By order issued July 12, 2013,1 the Federal Energy Regulatory Commission (“FERC” or the “Commission”) denied requests for rehearing of its March 9, 2012 order denying the complaint of DC Energy, LLC (“DCE”) and DC Energy Mid-Atlantic, LLC (“DCE Mid-Atlantic” and, together with DCE, “Complainants”) against PJM Interconnection, L.L.C. (“PJM”).2 Complainants and Scylla Energy Inc. (“Scylla”) filed requests for rehearing. In denying rehearing, the Commission affirmed its finding that the Complainants’ internal bilateral transactions (“IBTs”) did not display the characteristics of transactions contemplating the physical transfer of energy, and were thus not properly reported to PJM through its eSchedule tool for purposes of offsetting deviation charges.3

The Rehearing Order resolves much of the uncertainty the Complaint Order created concerning the nature of the “physicality” requirement for reportable, Tariff-compliant IBTs in PJM. However, the Commission did little to address the argument that its general holding, now affirmed on rehearing, leads to the conclusion that FERC lacks jurisdiction over the transactions because they could not be physically delivered, were intended to be financially settled, and thus as non-reportable IBTs would be swaps regulated by the Commodity Futures Trading Commission.


PJM Market Participants may enter into IBTs for the purchase and sale of electric energy. Although the transactions occur outside the PJM markets, Market Participants may report these transactions to PJM through its eSchedule tool if they meet the tariff requirements. These reported IBTs can be used to offset deviation charges associated with real-time imbalances. Only certain types of IBTs, however, are properly reportable under the PJM Open Access Transmission Tariff (“Tariff”). Section 1.7.10 of Attachment K – Appendix to the Tariff requires that an IBT “contemplate the physical transfer of energy to or from a Market Participant” in order to be reported to and coordinated with PJM’s Office of the Interconnection.4

Between May 2006 and July 2011, Complainants entered into numerous IBTs with each other “in order to capture small incremental margins associated with ‘restoring energy flow’ missing from the day-ahead market schedules but occurring in real-time.”5 Complainants explained that (i) DCE Mid-Atlantic placed virtual load bids for the specific load missing in the day-ahead market; (ii) DCE placed virtual supply offers for the specific supply resource missing in the day-ahead market; and finally (iii) DCE and DCE Mid-Atlantic entered into a real-time IBT in the form of a bilateral agreement for the physical transfer of energy in PJM.6 The IBTs were in the form of confirmations pursuant to a standard ISDA Master Agreement and Power Annex that provided for physical delivery of energy in PJM.7 Complainants avoided deviation charges resulting from the virtual transactions by entering into these IBTs.8

On October 20, 2011, PJM informed Complainants that their IBTs did not qualify for reporting because the transactions did not contemplate the physical transfer of energy and that, accordingly, PJM would be making billing adjustments to assess deviations charges for Complainants’ transactions starting in July 2009.9 In response, DCE and DCE-Mid Atlantic filed a complaint on October 27, 2011, requesting that the Commission find that their IBTs were Tariff compliant (and thus properly reportable) and prevent PJM from unwinding the IBTs and rebilling the deviation charges.

The Commission denied the complaint and found that Complainants’ IBTs did not satisfy the “contemplate the physical transfer of energy” requirement of section 1.7.10, and were thus not properly reported to PJM for purposes of offsetting deviation charges. In reaching this conclusion, the Commission identified the following examples of characteristics of a properly reportable physical IBT, none of which were found in Complainants’ IBTs:

The Market Participant owns generation resources, is a LSE or acts as a marketer-intermediary by contracting with entities owning generation or having load-serving or other physical obligations;10

The Market Participant acquires title to physical energy;11

The Market Participant incurs network transmission charges or makes reservations for point-topoint transmission capacity; and12

The IBT settled and was intended to settle physically, not financially.13

The Commission further determined that the mere use of an ISDA Master Agreement and Power Annex that provided for the physical delivery of energy in PJM was not in and of itself sufficient to demonstrate the requisite contemplation of a physical transfer of electric energy required of IBTs reportable under Tariff section Complainants and Scylla sought rehearing of the Complaint Order.

Key Findings of The Rehearing Order

FERC Found Complainants’ IBTs Do Not “Contemplate the Physical Transfer of Energy”

On rehearing, Complainants asserted that the Commission created new criteria of physicality under Section 1.7.10, and erroneously concluded that “whether transmission, generation and load serving obligations exist is determinative that [Complainants’] IBTs are not physical.”15 The Commission rejected this argument, finding, as it did in the Complaint Order, that section 1.7.10 does not explicitly require a Market Participant to reserve transmission service, or be a generator, LSE or marketer, but rather, that these factors “are reasonably applied to determine whether a transaction is physical or non-physical in nature.”16 The Commission reiterated that it did not find that these were the only factors that could be considered in determining the physicality of an IBT, nor that they are conclusive of physicality.17 Rather, the Commission identified these factors as exemplary when stating that Complainants “failed to show any aspect of their transactions would reasonable satisfy the requirement to ‘contemplate the physical transfer of energy.’”18

The Commission rejected on similar grounds Complainants’ and Scylla’s claims that the Complaint Order created a requirement that Market Participants have actual load or generation available to offset imbalances and prevent deviations.19 While the PJM Tariff requires Generation Capacity Resources to be available for dispatch, the Commission found that “neither the Tariff nor the Complaint Order requires a one-for-one megawatt matching between the physical energy associated with the IBT and real-time injections and withdrawals.”20 The Commission further held that the Tariff does not require a generator to run as a condition for Market Participants to report an IBT, but the generator must be offered to the market as available for dispatch.21

The Commission also rejected Scylla’s assertion that Complainants’ IBTs complied with the physicality requirement of section 1.7.10 because they had the effect of converging day-ahead and real-time pricing.22 The Commission found that the issue of price convergence benefits was unproven and, furthermore, immaterial because any price convergence would result from Complainants’ accepted day-ahead increment offers (“INCs”) and decrement bids (“DECs”) and not their IBTs. As the physicality requirement of Section 1.7.10 applies to IBTs and not INCs and DECs, Scylla’s argument was moot.23 Further, the Commission determined that the Complainants’ conduct resulted in real market harm, as other Market Participants had to shoulder the burden of the deviation charges Complainants avoided by improperly reporting their non-physical IBTs.24

FERC Found PJM’s Course of Performance Does Not Render Complainants’ IBTs Compliant with Section 1.7.10

Complainants asserted that the Commission erred in failing to take into account evidence regarding PJM’s course of performance – including passive acceptance of Complainants’ eSchedules – when ruling on the nature of Complainants’ IBTs. Of particular relevance, Complainants pointed to the fact that they relied upon PJM-issued materials and had “significant and detailed” conversations with PJM’s executives and Market Monitor during which PJM indicated that Complainants’ IBTs were Tariff compliant. 25 Complainants claimed that PJM was “well aware” that Complainants were not generators or LSEs.26 Scylla asserted that PJM’s efforts to modify Section 1.7.10 reflected PJM’s “actual knowledge” of the ambiguity of the tariff language, such that consideration of course of performance evidence is appropriate.27

The Commission rejected these arguments, finding that Complainants failed to present evidence that demonstrated that PJM was fully aware of the financial nature of Complainants’ IBTs when Complainants discussed the transactions with PJM, or that PJM ever interpreted its Tariff to allow non-physical transactions to be reported under section 1.7.10. Importantly, the Commission found that the mere fact that PJM knew that Complainants did not own generation or serve load did not establish that PJM knew that Complainants’ IBTs were financial; Complainants could have made arrangements to obtain generation or serve load.28 The Commission found that Complainants could not clearly demonstrate that PJM was aware of the nature of the IBTs, so it concluded that PJM’s acceptance of those IBTs did not support a finding that PJM affirmatively found those transactions Tariff-compliant. 29 Addressing Complainants’ reliance on PJM-issued materials, the Commission highlighted that the materials were non-Tariff sources (in some cases prepared as part of a stakeholder proposal process that was never proposed by PJM or accepted by the Commission) that did not show that PJM had ever previously permitted the reporting of financial IBTs.30

The Commission also rejected Scylla’s claim that PJM’s efforts to revise section 1.7.10 of the Tariff establish the ambiguity of the provision. ISOs/RTOs seek to amend their Tariffs for any number of reasons, the Commission concluded, including to address circumstances not previously considered. Accordingly, potential or proposed revisions cannot be viewed as dispositive of ambiguity in the current iteration of the tariff.31

FERC Found Complainants’ IBTs Are Not Similarly Situated to Other Tariff- Compliant Hub IBTs

Complainants continued to assert on rehearing that their IBTs were functionally identical to other Tariff-compliant hub IBTs or “other IBTs where the parties are not generators or load at the IBT location,” such that it was unduly discriminatory to rebill Complainants for avoided deviation charges.32 In rejecting these arguments, the Commission focused significantly on the differences between Complainants’ IBTs and the Western Hub Example IBT.33 Complainants asserted that, like their IBTs, the Western Hub Example IBT “shows a financial IBT between a non-generator and a non-LSE.”34 The Commission rejected this analogy on the grounds that the Western Hub Example IBT included “Seller and a non-LSE-buyer” where the Seller is identified in multiple places as “a generator.”35 The Commission found that Complainants, by contrast, neither own, control, nor contract as a marketer for generation.

The Commission also distinguished Complainants’ IBTs from the Western Hub Example IBT on the grounds that the Western Hub Example IBT “explicitly refers to the transfer of title to energy by seller to buyer, making it clear that a physical transfer is assumed.”36 The Commission rejected Complainants’ assertion that they too acquired title to physical energy – from PJMSettlement by eScheduling their hub IBTs.37 That argument, the Commission found, misinterprets the non-pool nature of IBTs. PJMSettlement is not a counterparty to any IBT, and thus the Commission found that Complainants cannot receive title to physical energy through PJMSettlement.38 In contrast, the Commission stated that “the title transfer for a Tariff-compliant IBT occurs outside of PJM without PJMSettlement ever taking title.”39

The Commission also addressed Complainants’ assertion that the Commission rendered all hub IBTs unreportable by stating in the Complaint Order that “the source of energy cannot be the PJM Interchange Energy Market.”40 The Commission clarified that this statement referred to a specific example, the Western Hub Example IBT, in which the seller in the transaction was specifically identified as a generator.41 The Commission clarified the distinction it made in the Complaint Order between the narrowly defined Western Hub Example IBT, where the seller is specifically identified as a generator, and hub IBTs generally, which the Commission recognizes can either source or sink (but not source and sink) from the PJM Interchange Energy Market.42

Complainants also generally asserted that they are similarly situated to a large number of other Market Participants that enter into IBTs and “rely on the PJM Interchange Energy Market for purchases and do not own any generation and do not serve any load.”43 The Commission rejected these generalized claims, finding that, on the basis of their properly-filed pleadings, Complainants failed to show that they were being treated in an unduly discriminatory manner relative to other IBT parties. The Commission specifically referenced the fact that “while Complainants state that these other market participants do not own generation and do not serve any load, they may have contracted with other market participants with physical obligations for the transfer of physical energy.”44 Further, the Commission rejected Complainants’ argument that they are similarly situated to Market Participants that engage in Tariff-compliant IBTs by virtue of the fact that they are power marketers that import to and export from PJM and can buy and sell power from PJMSettlement. The Commission concluded that neither these factors nor the Complainants’ general ability to physically perform were dispositive of whether their IBTs contemplated the physical transfer of energy.45

Rejecting Complainants’ IBTs Does Not Pose Jurisdictional Issues for FERC

The Commission reiterated in the Rehearing Order that PJM’s characterization of Complainants’ IBTs as “financial swaps” is not determinative of the regulatory status of those transactions for purposes of establishing the Commission’s jurisdiction. Importantly, the Commission found, section 1.7.10 does not prohibit parties from entering into financial IBTs, only from reporting those transactions (as physical IBTs) to PJM for purposes of offsetting deviation charges.46

The Bigger Picture – Lessons From DC Energy

On rehearing, the Commission clarified many of the points it made in the Complaint Order regarding the nature of reportable IBTs in PJM. Of particular relevance to the market, the Rehearing Order stands for the proposition that:

  • A PJM Market Participant is not required to reserve transmission service, or be a generator, LSE or marketer contracting with generation or load in order to enter into a reportable, Tariffcompliant IBT; however, one or more of such characteristics indicate that the underlying transaction contemplates the physical transfer of energy between Market Participants. The transfer of title to energy from buyer to seller also evinces physicality consistent with a Tariffcompliant IBT.
  • In contrast, the fact that a PJM Market Participant is a power marketer that can generally perform physically and can buy and sell power in the PJM Interchange Energy Market is not by itself dispositive of whether that Market Participant’s IBT is Tariff compliant. Further, the fact that an IBT may take the form of an ISDA Master Agreement and Power Annex for the physical delivery of power in PJM does not alone establish the physical nature of that IBT.
  • The Commission makes clear that an IBT entered into by a marketer that contracts with a party with physical obligations (i.e., a generator or LSE) contemplates the physical transfer of energy in satisfaction of section 1.7.10. It is unclear, however, how the Commission would view an IBT in which the marketer does not enjoy privity with an entity with physical obligations. In such a situation, the marketer may need to establish physicality by other means, possibly through counterparty confirmation that either the ultimate source of the transaction is generation or the ultimate sink is load.
  • The underlying agreement and its Tariff-compliant IBT need only source from generation or sink with load, but not both. The Commission recognizes that hub transactions will necessarily source or sink from the PJM Interchange Energy Market, owing to the fact that there is no physical generation or load at a hub. This condition does not, however, render hub IBTs de facto unreportable.
  • Generally, the Commission accords little weight to non-tariff guidance from ISOs/RTOs when there is no apparent (or proven) ambiguity in how the tariff has been interpreted and applied.
  • The Commission does not believe that PJM’s interpretation of non-reportable IBTs as “financial swaps” affects the Commission’s jurisdiction to regulate those transactions. While reportable IBTs must meet the physicality requirement of section 1.7.10, Market Participants remain free to engage in so-called financial IBTs, though such IBTs may not be reported.