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The "Goldilocks" Approach to Transmission Cost Allocation

A transmission tower, photographed from below, looking up at the sky.

Clean­ing up the elec­tric­i­ty grid means build­ing more elec­tric­i­ty trans­mis­sion for clean ener­gy sources – bil­lions of dol­lars and thou­sands of miles more. But large-scale trans­mis­sion projects can be held up over the con­tentious issue of cost allo­ca­tion” – more sim­ply described as who pays for what?” A recent court case from the D.C. Cir­cuit, Long Island Pow­er Author­i­ty v. FERC (“LIPA”), makes clear that the Fed­er­al Ener­gy Reg­u­la­to­ry Com­mis­sion (FERC) has sig­nif­i­cant lat­i­tude when assign­ing trans­mis­sion costs to par­tic­u­lar regions or cus­tomers, and resolves some of the lin­ger­ing uncer­tain­ty from ear­li­er cas­es. It also will fac­tor into FERC’s ongo­ing rule­mak­ing on trans­mis­sion cost allocation.

Too Hot” or Too Cold”

FERC has faced trou­ble in the past on these issues. In three cas­es involv­ing the PJM region (the country’s largest grid region, cov­er­ing the Mid-Atlantic and parts of the Mid­west), courts reject­ed FERC’s approach to trans­mis­sion cost allo­ca­tion. In 2009 and 2013, the 7th Cir­cuit reject­ed pure­ly region­al postage stamp” rates, in which trans­mis­sion costs were spread even­ly across the region. Although the court stat­ed that 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,” it empha­sized that FERC has an oblig­a­tion to compar[e] the costs assessed against a par­ty to the bur­dens imposed or ben­e­fits drawn by that par­ty.” Because the trans­mis­sion projects in ques­tion would pro­vide local ben­e­fits as well as region­al ones, the court found that the postage stamp approach to cost allo­ca­tion was too regional.”

On the oth­er side of the spec­trum, the D.C. Cir­cuit in 2018 reject­edPJM cost allo­ca­tion approach that assigned 100% of costs local­ly – even for high-volt­age projects that result­ed in region­al ben­e­fits. The court found that, where a utility’s cus­tomers would pay the full cost of two projects, but only receive 43% and 47% of their respec­tive ben­e­fits, FERC’s orders produce[d] a severe mis­al­lo­ca­tion of the costs.” The court also specif­i­cal­ly not­ed that FERC had acknowl­edged the sig­nif­i­cant region­al ben­e­fits of high-volt­age trans­mis­sion, but had pro­hib­it­ed region­al cost allo­ca­tion. In short, this approach was too local.”

Just Right”

The com­bi­na­tion of these three cas­es left open the ques­tion of what an accept­able cost allo­ca­tion approach looks like – a ques­tion that the D.C. Cir­cuit has now answered.

In LIPA, two trans­mis­sion own­ers again chal­lenged PJM’s cost allo­ca­tion – this time, a con­test­ed set­tle­ment that assigned costs 50 – 50 among region­al and local ben­e­fi­cia­ries for lines con­nect­ing PJM and New York. Here, the D.C. Cir­cuit indi­cat­ed that FERC had appro­pri­ate­ly bal­anced costs and ben­e­fits – land­ing on the just right” sweet spot. The court indi­cat­ed that FERC had appro­pri­ate­ly placed sig­nif­i­cant weight” on each group of ben­e­fi­cia­ries, and it was not inclined to fur­ther dis­sect the cho­sen approach. The deci­sion has sev­er­al implications:

  • First, a 50 – 50 divi­sion among region­al and local ben­e­fits is not a mag­ic num­ber.” The deci­sion states that a 60 – 40 divi­sion in either direc­tion would like­ly have been approved as well. As long as region­al and local ben­e­fits both receive sig­nif­i­cant weight” for high-volt­age projects, courts are like­ly to defer to FERC if there is a plau­si­ble basis for the pre­cise allocation.
  • Sec­ond, there is no oblig­a­tion for a time-inten­sive assess­ment of the spe­cif­ic ben­e­fits and ben­e­fi­cia­ries of each project, or cat­e­go­ry of projects. Here, FERC used a cost allo­ca­tion approach it had approved in anoth­er con­text based on evi­dence that the trans­mis­sion projects in the set­tle­ment were sim­i­lar. The court clear­ly states that so long as FERC has a basis to believe projects are com­pa­ra­ble, it can approve sim­i­lar cost allo­ca­tion for sim­i­lar trans­mis­sion projects. This is valu­able, because an indi­vid­u­al­ized assess­ment for each trans­mis­sion line (or type of line) can be extra­or­di­nar­i­ly time- and resource-intensive.
  • Third, the case places in ques­tion cur­rent prac­tices that require a sin­gle cus­tomer to pay for all trans­mis­sion costs in cer­tain cir­cum­stances. In par­tic­u­lar, par­tic­i­pant fund­ing” is a prac­tice in some regions that assigns 100% of the cost of trans­mis­sion upgrades to gen­er­a­tors rather than retail cus­tomers, even for high-volt­age ele­ments. Because these approach­es do not place sig­nif­i­cant weight” on any oth­er type of cus­tomer, they may be vul­ner­a­ble to legal challenge.

Lat­er this year, FERC is like­ly to come out with a pro­posed rule – and then a final rule – reform­ing trans­mis­sion cost allo­ca­tion. The LIPA deci­sion pro­vides guid­ance, and empha­sizes the need for costs to be allo­cat­ed rea­son­ably between regions or util­i­ties. The LIPA deci­sion also pro­vides FERC and stake­hold­ers a bet­ter idea of how courts will eval­u­ate trans­mis­sion costs in the future.

* The views expressed here­in do not reflect the offi­cial posi­tion of Amer­i­can Clean Pow­er Association.