On October 23, 2009, the Federal Energy Regulatory Commission (“FERC” or the “Commission) approved an interim Midwest Independent Transmission System Operator, Inc. (“Midwest ISO”) Open Access Transmission, Energy and Operating Reserve Markets Tariff (“Tariff”) amendment to revise the method for allocating the cost of network upgrades for generation interconnection projects that meet the Midwest ISO’s regional expansion criteria and benefits standards (“RECB”).  The Tariff will now require that generators pay all interconnection costs to lines smaller than 345 kV and 90 percent of network upgrades for lines that are 345 kV or greater.  The remaining 10 percent will be recovered system-wide.

 Prior to this order, generators were allowed to recoup up to half of any system upgrade if the new power benefited the Midwest ISO’s grid as part of the RECB cost allocation methodology.  However, in August 2008 the Midwest ISO’s Informational Filing showed that many stakeholders were dissatisfied with this cost allocation methodology.  In particular, Otter Tail Power Company (“Otter Tail”) and Montana-Dakota Utilities Company (“MDU”), two transmission owners within the Midwest ISO, threatened to leave if the pricing structure was not changed.  Both Otter Tail and MDU, along with other small transmission owners, felt that it was unfair that their ratepayers would be faced with paying a substantial share of costs for electricity that will primarily serve load outside of their pricing zones.  If both Otter Trial and MDU withdrew, then the remaining transmission owners would be faced with rising costs, making it more likely that many more transmission owners would withdraw too. 

 FERC recognized in its order that the cost allocation problem is one of the more contentious issues currently facing the Midwest ISO.  Some regions, such as the PJM Interconnection LLC and the New York ISO require that a developer pay most of the associated costs with network upgrades.  In other regions, such as the Southwest Power Pool Inc. and the California ISO, network upgrade costs are spread broadly.  For the Midwest ISO, the cost allocation problem is particularly sensitive because of the numerous wind projects that have been proposed in distant, rural areas such as in Iowa and the Dakotas.

 Independent generators claimed that FERC’s order violates FERC’s previously established policy of letting new transmission costs be spread across the region, so long as the entire region benefits from the new transmission project.  FERC however, noted that it would provide grid operators a sizeable amount of flexibility for interim solutions to cost allocation problems while long-term solutions are being developed.  Additionally, FERC decided that the interim cost allocation method should apply to all of the Midwest ISO and not just Otter Trail and MDU’s zones, as some had suggested. 

 FERC attempted to mitigate some of the concerns of independent generators by emphasizing that the pricing structure is only temporary.  While FERC refused to set a sunset provision on this new cost methodology, it did condition its order on the filing of new tariff sheets by July 15, 2009 to facilitate a Phase II cost allocation methodology to be implemented.  Additionally, FERC directed parties to submit informational reports on November 20, 2009, February 26, 2010, and May 28, 2010 on the status of Phase II.  While FERC did not provide specific guidance for what should be included in any Phase II filing, it did note that it has consistently tried to balance entities that cause needed upgrades and entities that benefit from the upgrade. 

 FERC’s full order is available at www.ferc.gov under Docket No. ER09-1431.