Allocating Transmission Line Costs

Case Study of:

ICC v. FERC 576 F.3d 470Presented 11/29/09

by: Daniel Hergottemail: drhergott@gmail.com

ICC v. FERC Presentation Overview

1. The Problem

2. FERC Ruling

3. 7th Circuit Majority Holding

4. 7th Circuit Dissent

5. Consequence and Remaining Questions

Relief on Chicago sub station across from the Daley Center built in the1930’s during WPA

• U.S. electric grid is old and needs to be updated

• But to what end?

DOE Map showing Mid-Atlantic Area Congestion Corridor

1. The General Problem: We Need More Transmission Lines

Transmission Line Challenges

• Mitigating Environmental Impact– Wide right of ways– Aesthetics

• Siting– Physical Geography– Easements– Local opposition

• Coordinating– State & Local Agencies– RTO Members

• And . . .

Expensive to Build – Who Pays?

• How should the pay structure be designed?

• What role do regulators play in rate design?

• How do we regulate the regulators?

The Specific Problem: PJM’s “Project Mountaineer”

“Project Mountaineer”

• 550 to 900 miles of 500 kV and 765 kV transmission lines (all in the East)

• Cost: $3.3 to $3.9 billion

• Who should pay?

License Plate Rate Design

• Utilities in the sub-regional zone

• Utilities that benefit from the new transmission

Transmission lines are paid by:

According to PJM:

“Although a large number ($3.3 to $3.9 billion), if such costs are spread to all customers within the PJM footprint, the cost to a typical retail customer would amount to only one mill/kwh.”

-- Karl V. Pfirrmann, president of the PJM Western Region*

Postage Stamp Rate

• Costs are rolled-in and allocated to all customers according to each customer's share of the region's load

“Project Mountaineer” “Super-highway” to Bring Low Cost Coal Resources to Market

• “PJM[‘s] new initiative [utilizes the] regional transmission planning process to . . . develop an efficient transmission “super-highway” to bring low cost coal resources to market.”

-- Karl V. Pfirrmann, president of the PJM Western Region*

How Much Does Chicago Benefit From “Project Mountaineer”?

• New Market For Energy Sales

• Increased Reliability in the PJM Network

• Cost Sharing for All Lines Above 500 kV

2. FERC’s Ruling:PJM Interconnection, L.L.C., 119 F.E.R.C. ¶ 61,063 (2007)

• Cost allocation is not an exact science

• It involves judgment of a myriad of facts

• We all benefit from a more reliable grid

• 500 kV and above transmission creates sufficiently broad benefits

J. Wellinghoff, FERC Chairman

FERC’s Rate Plan:

New facilities at or above 500kV:

• Region-wide Postage Stamp Rate

New facilities below 500 kV: • License Plate Rate Design

FERC’s Policy Goals:

• Encourage the development of “backbone” infrastructure

• Provide cost certainty to support new investment

• Eliminate recurring litigation over cost allocation

• Provide incentives to construct new transmission

3. ICC Takes its Complaint to the 7th Circuit

“Not so fast Wellinghoff!”

J. Posner of the 7th Cir.

Federal Power Act 16 USCS § 824e(a):

Whenever the Commission . . . shall find that any rate . . . is unjust, unreasonable, unduly discriminatory or preferential . . . the Commission shall determine the just and reasonable rate.

Power of Commission to fix rates and charges:

7th Circuit Holding:Remanded

• “[Under the APA] our review is deferential, we require only that the agency have made a reasoned decision based upon substantial evidence in the record.”

• “Not even the roughest estimate of likely benefits to the objecting utilities is presented.”

• “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.”

Calculating Benefit

• The Commission has a duty to: – Compare the costs assessed against a party to the

burdens imposed or benefits drawn by that party

• If it cannot quantify the benefits:– But has articulable and plausible reasons to believe that

the benefits are at least roughly commensurate with those utilities’ share of total electricity sales, then fine;

– But FERC cannot avoid comparing the costs and benefits

4. Dissent: J. Cudahy

• FERC did not explain how PJM’s members benefit from a reliable network because no court has ever required it to do so.

• Upgrades to the grids reliability were presumed to benefit all of the network’s members.

Big Picture

• U.S. grid is inadequate and urgently needs to be upgraded

• Grid was not built for long-distance transmission

• Demand for renewable energy poses additional transmission challenges

• Long-distance transmission is accomplished most efficiently by the highest levels of voltage—500 kV and above

Electricity Grid Needs a “Backbone”

R. Nader, Presidential Candidate

U.S. Power Grid

Dissent’s Final 2 Points

• FERC isin a better position to improve a deficient transmission grid than this court

• “Explanations come to an end somewhere” – L. Wittgenstein

L. Wittgenstein

5. Consequence and Remaining Questions

• How would the Supreme Court rule?

• Who is in the best position to improve the electric grid?

• How should it be improved?– Renewable Energy– Smart Grid (efficiency and conservation)– Cost/Benefit Analysis

C.J. Roberts May Know• Grant Cert?

• Circuit Split?

• How do we regulate the regulators (Chevron Analysis)?

• “There is no neutral or inherently fair allocation of fixed costs, as the history of rate design amply demonstrates.” J. Roberts D.C. Circuit*

C.J. Roberts

Chevron 2-Step

1. Ambiguity: Has Congress directly addressed the question at issue?

2. Reasonable: Is the agency's action based on a permissible construction of the statute?

Administrative Law is not for SISSIES!

Nino is WRONG.

I DON’T MAKE PREDICTIONS!

Who Is In the Best Position to Improve the Electric Grid?

• FERC:– Expertise– Promote Renewable

Energy– Develop Smart Grid

• Courts:– Incremental Change– Protect Regional Concerns

• Congress:– Address National Issues– Set Clear Policy Goals– Democratic Accountability

How Should the Grid Be Improved?

• Bigger is Not Necessarily Smarter– Distribution Improvements– Decentralize– Environmental Impact

• Renewable Energy– State Renewable Portfolio Standards– Long-Distance Transmission

• Cost/Benefit Analysis – Carbon Tax– Economic Benefits– Follow the Money

Goals for a BRIGHT FUTURE

• Reduce GHG’s

• Reduce Reliance on Fossil Fuels

• Improve Grid Reliability, Energy Efficiency, and the Economy