On March 30, 2012, FERC issued an order on remand from the United States Court of Appeals for the Seventh Circuit (“7th Circuit”) regarding the appropriate cost allocation methodology for large transmission projects in the PJM Interconnection, L.L.C. (“PJM”) region.  FERC reaffirmed its decision to approve PJM’s postage stamp rate that socialized the cost of high-voltage projects to the entire RTO. 

In 2009, the 7th Circuit upheld FERC’s decision to implement a license-plate or zonal rate for transmission charges applicable to existing facilities.  However, the 7th Circuit remanded the case back to FERC because the agency did not adequately explain why it approved the pricing of new facilities above 500 kV on a postage stamp basis (rather than a license plate basis). 

The 7th Circuit specifically found “FERC is not authorized to approve a pricing scheme that requires a group of utilities to pay for facilities from which its members derive no benefits, or benefits that are trivial in relation to the costs sought to be shifted to its members.”  The 7th Circuit specifically noted that PJM’s postage stamp rate forced western utilities to pay for upgrades that benefit eastern utilities in the region, and FERC never quantified a cost/benefit analysis for new high-voltage facilities in PJM.  The court further stated that the Commission cannot avoid its duty to compare “costs assessed against a party to the burdens imposed or benefits drawn by that party.”  One particular issue criticized by the 7th Circuit is that FERC approved PJM’s use of a flow-based model (“DFAX model”) to evaluate the benefits of low voltage upgrades, but FERC never explained why that model could not be applied to upgrades above 500 kV.  

In its order on remand, FERC explained that the DFAX model is workable for analyzing lower voltage facilities where there are a small number of constraints in discrete locations.  The DFAX model, FERC explained, is inadequate for assessing the costs and benefits of a high-voltage transmission projects.  This is because DFAX “is unable to identify the causes of multiple constraints, fails to account for the fact that a high voltage upgrade will resolve multiple constraints in multiple areas in addition to the constraint that is the focus of a DFAX analysis, and fails to account for changes in usage and flow direction over time, particularly given the 40 year or longer life span for transmission facilities.”  Also, FERC stated the DFAX model is a “snapshot” that cannot fully analyze the “spectrum of benefits” of a large transmission project over time, nor can DFAX capture the reliability benefits of a new high-voltage transmission project.

Importantly, FERC’s remand order interpreted the 7th Circuit’s decision as not mandating a customer-specific comparison of costs and benefits.  Indeed, the Commission refrained from conducting a cost-benefit analysis of specific PJM zones and found that it would be excessively restrictive to RTO planning processes if regulators required a perfect matching of benefits and costs in a particular zone.  Instead, FERC found “the correct cost causation principle is whether the planned 500 kV and above facilities will provide sufficient benefits to the entire PJM region to justify a regional allocation of those costs.” (Emphasis added).  Accordingly, the Commission determined that PJM’s Regional Transmission Expansion Plan (“RTEP”) adequately identifies system-wide needs for new facilities, and PJM has reasonably shown an economic and engineering basis for applying different cost allocation methodologies to different sized facilities.  FERC noted that PJM’s RTEP for 2011 proposed facilities 500 kV and greater to facilitate the PJM West being more fully integrated into the region. FERC also explained that large high-voltage transmission projects will provide more reliability, reduce congestion costs, and require less operating reserves on a region-wise basis, and thus, a zone-specific cost-benefit approach was unworkable.  As such, the Commission concluded that the postage stamp method (i.e., where costs are allocated region-wide based on load ratios) is a just and reasonable approach to allocating the costs of high voltage projects.

Commissioner LaFleur dissented by stating she supports a hybrid approach and would send the case back to settlement judge proceedings.  LaFleur supports combining the postage stamp rate with useful aspects of the DFAX methodology.  LaFleur stated the Commission’s position of not using the DFAX at all for high-voltage projects is “overbroad.”  LaFleur also reiterated that this PJM order will not prejudge any proposals submitted in compliance with Order No. 1000.

Commissioner Norris released a separate statement and addressed FERC’s legal responsibility to: (1) find a just and reasonable price methodology for cost allocation; and (2) address the 7th Circuit’s remand.  He also reiterated that Order No. 1000 now gives PJM and its stakeholders a clean slate to address regional cost allocation in their Order No. 1000 compliance filings.

A copy of the FERC order is available here.