FERC Takes Action on Co-Located Load in PJM

The Federal Energy Regulatory Commission (FERC or Commission) on Feb. 20, 2025, initiated a review of issues associated with the co-location of large loads (such as data centers) at generating facilities in the PJM Interconnection LLC (PJM) capacity market. FERC's inquiry focuses on whether PJM's tariff needs to incorporate rules to create greater clarity around co-located projects while ensuring grid reliability and fair costs to consumers. To that end, FERC issued a "Show Cause" Order pursuant to Section 206 of the Federal Power Act directing PJM and its various transmission owners to either explain why PJM's tariff adequately addresses co-location or, if it fails to do so, identify changes that would remedy any deficiencies.

Notably, FERC consolidated this proceeding with several dockets concerning 1) its Nov. 1, 2024, technical conference on co-located load issues (see Holland & Knight's previous alert, "First Look: FERC Discusses Co-Location of Large Loads," Nov. 7, 2024) and 2) a separate co-location related complaint filed against PJM, as these matters raised common factual and legal issues.

Show Cause Order and Consolidated Proceeding

In its Show Cause Order, FERC invites parties to comment on jurisdictional principles, including when and under what circumstances a co-located load is interconnected to the transmission system in interstate commerce. For example:

• If a co-located load is connected to the interstate transmission system only through the generator, or if it is served by the generator at a transmission-level voltage but using facilities that are not interconnected to the interstate transmission system, does that constitute a transmission interconnection in interstate commerce?
• If the load in a co-location arrangement is allegedly fully isolated, does that constitute an interconnection to the transmission system?
• If a fully isolated co-location arrangement does not constitute an interconnection to the transmission system, what are the characteristics of the fully isolated configuration necessary or sufficient to reach that determination?

Apart from its jurisdictional concerns, the Commission found that PJM's existing tariff appears to be unjust and unreasonable or unduly discriminatory or preferential because it does not contain provisions addressing with sufficient clarity or consistency the rates, terms and conditions of service that apply to co-location arrangements.

FERC was especially concerned that the absence of specific PJM tariff provisions in this arena creates the potential that participants in a co-location arrangement may not be required to pay for wholesale services that they receive. This could violate FERC's "cost causation" principle, which provides that all Commission-jurisdictional rates and charges must reflect to some degree the costs actually caused by the customer who must pay for them and that costs must be allocated in a manner that is at least roughly commensurate with the benefits that the entity receives.

The Commission also raised concerns about the reliability and resource adequacy implications of co-location arrangements. FERC noted that these concerns are not necessarily unique to co-location arrangements and that significant load growth more generally may raise many of the same concerns. The Commission stated that, based on comments submitted in the proceeding, both co-located load and non-co-located load may have similar resource adequacy impacts. However, the speed at which co-located load can be added to the grid may pose particular resource adequacy challenges, especially if co-location arrangements are not adequately and transparently reflected in existing resource adequacy planning mechanisms, such as the PJM capacity market. Additionally, the risk that resource adequacy planning mechanisms would not reflect co-located loads with sufficient forward notice concerned the Commission, given the length of time required to add new generation capacity or upgrade transmission facilities.

Commenters across the now-consolidated proceedings also raised concerns regarding whether PJM's capacity market rules adequately consider the potentially unique physical and operational characteristics of different co-location arrangements and sufficiently provide for their participation in the capacity market in a way that ensures just and reasonable rates. Commenters also asked whether a commitment to provide backup power to co-located load would interfere with the backup resource's capacity obligations.

Next Steps

Within 30 days of the date of FERC's Show Cause Order, PJM and its identified transmission owners must:

• show cause as to why PJM's tariff remains just and reasonable and not unduly discriminatory or preferential without provisions addressing with sufficient clarity or consistency the rates, terms and conditions of service that apply to co-location arrangements, or
• explain what changes to the tariff would remedy the identified concerns if the Commission were to determine that the tariff has in fact become unjust and unreasonable or unduly discriminatory or preferential and, therefore, proceeds to establish a replacement tariff

In responding to these questions, FERC asked PJM and its identified transmission owners to address no fewer than 38 specific questions (Show Cause Order ¶ 88) regarding the impacts of co-location on PJM's transmission service, interconnection procedures and cost allocation, capacity market, reliability, resource adequacy, and ancillary and other wholesale services.

After PJM submits its responses, any interested entities may respond within 30 days of PJM's filing, addressing either or both of the above questions.

In a statement issued along with the Show Cause Order, FERC Chairman Mark Christie confirmed that FERC would like to complete the proceeding expeditiously, stating that the Commission will attempt to issue an order as quickly as feasible after the identified response deadlines.

While the Commission's Show Cause Order is directed to PJM, the outcome of this proceeding may well serve as a template, or at a minimum provide guidance, for addressing similar jurisdictional/load growth/resource adequacy/cost allocation issues in other regulated capacity markets. Because FERC likely will receive a full-throated industry reply to whatever PJM proposes in response to the Show Cause Order, it will be essential for FERC to consider carefully its policy options when deciding how to solve the Rubik's Cube of regulatory issues presented by co-location.

For more information or questions, please contact the authors.

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