill and Brookfield a pass-through charge for PJM transmission service costs that was initially charged to Linden.

    Cargill and Brookfield disputed these charges and filed an action in federal district court. Linden countered and filed a complaint and petition for declaratory order with FERC. On February 27, 2013, the district court held that it would abstain from ruling on the petition until FERC had addressed the complaint.

    In its complaint, Linden argued that the language of the TSR Agreements expressly allowed for pass-through of PJM transmission upgrade costs from Linden to Cargill and Brookfield, and the history of the PJM tariff prove FERC’s intent to have such customers pay these costs. Specifically, Linden argued that the TSR Agreements incorporate by reference sections of the PJM tariff that make customers such as Cargill and Brookfield responsible for transmission upgrade costs when passed through. Additionally, Linden argued that schedules 14 and 16 of the PJM tariff detail the manner in which PJM may allocate upgrade costs to a merchant facility, and that those costs may be passed on from a merchant facility to a customer.

    In their answer, Cargill and Brookfield countered that Linden may only pass through upgrade costs when there is contractual authority to do so, and no such contractual authority exists. Cargill and Brookfield argue that the TSR Agreements list all payment obligations required of them, and there is no requirement to pay for transmission upgrade costs. Therefore, Cargill and Brookfield argue that the inclusion of specific payment obligations implies that the only payment obligations are the ones listed, and excludes any payment for items not listed.

    FERC agreed with Cargill and Brookfield and rejected Linden’s complaint. In its order, FERC stated that the only payment obligations are contained solely in within the TSR Agreement and may not be incorporated by reference. FERC continued, stating that “the very essence of a negotiated rate contract” is that a party is at risk for either overpayment or undercollection of negotiated coasts, and cannot create any additional costs that were not originally contained within the contract. Furthermore, FERC stated that while Linden was aware of the risks of the proceeding, but Linden chose not to include an express provision within the TSR Agreement to later allocate pass-through charges it received from PJM to its customers. Instead, FERC noted that Linden chose to rely on its negotiated rate as sufficient to cover any “potential risk of exposure to transmission cost increases.” Therefore, FERC held that “there is no language in the TSR Agreements that persuasively supports Linden VFT’s position that the TSR Customers are contractually obligated to pay the PJM Transmission Service Costs.”