If you want a summary of why the Cheney/FERC “postage stamp” cost recovery scheme for new high voltage transmission lines is illegal, you have no further to look than Dayton Power & Light’s recent request for rehearing filed at FERC.
I am going to quote a couple of pages in their entirety, plus one footnote, because this says it all:
“A billion here and a billion there and pretty soon you are talking about real money.” This quote, never verified but generally attributed to the late Everett Dirksen, Senator from Illinois, is particularly applicable to this case where the Commission, for the second time, hasruled in favor of an allocation mechanism that would assign $1 billion to Commonwealth Edison Company (“ComEd”) in Illinois and more than $1 billion to the utilities operating in Ohio as their contribution to $6.6 billion in new 500 kV transmission facilities, all of which have been constructed or are planned for construction to solve reliability problems of other utilities operating hundreds of miles to the east. The costs currently at issue are expected to continue rising as more eastern projects and costs get added year by year. There are no comparable reliability problems in Illinois or Ohio, where the transmission system is already strong and reliable and economic and population growth has been slower. There are no planned large new reliability projects in Illinois or Ohio where costs would be allocated to the eastern states.
When evidentiary submissions were made in this proceeding in May and June 2010, the amount at issue for Dayton Power was approximately $162.6 million. With an updated allocator as used in the Order on Remand, the amount is approximately $147 million, or about $28.1 million if converted to an annual charge. Dayton Power‘s current transmission revenue requirement is $40.1 million annually.6 So, this order would increase Dayton Power‘s annual transmission revenue requirement by 70%. To Dayton Power and its customers, that‘s “real money.”
The record evidence does not support a finding that Dayton Power receives any benefit from the new transmission facilities that create these costs, much less annual benefits as required by the Seventh Circuit that “are roughly commensurate” to $28 million in annual costs. Dayton Power respectfully offers the following simplistic yet accurate description of the $6.6 billion in constructed and planned transmission facilities: They are too far away from us to help us. Under almost any planning scenario, most of them don‘t even have a measurable effect on the flows on our system.
For the reasons explained in detail herein, the Order on Remand: 1) violates the mandate of the Seventh Circuit; 2) violates due process under the 5th and 14th Amendments to the Constitution and the Administrative Procedures Act; 3) is arbitrary and capricious and not supported by substantial evidence in the record; and 4) is unjust, unreasonable, and unduly discriminatory and preferential in violation of the Federal Power Act in subsidizing those who are direct beneficiaries of new high voltage transmission facilities by allocating literally billions of dollars in costs of those facilities to entities who receive little or no benefits from those facilities and actually face increased costs of energy as the result of those facilities.
The costs currently at issue here are $6.6 billion in new high-voltage transmission lines operating at 500 kilo-volts (“kV”) or above, that have been identified in PJM‘s Regional Transmission Expansion Plans (“RTEP”) as necessary to resolve reliability problems in the eastern portion of PJM. Even the two lines planned to traverse parts of West Virginia (one inservice now, the other delayed) were designed to resolve eastern reliability problems by increasing west-to-east power flows across a constrained interface. The Order on Remand allocates 100% of the costs at issue based on “load ratio share,” which is computed using the customer load within a utility zone during the five hours in the preceding year when usage across PJM were at their peaks.
The Order on Remand errs in failing to give any weight at all to the actual cause of the costs to be incurred—to resolve these specific reliability problems that have been identified to exist in zones of utilities located in the eastern portion of PJM. A system-wide allocation based on load ratio share is purportedly justified by generalized assertions of system-wide benefits that are assumed to exist or based on speculation about future possibilities and extra-record evidence that is often unreliable and misused. The Order on Remand allocates 100% of the costs based only on this load ratio share allocator and does not answer a fundamental question: Why is it appropriate to allocate zero costs based on the specific reliability benefits that are provided to those entities with identified reliability needs?
The Order on Remand also errs in failing to give any weight at all to the benefits that eastern utilities will receive in the form of lower energy prices and, conversely, the detriment of higher energy prices that Midwestern utilities will face. This is the natural result of building transmission lines that are explicitly planned to increase solve eastern reliability problems by increasing the transfer capability of the existing system to move Midwestern power, which is lower priced, to eastern markets that have been growing faster and have higher priced alternatives. As more and more of this lower cost power flows from the west to eastern markets, it decreases prices there, and the loss from Midwestern markets increases prices in the Midwest.
These are not merely allegations of parties on one side of an issue. There is hard data quantifying these benefits and detriments that was originally computed by PJM and compiled and submitted into evidence by Dayton Power.9 But equally significant is that the parties on the other side of the cost allocation issue, and PJM, and this Commission have consistently acknowledged lower Locational Marginal Prices (“LMPs”) in these eastern utilities‘ zones as a benefit for the project in the context of reviewing PJM RTEP filings or incentive rates applications filed by the utilities constructing the projects. It would be arbitrary and capricious to acknowledge the existence of these LMP benefits in all cases except in the one case where the Commission has been specifically directed to ensure that the allocation of costs is roughly commensurate with benefits received.
Dayton Power also respectfully submits that it is unconscionable to allocate $6.6 billion in costs based on load ratio share, an allocator that is both overly-simplistic and completely disconnected from cost causation principles as applied to the costs of these new transmission facilities. The load ratio share is computed using only five hours of PJM peak loads in a 12-month period preceding the year of allocation and the amount of load served within a Zone during those five hours. It does not take into consideration why the project is built, who is contributing to the reliability violation being rectified, or even who will be using the new transmission facility. It does not look at any differences in seasonal flows, hourly changes in flow direction, or any other types of changes (other than peak load) that can occur within a yearor from year to year. If, contrary to all the record evidence, there were some future shift in flow patterns such that flows go east to west, it would not take that into consideration either. It is not a flow based allocator. It does not take into consideration any use of the new facility today or tomorrow or any point in time in the future. Its only consideration is how much peak load exists within a utility zone during five hours in the prior year.
To correct these deficiencies, the Commission on rehearing must: 1) review the record evidence in conformance to the mandate of the Seventh Circuit and apply the “beneficiary pays” principle such that the costs imposed on each utility for these new transmission lines for each utility is roughly commensurate with the benefits it receives; 2) eliminate the reliance on extra record, post-hearing documents and statements therein; 3) find that socialization of the costs of high voltage transmission facilities based on load-ratio share is unjust and unreasonable and not supported by substantial evidence; and 4) find that allocating such costs based on a distribution factor analysis (“DFAX”) method is just and reasonable, is supported by substantial evidence in the record, and complies with the Seventh Circuit‘s mandate.
I stripped all the footnotes out of the quoted section. Here is the footnote that explains the designation of eastern and western PJM:
For purposes of this rehearing request, “eastern portions of PJM” will mean that portion of PJM that includes what used to be referred to as the Mid-Atlantic Area Control Zone plus Virginia. Thus, “eastern portions of PJM” as used herein includes all of New Jersey, Delaware, eastern Pennsylvania, Maryland and the District of Columbia plus Virginia. The “eastern utilities” within those areas are Atlantic City Electric Company, Baltimore Gas and Electric Company, Delmarva Power and Light Company, Jersey Central Power and Light Company, Metropolitan Edison Company, PECO Energy Company, Pennsylvania Electric Company, PPL Electric Utilities Corporation, Potomac Electric Power Company, Public Service Electric and Gas Company and Rockland Electric Company, plus Dominion Resources, Inc. in Virginia. “Midwestern” or “Midwestern utilities” means utilities and their transmission systems within PJM that are operating in Ohio (Dayton Power, First Energy‘s Ohio subsidiaries, Duke Energy Ohio, and American Electric Power Company‘s Ohio subsidiaries) and the utilities who are PJM members operating in portions of Illinois, Indiana, Michigan, and Kentucky. There are also PJM members located in western Pennsylvania and West Virginia. While not included herein as “Midwestern utilities,” the economic consequences for those utilities are similar, i.e., they would be paying for a portion of the new high voltage transmission lines based on the size of their load but do not have a reliability need for the lines and make little or no contributions to the constraints that caused the new facilities to be constructed.
The Dayton Power & Light lawyers make an excellent point about PJM’s failed computer models used to establish need for new projects. PJM begins its whole RTEP modeling by setting power flows at the level of the five peak hours from the previous year. That is the sole basis for establishing need. As the DPL lawyers point out, this is crazy, because it doesn’t include a whole range of other elements that should be used in transmission planning.
We have made all of these arguments at one time or another over the last four years. Now you have them all in one place.