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Monday, September 26, 2011

Electricity Transmission Cost Allocation

Richard J. Campbell
Specialist in Energy Policy

Adam Vann
Legislative Attorney

Perhaps the most contentious electricity transmission financing issue is cost allocation for new interstate transmission lines—that is, deciding which electricity customers pay how much of the cost of building and operating a new transmission line that crosses several states. This report provides background and analysis of current transmission cost allocation policy and issues.

For many years, the Federal Energy Regulatory Commission (FERC) declined to go beyond establishing general principles as set forth in its Order No. 890, which addressed “undue discrimination and preference” in the providing of transmission services. Transmission cost allocation proposals made by transmission service providers were therefore reviewed by FERC to ensure compliance with the general principles outlined in Order No. 890 and the Federal Power Act (FPA). However, there were calls for FERC to provide a clearer framework for cost allocation. The decision of the Seventh Circuit in Illinois Commerce Commission v. FERC, to reject a cost allocation plan approved by FERC which would have permitted “socialization” of the costs for some new transmission projects (i.e., allowing the costs to be spread widely among ratepayers in the PJM Interconnection, even those who do not substantially or clearly benefit from a project) encouraged FERC to seek more clarity with respect to cost allocation. Congress also entered the fray in the form of legislative proposals that would amend the Federal Power Act to include new transmission cost allocation guidelines that FERC would be required to follow.

In 2009 FERC decided to take an in-depth look at cost allocation and other transmission planning issues as part of a new docket. FERC observed that its “best remaining opportunity to eliminate barriers to new transmission construction may therefore be to provide greater certainty in its policies for allocating the cost of new transmission facilities, particularly for facilities that cross multiple transmission systems.” FERC requested comments from stakeholders on transmission planning issues.

After receiving and reviewing comments from stakeholders and offering a proposed rule in 2010, FERC published Order No. 1000, a final rule reforming FERC’s transmission planning and cost allocation requirements for transmission service providers, on July 21, 2011. The final rule required transmission service providers to (1) participate in a regional transmission planning process; (2) amend their transmission tariffs to provide for consideration of public policy; (3) remove from their tariffs a federal right of first refusal for certain new transmission facilities; and (4) improve coordination between neighboring transmission planning regions.

The Final Order comes as state renewable portfolio standards and the upcoming U.S. Environmental Protection Agency (EPA) regulations for coal power plants may drive demand for new transmission lines. The uncertainty regarding the implications for generation resources of upcoming EPA regulations has caused some utilities to delay decisions on building new generation, with plans to satisfy (at least interim) power needs from power markets until the regulatory clarity they seek is provided.

This report analyzes recent developments concerning transmission cost allocation leading up to Order No. 1000, as well as the contents of the Order and their potential impact on the transmission planning process in the future. FERC acknowledges that some key questions may only be answered in the compliance filing process.

Date of Report:
September 7, 2011
Number of Pages:
Order Number: R41
Price: $29.95

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