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Every Last Penny

Transmission cost allocation, the worth of the grid, and the limits of ratemaking.

Fortnightly Magazine - August 2010

And so while FERC still appears to favor transmission cost allocation with the widest possible geographic reach, the 7th Circuit case, involving 18 specific high-voltage grid projects planned by PJM, likely offers the worst possible test case for seeking court approval. That means FERC must somehow appease Judge Posner to save its skin, yet preserve enough wiggle room to OK MISO’s proposal at a later date.

FERC could choose to give ground in the PJM case, adopting perhaps partial use of a more prosaic bean-counting method, as the Pennsylvania Consumer Advocate in fact recommends in the remand case. Yet even a strict flow-based allocation is not free of baggage, as this column will attest.

Dayton Power sums it all up: “FERC,” it states, “has an exceptionally difficult task to perform in this proceeding.”

Taking a Snapshot

The notion that grid-cost socialization in PJM could shift over $2 billion in costs from eastern to western RTO members stems from studies that PJM conducted earlier this year, on instructions from FERC, to illustrate hypothetically how a postage-stamp allocation for EHV transmission projects would differ if PJM instead would employ its “beneficiary pays” allocation method ( e.g., the DFAX model), which otherwise applies only to grid projects below 500 kV.

The PJM study showed that while the choice of method would make little cost difference for some utilities ( e.g., Dominion and Allegheny, for example), others would come out either winners or losers under socialization, in some cases by ratios greater than 100 to 1. (See, Response of PJM, p. 17, Docket EL05-121, filed Apr. 13, 2010.)

Eyeing such numbers, Exelon’s v.p for federal regulatory affairs, Karen Hill, noted that if FERC recanted on socialization, switched instead to a strict “beneficiary pays” principle based on the DFAX model, then “western zones of PJM would be allocated approximately $2.4 billion less and eastern zones approximately $2.4 billion more for RTEP projects 500 kV and above at issue in this proceeding.” (Exelon Comments, Doket EL05-121, p. 3.)

Nevertheless, the DFAX model as applied to high-voltage lines remains highly contentious.

Simply put, DFAX identifies what loads in which local utility transmission zones are flowing over a grid facility that is constrained beyond what reliability allows. Or, as described more fully by PJM, DFAX is a computer model used in conjunction with the RTO’s annual regional transmission plan (RTEP), to calculate individual relative percentage distribution factors that “express the portions of a transfer of energy from a defined source to a defined sink that will flow across a particular transmission facility or group of facilities.”

As explained by Steven Naumann, Exelon’s v.p. of wholesale market development, DFAX “identifies the loads that cause the costs of the reliability upgrades to be incurred. Since PJM must operate in a manner that is not in violation of NERC [standards], these loads would have to be curtailed if the reliability upgrades were not installed. These loads are by definition the beneficiaries of the reliability upgrades. (Exelon comments, Affidavit at p. 8.)

However, others point out, such as FERC supporters BG&E, PEPCO,