On March 30, 2012, the Federal Energy Regulatory Commission (“FERC” or “Commission”) issued an Order on Remand finding that the flow-based cost-allocation methodology used by PJM Interconnection, L.L.C. (“PJM”) is inadequate to determine and allocate costs associated with new high voltage transmission lines.1 Finding that PJM’s current static flow-based model for allocating these costs is unjust and unreasonable, FERC further found that a system-wide “postage stamp” method of cost allocation is a “more credible basis” on which to base rates.2 Importantly, FERC emphasized that its determination is limited to this case, and “should not be construed as preventing PJM and its stakeholders from developing other cost allocation methodologies in response to Order No. 1000 or other relevant stakeholder processes.”3 Indeed, some interested stakeholders in this proceeding and as part of Order No. 1000 compliance are considering a hybrid and other cost allocation methodologies at different voltage levels and under different planning scenarios.
The Order on Remand responds to the decision of the United States Court of Appeals for the Seventh Circuit in Illinois Commerce Commission v. FERC.4 The Court found in Illinois Commerce Commission that FERC had not provided sufficient evidence to justify its prior conclusion that PJM’s existing, flow-based cost-allocation practice for high voltage facilities was unjust and unreasonable, and that FERC had not adequately supported its conclusion that the postage-stamp methodology was just and reasonable. The Court remanded to FERC its earlier set of decisions regarding transmission cost allocation in the PJM region, and tasked FERC with reevaluating the issue of the appropriate methodology to be used by PJM to allocate costs associated with new transmission facilities that will operate at or above 500 kV. The overall proceeding began in 2007 as an investigation of the reasonableness of PJM’s transmission cost allocation.
FERC first evaluated PJM’s flow-based methodology for cost allocation, the distribution factor (“DFAX”) methodology. FERC found that the DFAX methodology, while capable of adequately allocating the costs of below 500 kV facilities, “is not appropriate for determining the allocation of costs for the spectrum of benefits that PJM’s customers receive from high voltage transmission projects when initially installed and over their useful life,”5 because it does not reflect changes in power flows and does not fully reflect the reliability benefits that higher voltage lines provide to network users.6
Having determined that PJM’s reliance on the static DFAX model would be “unjust and unreasonable,” FERC considered a variety of other proposed cost allocation methodologies, and concluded that a postage stamp methodology, under which all transmission service customers in a region pay a uniform rate per unit-of-service, based on the aggregated costs of all covered transmission facilities in the region, would be “just, reasonable, and not unduly discriminatory.”7
FERC rejected the contention that Illinois Commerce required a granular, party-by-party or utilityby- utility cost-benefit analysis. Instead, FERC said, “such a requirement could excessively restrict the Commission’s ability to consider the individual circumstances in, and possible proposals by, the various RTOs and other regions…[T]he correct cost causation principle is whether the planned 500 kV and above facilities will provide sufficient benefits to the entire PJM region to justify a regional allocation of those costs.”8 The benefits provided by higher voltage facilities, FERC said, are sufficiently widely shared across the entire PJM region to justify the postage stamp methodology as a just and reasonable method of cost-allocation.9
Impact on Compliance with Order No. 1000
PJM and its stakeholders are currently in the process of considering how to comply with FERC Order No. 1000, which requires transmission providers to reform their cost allocation procedures.10
Several parties to the proceeding indicated interest in possible hybrid methodologies of costallocation, which would combine the attributes of flow-based modeling and postage-stamp modeling. FERC stated in the Order on Remand that “PJM and its stakeholders are not precluded from considering” other methodologies in response to Order No. 1000.11 Commissioner John R. Norris in a statement said the Order on Remand “should not be viewed as predetermining how PJM and its stakeholders should comply with Order No. 1000,” and that the Order on Remand “is about allocating the costs of transmission facilities prior to compliance with Order No. 1000, and separate proceedings will address how transmission costs will be allocated for transmission facilities subject to that rule.”12