COST ALLOCATION: Issue 3

FERC responds to Seventh Circuit Decision

Cost allocation policies are currently under review at the FERC thanks to a Seventh Circuit Court of Appeals decision in August of 2009. That decision remanded to FERC the determination of an appropriate cost allocation method for the PJM Interconnection. The PJM Interconnection is an RTO that coordinates the movement of wholesale electricity in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.

The case originated when the Illinois Commerce Commission and other interested parties challenged FERC's 2007 decision to allow the PJM Interconnection to spread or "regionalize" costs for new high-voltage long-distance transmission lines among customers across the interconnection. The contested policy, often referred to as "postage stamp" allocation, allowed utilities building new transmission lines over 500 kV to raise their rates in a uniform amount sufficient to defray the facility costs. This contrasted with the traditional "beneficiary-pays" formula in which costs were assigned to specific load zones based on flow analysis of those areas receiving energy via the new facilities.

The majority of the court sided with the Illinois Commerce Commission and stated that FERC provided an unsubstantiated claim for its position. In its decision, the majority court's ruling did not preclude the option for broad cost allocation, but highlighted that FERC's argument was void of the hard data of the interconnection-wide benefits of new transmission development. The court called for new consideration of the benefits that all utilities in the region might derive from the greater reliability that the larger-capacity transmission facilities might provide the entire network.

"We do not suggest that the Commission has to calculate benefits to the last penny, or for that matter to the last million or ten million or perhaps hundred million dollars… If it cannot quantify the benefits to the Midwestern utilities from new 500 kV lines in the East …, but it has an articulable and plausible reason to believe that the benefits are at least roughly commensurate with those utilities' share of total electricity sales in PJM's region, then fine; the Commission can approve PJM's proposed pricing scheme on that basis." [1] 

Reaction to the ruling was varied, but most analysts agreed on one thing: the ruling did not conclude the debate over the best cost allocation policies for our country going forward. Rather, it merely provided an invitation for FERC to justify its approach, and possibly establish a precedent for all regions to follow.

FERC has done just that. On January 21, 2010, FERC established a paper hearing process and has called on all interested parties to add evidence to justify the postage-stamp cost allocation methodology for new transmission facilities that operate at or above 500 kV.

In a filing before the FERC in early January, the American Wind Energy Association and the Solar Energy Industries Association echoed the WIRES Coalition's filing [see sidebar, previous page] calling for the Commission to provide guidance to regions struggling with different cost allocation methodologies:

The Commission should "institute a rulemaking proceeding . . . which, at a minimum, will provide the industry with nationally applicable principles and guidance to govern the allocation of the costs to ratepayers with respect to all future high-voltage electric transmission expansions and upgrades that are jurisdictional to the Commission." [2] 

FERC's paper hearing process is under way. Interested parties in the PJM interconnection began providing information in late January, and all interested parties will soon have an opportunity to provide comments. FERC has encouraged PJM and the parties to provide studies, methodologies or other evidence to support their positions regarding the allocation of costs.

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