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Commissioner Tony Clark Statement
March 21, 2013
Docket No. EL05-121-008
Item No. E-9

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PJM’s Postage Stamp Methodology

"Today, a majority of the Commission reconfirms its decision to uphold a 100% postage stamp cost allocation methodology for high-voltage transmission facilities in the PJM region. Given the record before us, I cannot support this order.

“The benefits used to justify the postage stamp methodology neither drove the development of the new high-voltage transmission facilities nor resulted directly from the new facilities themselves. The order imposes costs across PJM for projects built to resolve Eastern reliability issues on the theoretical basis of potential shifts in power flows and the claim of general system benefits. While these lines do provide secondary benefits, such as congestion savings, the predominantly west-to-east power flows in PJM make it highly likely that these benefits will accrue to Eastern load centers, not Midwestern. Also, while the entire PJM region benefits from region-wide planning and system operations, as recognized in today’s order, these are generic benefits that are a product of PJM membership. The benefits cited are not specifically the product of the projects at issue here. Given the fact pattern in this proceeding, I would have established an evidentiary hearing procedure to determine a just and reasonable and not unduly burdensome cost allocation methodology to replace PJM’s static flow-based methodology, as discussed below.

Procedural History

“In 2009, the United States Court of Appeals for the Seventh Circuit granted the petition for review of the Commission’s decision in Opinion No. 494 to adopt a postage stamp methodology for allocating the cost of new transmission facilities operating at 500 kV and above. After remand from the Seventh Circuit, the Commission issued the Order on Remand upholding a 100% postage stamp cost allocation methodology. Today, the Order on Rehearing focuses on opposing parties’ responses to the Commission’s decision in the Order on Remand. The instant order marks the first time I have participated in this proceeding.

“The court provides us with a straightforward task: make a reasoned decision based upon substantial evidence. The Seventh Circuit stated that “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 court required us to compare the “costs assessed against a party to the burdens imposed or benefits drawn by that party.” However, even if we could not quantify the benefits to the Midwestern utilities from new 500 kV lines in the East, but had a plausible reason to believe that the benefits are at least roughly commensurate with those utilities' share of total electricity sales in PJM's region, the Seventh Circuit gave the Commission latitude to approve the proposed pricing scheme on that basis.

“Even given this latitude, I do not believe there is sufficient evidence or reasoning in the record to find that benefits for utilities in the Midwest are even roughly commensurate to the costs incurred under the postage stamp methodology. Inasmuch as this is the case, I believe the Commission’s decision has largely ignored the court’s clear directive.

Postage Stamp Transmission Facilities

“Let us first consider PJM’s planning process and the above 500 kV facilities at issue in this proceeding. PJM’s 100% postage stamp cost allocation methodology was in effect from June 20, 2006 to February 1, 2013. Within that time, several high-voltage facilities and necessary lower-voltage facilities were approved through PJM’s Reliability Transmission Expansion Plan (RTEP) process.

“PJM’s RTEP ensures system reliability and adherence to North American Electric Reliability Corporation (NERC) standards. In its RTEP, PJM analyzes grid system dynamics on a region-wide basis to ensure that the integrated grid is in compliance with NERC standards over a five-year near-term horizon and 15-year long-term horizon. The two largest projects to come out of the RTEP process in recent years are the Susquehanna-Roseland 500 kV line and the 502 Junction – Loudoun [Trans-Allegheny Interstate Line (TrAIL)]. According to PJM’s April 13, 2010 response to the Commission’s January 21, 2010 Order establishing paper hearing procedures, the Susquehanna-Roseland and TrAIL lines cost approximately $1,161 million and $1,117 million, respectively.

“The Susquehanna-Roseland 500 kV line has an expected in-service date of June 1, 2015. As approved in PJM’s 2007 RTEP, the Susquehanna-Roseland line would extend from northeastern Pennsylvania to Roseland, New Jersey. PJM approved the addition of the Susquehanna – Roseland 500 kV line because it “reduces northern New Jersey overloads to a point that future overloads are not expected until at least 2016.” According to PJM’s estimate in this proceeding, Commonwealth Edison (ComEd), an Illinois utility, would only have been responsible for 0.28%, or $3.25 million of the total cost of the Susquehanna-Roseland line under the flow-based DFAX methodology. Under the 100% postage stamp methodology, however, the costs allocated to ComEd increase fiftyfold, saddling ComEd customers with over $168 million in costs for Susquehanna-Roseland, a transmission facility built for the sole purpose of alleviating transmission constraints in an area more than 500 miles away from Illinois.

“The 500 kV TrAIL transmission facility was placed in service on May 23, 2011. According to PJM’s 2011 RTEP, TrAIL improves reliability into such congested areas as Washington, D.C., Baltimore and northern Virginia. It was built in three segments, connecting substations in southwestern Pennsylvania, northern West Virginia and northern Virginia. According to the 2006 RTEP, TrAIL relieves expected overloads on 500 kV circuits in West Virginia, Virginia, and Maryland. In its decision to approve the TrAIL facility, PJM stated that “[g]rowing west-to east power transfers to serve eastern load centers have been identified as a major driver of the generator deliverability-based overloads now observed on these circuits.” Not surprisingly, if ComEd’s costs would have been allocated according to the flow-based DFAX methodology, ComEd would not be responsible for any of the costs associated with the TrAIL enhancement. In comparison, a 100% postage stamp cost allocation forces ComEd to pay an estimated $162 million for a line that has been built to resolve anticipated reliability violations caused by power demands in the East.

“Susquehanna-Roseland and TrAIL are just two examples of the many Eastern-driven projects that will be paid for by consumers who appear to share little of the benefits. These backbone transmission facilities were approved to resolve specific anticipated reliability violations in the East, not to increase the general system-wide benefits discussed in the Order on Remand or the Order on Rehearing.

System-wide Benefits

“Upon review, I conclude that even a roughly commensurate standard cannot be satisfied by the system-wide benefits described in this proceeding. The Order on Remand used PJM’s estimates from a generic 2011 ISO/RTO Metric Report to conclude that planning and operating a reliable transmission system produces as much as $2.2 billion in annual savings for the region. The order claimed the “benefits” created by planning and operating a reliable transmission system include: (1) using redispatch procedures to maintain reliability rather than power sales curtailments; (2) planning for future reliability needs on a region-wide rather than a utility-by-utility or state-by-state basis; (3) reducing reserve requirements and increasing demand response; and (4) reducing production costs, operating reserve costs and ancillary services costs. The Order on Remand characterized these annual savings as benefits in order to conclude that ComEd benefited from the transmission facilities by $225 million to $325 million.

“While I agree with the Order on Rehearing that each of the transmission facilities that operate at or above 500 kV is part of an interconnected transmission network, I disagree that planning and operating on a regional basis can be used to justify a 100% postage stamp cost allocation. The benefits comprising the $2.2 billion in the preceding paragraph are not actually benefits provided by the high voltage facilities at issue in this proceeding; they are the benefits utilities receive by virtue of their membership in the PJM RTO.

“For instance, the Order on Remand states that planning for future reliability needs on a region-wide basis results in an estimated $390 million in annual savings. The analysis in the Order on Remand then characterizes this $390 million as benefits to the region and applies them, in part, to ComEd. However, PJM’s region-wide planning through the RTEP resulted in the development of high-voltage backbone facilities in the East, not projects in the Midwest. I am unable to see how this results in a roughly commensurate benefit to the Midwest. Similarly, while I agree that operating the transmission system on a regional basis provides system-wide benefits, these benefits did not lead to the development of projects like TrAIL and Susquehanna-Roseland, nor do these projects directly lead to greater operational efficiency for utilities hundreds of miles to the west. Put simply, using membership in an RTO as a basis for allocating the costs of high voltage transmission on a pro-rata basis does not fit the circumstances at play here. Effectively, this rationale ignores the court’s mandate to engage in some weighing of the benefits and burdens of the actual projects.

“The Order on Remand also recognizes that the development of backbone projects results in expected congestion savings, reduced outages, reduced operating reserve requirements, and reduced losses. However, the direct beneficiaries in these instances are the entities closest to the transmission projects, not those located hundreds of miles away. That is, avoiding overloads in northern New Jersey reduces outages first and foremost for those living in New Jersey. Along these same lines, congestion savings from projects like TrAIL are most beneficial to utilities in Maryland, Virginia, and New Jersey.

“The Order on Rehearing makes the point that, without the addition of new transmission facilities that operate at or above 500 kV, the integrity of the transmission system would deteriorate, and the benefits of the integrated system would be reduced. I agree. A comprehensive planning process such as PJM’s RTEP provides the region with protection against future reliability violations and maintains the integrity of the transmission system. However, this would be the case regardless of the cost allocation mechanism. As PJM explains in its most recent RTEP, “[i]f violations of NERC Reliability Standards are identified, PJM is obligated to develop and implement solutions to mitigate them.” In addition, PJM recognizes that it is a federally-approved RTO “charged with ensuring the safety, reliability and security of the bulk electric power system.” Thus, with expected reliability violations on the horizon, PJM is obligated to develop solutions to prevent or mitigate these system concerns. 100% postage stamp cost allocation is not necessary for these facilities to be built. What is necessary, however, is for the Commission to offer some valid justification for how costs and benefits are allocated in a roughly commensurate manner to the users of the system, and that is where the order’s analysis falls short.

“In many instances, the order’s justification for a postage stamp cost allocation methodology turns to a claim that flows on transmission facilities operating at or above 500 kV can change over time. This reasoning supposes that theoretically power flows could shift and become predominantly east-to-west, thereby benefiting utilities like ComEd in a manner roughly commensurate with the hundreds of millions they will pay under the postage stamp methodology. The record, however, shows no concrete evidence that power flows are going to shift west or that the new transmission facilities would provide direct benefits to the Midwest under such circumstances. I see no basis for saddling ComEd’s (or any other Midwestern utility’s) customers with costs for transmission projects meant to resolve potential reliability violations hundreds of miles to the East, and for which the Midwestern utilities will see only trivial benefits, on a theory of potentially shifting power flows. Costs need to be allocated in a manner roughly commensurate with actual, not theoretical, benefits.

A Just and Reasonable Cost Allocation Methodology

“When acting under section 206 of the Federal Power Act, in order to change an existing cost allocation methodology, the Commission must show that the existing cost allocation of a utility is unjust and unreasonable and then must establish a new just and reasonable cost allocation as a replacement.

“To meet the first prong of its section 206 burden, the Commission concluded that PJM’s use of a static, flow-based model for allocating the costs of new transmission facilities that operate at or above 500 kV was unjust and unreasonable and unduly discriminatory. I generally agree with this conclusion and find that PJM’s static DFAX methodology did not adequately recognize changes in the system throughout time. Nonetheless, the static DFAX methodology did have one advantage over the postage stamp methodology upheld in today’s order—it provided PJM with an objective and quantifiable basis for attributing costs to utilities that caused anticipated reliability violations. In doing so, PJM’s static DFAX methodology established a direct link between who pays for a facility and who causes the need for that facility.

“While the Commission has adequately demonstrated that the existing DFAX methodology is unjust and unreasonable, today’s order fails to establish a just and reasonable replacement for the static DFAX model and thus does not meet its burden under the second prong of section 206 of the FPA. After applying the Seventh Circuit’s evaluation criteria by comparing the costs assessed against the parties in this proceeding to the burdens imposed or benefits drawn by these parties, I conclude that a 100% postage stamp cost allocation methodology has not been shown to be just and reasonable for all utilities in the PJM region.

“First, a 100% postage stamp methodology does not account for the burdens imposed by the parties on the transmission grid. The Midwestern utilities are not the parties burdening the grid with anticipated reliability violations and are not driving the need for the transmission facilities at issue in this proceeding. Despite this fact, the postage stamp cost allocation methodology in PJM applies costs on a pro-rata basis, even though some utilities in PJM are far-removed from the reliability drivers in the East. Moreover, the predominantly west-to-east power flows in PJM make it highly unlikely that Midwestern utilities will rely on power from the new facilities in an amount equal to their load ratio share.

“Second, it is clear that the benefits drawn by Midwestern utilities are trivial compared to the costs they are allocated under a 100% postage stamp methodology. As demonstrated above, the system-wide “benefits” used as evidence in the order are either not directly provided to Midwestern utilities or are not directly applicable to the new high voltage facilities in this proceeding. Thus, these purported benefits do not provide a sufficient foundation to meet the roughly commensurate standard.

“However, this is not to say that a 100% postage stamp methodology is necessarily unjust and unreasonable in all circumstances. The Midwest Independent Transmission System Operator, Inc. (MISO) applies such a methodology to its Multi-Value Projects. MISO’s Tariff, however, explicitly provides that a Multi-Value Project must be evaluated as part of a portfolio of projects whose benefits are spread broadly across the footprint. In contrast, PJM did not approve the instant projects through such a process and thus did not ensure regional benefits. Additionally, PJM’s RTEP plans from 2006 to date did not include any backbone transmission facilities in the Midwest that would balance out the disparity of having Midwestern utilities pay for projects built to resolve potential reliability issues in the East.

“While I understand the need to bring this proceeding to a close and establish finality for participants, I must balance this need with the Commission’s obligation to ensure just and reasonable rates. I cannot rationalize why Midwestern utilities should be responsible for hundreds of millions of dollars in costs for facilities built to resolve potential reliability violations caused by other utilities. The Commission's position seems to be: a high voltage line built anywhere in PJM is necessarily an equal benefit to every consumer everywhere in PJM. Given the overwhelming weight of evidence to the contrary, I cannot support this conclusion.

“The Commission should have taken a different direction supported by a record. The static DFAX model may not be ideal, but it should not be replaced by another unjust and unreasonable methodology. The Commission should have established hearing and settlement judge procedures to allow parties an opportunity to build a record by which they could determine a suitable alternative to the static DFAX. One alternative could have been a Solution-Based DFAX. A Solution-Based DFAX is updated annually and would eliminate the Commission’s major concern about the static DFAX model. Another approach could have been a hybrid methodology, which the Commission has approved as the cost allocation methodology going forward. Either of these approaches would have been preferable to the imposition of a 100% postage stamp cost allocation on consumers that may never directly benefit from the projects they are now forced to fund.

“For these reasons, I respectfully dissent from this"

Commissioner Tony Clark

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Updated: June 10, 2013