E-1: Commissioner Chang’s Concurrence on PJM Co-Location

In today’s order, the Commission addresses the rates, terms, and conditions through which Co-Located Loads may take service from the PJM Interconnection, L.L.C. (PJM) system.  I write separately to address certain aspects of the Commission’s proposed replacement rate and highlight the importance of developing a minimum charge for the new transmission services we establish today.

Today’s Order

Due to significant delays in PJM’s ability to interconnect new generation and load, large loads, including data centers, have preferred co-location arrangements to expedite their access to the PJM system.  As today’s order discusses, PJM’s current tariff does not provide adequate clarity for the rules governing co-location arrangements.  With today’s action, the Commission is providing guidance on how loads and generators may co-locate, including the development of new transmission services that recognize their ability to limit their energy withdrawals from the transmission system.  The responsibility for setting these rules sits with the Commission.  As we work together to address this issue, we must continue to keep protection of other customers from unnecessary risks and costs at the forefront of our decision making.  

Today’s order represents the first step to developing a package of solutions to address co-location in the PJM footprint.  Specifically, by recognizing that controllable Co-Located Loads might use less service from the transmission system than traditional loads in front of the meter, the order’s revised transmission service framework may reduce the number of, and costs associated with, future transmission upgrades.  The order also helps to clarify how new generation resources may connect to the system on a provisional basis to serve Co-Located Loads.

Designing this new co-location framework highlights an essential component of the overall package: how we protect other customers from adverse reliability impacts and unjustified cost shifts.  The Commission will ultimately resolve the rates, terms, and conditions of these new services following the paper hearing and compliance processes we direct today.  As we consider the record, we will assess how those rates, terms, and conditions facilitate the efficient interconnection of Co-Located Loads, control transmission costs needed to serve them, and protect other customers against unjustified cost shifts. 

Need for a Minimum Charge

One aspect of the paper hearing is particularly essential to protecting customers against transmission cost shifts under the new framework established through today’s order: the need to establish a minimum charge for the Firm and Non-Firm Contract Demand transmission services.  

The order proposes to establish these two new transmission services for use where the Co-Located Loads can electrically control the amount of energy that they will receive from the PJM system.  As the order explains, all Co-Located Loads are synchronized to the PJM transmission system through their generators.  All generators, and as relevant here, all generators that are part of Co-Located Arrangements, rely on the PJM transmission system to operate.  Without the PJM grid, Co-Located Loads and their associated generators would be islanded.  In today’s order, neither of the newly developed Contract Demand transmission services requires Co-Located Loads to take any specific quantity of transmission service.  In particular, the order contemplates that, under the new Contract Demand transmission services, if the Co-Located Load takes no service, it would pay only for black start and regulation service.[1]  Because the charges for those services only account for the provision of those discrete ancillary services, they do not contribute to the actual cost of building, operating, or maintaining the grid, or the Co-Located Load’s explicit reliance on the PJM system.  Black start and regulation service charges are nearly inconsequential.[2]  Thus, just paying black start and regulation service charges does not constitute the Co-Located Loads paying for their “fair share” of the cost of maintaining and operating the transmission system.  Furthermore, under such a scenario, a Co-Located Load would not pay for a portion of PJM’s administrative costs, which are typically included in transmission service rates, even though the Co-Located Load benefits from services provided by PJM. 

As a result, absent developing rates that explicitly charge the Co-Located Loads for their synchronization to and reliance on the PJM system, it is possible that a Co-Located Load would not contribute to the costs of operating and maintaining the system.  Similarly, if a Co-Located Load takes a de minimis amount of Firm or Non-Firm Contract Demand service, it would pay only a minimal amount of system costs.  Such scenarios would fail to recognize the benefits Co-Located Loads receive from the grid and risk shifting system costs to other customers.  Simply put, Co-Located Loads electrically connected to the grid (through a co-located generator) benefit from the system and should cover their costs.  This is a foundational cost causation principle that the Commission must uphold. 

In the paper hearing established in today’s order, the Commission seeks comments on whether the rates, terms, and conditions for these two new transmission services should reflect a minimum charge that recognizes that, without the transmission system, the Co-Located Load and generators could not operate as envisioned.  The paper hearing also seeks briefing on how such a charge should be determined[3] and whether PJM administrative services charges should be applied to the new services.[4]  To ensure the Commission has a full and complete record on this issue, I encourage commenters to address the following points and questions in their responses to the paper hearing.

First, a just and reasonable replacement rate for the new transmission services should reflect some form of minimum transmission service charge, which would protect other customers against cost shifts resulting from Co-Located Loads that rely upon the transmission system but do not directly or meaningfully contribute to its costs via transmission service payments.  This minimum charge would provide a floor to the Co-Located Load’s cost responsibilities to pay for a portion of system costs, commensurate with the benefits that the Co-Located Load receives from the system, even where it plans to draw little or no energy from that system.  I welcome comments on the need for such a minimum charge, including, but not limited to: (1) whether a Co-Located Load that is synchronized to the grid but does not meaningfully contribute to transmission system costs violates cost causation principles; and (2) whether such minimum charge is necessary for those that choose to take either the Firm and Non-Firm Contract Demand transmission service.

Second, I welcome comments on both the rate design and the specific costs to be included in such a minimum charge.  For instance, given that all Co-Located Loads rely on the existence of the PJM grid and are synchronized to it, such loads should pay for at least their fair share of the system’s operations and maintenance costs.  In addition, I welcome comments as to whether Co-Located Loads should bear responsibility for some portion of the capital investments required to ensure the transmission grid continues to reliably serve all customers, and if so, the specific calculation of such charges.

Next Steps and Open Issues

While today’s order is consequential, it is important that we place it in the proper context: it addresses a significant but discrete issue in PJM, and sets out services and guidance for a commercial model that may only be viable in a limited number of states where the co-located generator is eligible under state law to serve Co-Located Load.  For states where retail loads must be served by the local electric utility, the model contemplated in this order may not apply, and thus it does not necessarily provide a replicable approach for large loads generally.  Therefore, the broader challenge of reliably, efficiently, and fairly interconnecting large loads and the generation needed to serve them remains before the Commission, the states, and industry. 

Further, today’s order does not address the broader reliability challenges impacting the PJM footprint and its customers.  While the order directs PJM to clarify options that exist under its current tariff, it does not address the clogged interconnection queue that has driven the interest in co-location in the first place as a way to expedite large loads’ access to the grid.  Solving this foundational problem will require a durable fix to the interconnection process that helps resources interconnect at a much more efficient pace.  As part of solving this problem, PJM must ensure that the transmission system is built to adequately support the interconnection of new, needed generation.  I have a strong preference for durable reforms over one-off fixes.[5]  Sound investments are driven by good data, comprehensive planning, and disciplined operations.  The Commission, states, grid planners and operators, and utilities must balance near-term pressures and incentives with delivering long-term value to the customers we serve.  Beyond this proceeding, I am concerned about PJM’s ability to procure sufficient resources to reliably serve both new and existing load.  PJM’s resource adequacy construct must deliver clear price signals while being mindful of ratepayer costs. 

As we consider further reforms, the Commission’s core regulatory principles – most notably open access to the transmission system (including through an efficient interconnection process) – remain the foundation for addressing load growth and related challenges.  While reform to existing approaches is likely needed, customers – particularly captive ones – must not bear the cost of a data center-driven infrastructure buildout, and the risks and costs associated with this buildout must not be shifted to small businesses and residential customers.

Conclusion

Following the paper hearing and compliance process, the Commission will determine the just and reasonable replacement rates.  This process will consider comments regarding the design of these new transmission services, and how to ensure that other customers are protected against unnecessary risks and costs.  As we establish new transmission services, it cannot come at the expense of other ratepayers.  I look forward to reviewing the record developed in response to today’s order while the Commission, the states, PJM, and others work to address the broader reliability and interconnection challenges facing the region.

For these reasons, I respectfully concur.