Back in 2007, while gearing up for the billions of dollars that PJM's coal-fired Project Mountaineer transmission projects would cost, FERC issued Order No. 494, which socialized the cost of these exorbitantly expensive, unneeded projects over a larger customer base. Once authorized by FERC in the Order, PJM changed its cost allocation methods to adopt the “postage-stamp” method of allocating the cost of new transmission in its RTEP that operates at or above 500 kV. Prior to Order No. 494, all new transmission was paid for through a “license plate” methodology whereby those who directly benefited from the project would shoulder the cost.
Under a license-plate (or zonal) rate design, a customer pays the embedded cost of transmission facilities that are located in the same zone as the customer. A customer does not pay for other transmission facilities outside of the zone, even if the customer engages in transactions that rely on those zones.
Under a region-wide, postage-stamp methodology, 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.
Due to these new postage stamp rates, a high percentage of regional load, and the wide geographic reach of the PJM region, customers in Illinois suddenly found themselves being charged the second highest percentage of eastern PJM’s Project Mountaineer costs.
“However, the cost shifts that would be incurred by switching from the DFAX methodology to the postage-stamp methodology are significant, resulting in western zones paying between 1,260 percent and 22,500 percent more for these facilities.”
The Illinois Commerce Commission objected to this inordinate cost, compared to “benefits” received, and the issue ended up before the 7th Circuit Court of Appeals. In October of 2009, the Court remanded the rate methodology back to FERC, finding that the Commission had not provided sufficient record evidence to justify its findings that the existing allocation practice for new facilities at and above 500 kV was unjust and unreasonable, and the Commission had not adequately supported its conclusion that the postage-stamp methodology was just and reasonable. The court found that the Commission’s reliance on the difficulty of measuring benefits for above 500 kV facilities, and the resulting likelihood of litigation, failed to justify the Commission’s decision. The court stated that the Commission had failed to show “the absence of any indication that the difficulty exceeds that of measuring benefits to particular utilities of a smaller-capacity transmission line.” The court further found that the Commission failed to justify requiring PJM to adopt a region-wide, postage-stamp cost allocation methodology for new transmission facilities that operate at or above 500 kV.
However, the court also recognized that, in comparing costs and benefits, the Commission “does not have to calculate benefits to the last penny, or for that matter to the last million or ten million or perhaps hundred million dollars.” FERC seems to have taken this to heart in their Order on Remand, issued on Friday. To summarize, the Order determined that allocating costs of transmission enhancements that operate at or above 500 kV to utility zones using a postage-stamp cost allocation methodology is a just, reasonable and not unduly discriminatory method of allocating the costs of these new facilities.
In order to get there, FERC provided what it feels is the justification the court found missing in Order No. 494.
“In summary, ComEd, along with the other western utilities, will receive significant benefits from the new 500 kV and above projects that prevent the degradation of the PJM transmission system and maintain the capability to continue to produce up to $2.2 billion in estimated system-wide savings each year, as indicated by the ISO/RTO metrics report, along with additional estimated annual savings associated with decreased service interruptions and power quality disturbances, reduced line losses, and reduced congestion. These estimated annual, system-wide savings totaling approximately $2.2 billion compare favorably to the annual, system wide costs of approximately $1.3 billion for the facilities at issue here. In total, PJM’s transmission system provides ComEd’s customers with access to savings of approximately $320 million to $468 million each year. While we recognize that there is imprecision in valuing the benefits of new 500 kV and above facilities, these estimated savings identified herein provide sufficient justification for allocating approximately $198 million per year in costs to ComEd under the postage stamp methodology for new transmission facilities necessary to maintain the integrity and reliability of the existing system so that customers will continue to have access to savings and to provide for future needs.”
To justify this, FERC said, “The projects in the current RTEP are an example of changing system conditions. As previously noted, the PJM RTEP involves continuous monitoring and re-evaluation of previous RTEP results to reflect changing assumptions and system conditions (retooling). As a result of this retooling, projects are added, accelerated, deferred or canceled based on the updated analysis of economic, technological, and resource sector changes. This retooling could significantly affect the projects in the RTEP, and the subsequent postage stamp cost allocation. For example, as previously noted, both the PATH and MAPP 500 kV transmission lines have been placed in abeyance in the most recent RTEP.”
But, “PJM states that it cannot capture the benefits associated with the robustness of 500 kV and above projects with respect to changing system parameters.” So, they came up with a bunch of dubious reasons, such as:
“PJM states that modeling assumptions constantly change which can have a significant impact on the planning process. For example, PJM notes that, due to significant changes in the underlying modeling assumptions, the Potomac-Appalachian Transmission Highway (PATH) line, which was originally approved with a required in-service date of 2012, was delayed in the 2007 RTEP until 2013, and it was delayed in the 2008 RTEP until 2014. In the most recent RTEP, the PATH line and the Mid-Atlantic Power Path (MAPP) line have both been placed into abeyance.”
“The parties have not directly quantified an economic value of the benefits of a reliable system, or more particularly, the benefits of the new 500 kV and above projects. This is not remarkable because planning for a reliable transmission system is primarily preventative; that is, the purpose of reliability planning is to prevent degradation of the reliability of a networked transmission system.”
“For example, reactive analysis has emerged as a key transmission expansion driver, and voltage criteria violations, which were alleviated by the MAPP and PATH lines, are identified in 2016 and beyond. PJM also notes that while new generation is added, a significant portion of that new generation reflects increases in real power capability, without any corresponding increase in reactive power.”
“PJM explains in its RTEP that reactive violations relate to failure to maintain adequate voltage levels necessary to reliably support power flows across the transmission system. Significant levels of power transfers cause bus voltages across PJM to decrease. Voltage collapse typically arises following the loss of a transmission line or generator under heavy energy transfers into an area that is experiencing an available generation deficiency. At its most severe, following the loss of a critical line or generator, voltage collapse can occur on heavily loaded systems, leading to a blackout to a portion of the system that can cascade to further instability across a much larger area. On a long term basis, PJM determines that new transmission facilities or enhancements to existing ones become necessary.”
And what have we been telling you about the reliability benefits of siting generation as close to load as possible? PJM and FERC continue to try to expand transmission with generation located further and further away from load, which makes the entire system more and more fragile. Their "fixes" just create more problems that need more "fixes." Long-distance energy trading is just a BAD idea... remember Enron?
“In the judgment of PJM and its stakeholders, the RTEP projects, including the 500 kV and above projects at issue here, are the most effective way to maintain reliability of the system going forward and prepare for future challenges. The postage stamp cost allocation for 500 kV and above facilities flows from the process by which PJM and its stakeholders plan the high voltage system because it accounts for the fact that high voltage facilities address multiple reliability issues across multiple areas and under changing system conditions.”
FERC found that the integration of the PJM region, by itself, provided some quantifiable amount of “savings” to consumers. But, wouldn't these "benefits" accrue without new Project Mountaineer lines? Do the "benefits" come from Project Mountaineer or from the RTO model?
“These savings would not be possible but for the high voltage facilities, and the planned new transmission facilities at issue here, that allow the entire PJM system to be interconnected and continue to be operated reliably. All parties benefit from having a reliable and robust system and therefore these estimates are a reasonable measure of the annual benefits of the planned high voltage lines. The system-wide savings mentioned above, although they are an approximate estimate of the benefits of new 500 kV and above facilities, do compare favorably to the estimated $1.3 billion annual cost of the new 500 kV and above facilities designed to maintain the integrity and reliability of the transmission network that provides access to these annual savings. In comparing costs to benefits, we note that the $1.3 billion in estimated annual costs of new 500 kV facilities may be conservative in that it includes two projects (i.e., PATH and MAPP) placed into abeyance by the PJM Board on February 28, 2011 and August 18, 2011, respectively.”
FERC admits that the Project Mountaineer transmission projects were intended to benefit eastern markets:
“To date, the majority of 500 kV and above facilities approved through RTEP were intended to address reliability violations in the East, which parties opposing the postage stamp methodology argue is a signal that eastern zones will disproportionately benefit from such projects. However, as discussed above, all parties benefit from an integrated system that ensures deliverability to all areas of the region. Further, as discussed above, we note that certain major 500 kV and above projects were approved to be located in western PJM, and to address reliability violations in western PJM. Specifically, the TrAIL and PATH projects are both located in the State of West Virginia in western PJM, as well as the States of Maryland and Virginia in eastern PJM.”
But, "western PJM" didn't need TrAIL or PATH, eastern PJM did.
And PJM even promotes future continued building of expensive, new, transmission lines that will keep their investor-owned utility “stakeholders” fat and happy for many years to come.
“PJM explains that it is well understood that a number of 500 kV and above lines will be required to integrate large amounts of renewable generation resources into the grid.”
But only if eastern PJM is served by Midwest land-based wind. Off-shore wind does not require expensive, new, transmission.
This justification for continued postage-stamp rates was in response to several parties that contended that a hybrid mixture of both postage stamp and DFAX rates would more accurately reflect the beneficiaries of the new transmission projects over time.
“Pennsylvania OCA, the Pennsylvania PUC, and VEPCO support hybrid methodologies. These parties note that both the DFAX and postage-stamp methodologies have weaknesses: the DFAX methodology does not recognize the benefits of a robust, extra high voltage network or that benefits may change over time, while the postage-stamp methodology does not provide the proper economic signals regarding the factors driving the need for construction of an upgrade. Thus, the Pennsylvania OCA recommends that PJM assign 75 percent of the costs of a new high voltage project according to the DFAX methodology, and 25 percent according to the postage-stamp methodology. Similarly, VEPCO recommends that costs be divided equally between the two methodologies and then phased out.”
PJM graciously provided the differences in cost allocation for Project Mountaineer between the two methods:
“PJM provided an analysis of the total costs assigned to each PJM zone for eighteen PJM Board-approved at or above 500 kV facilities using the postage-stamp methodology, as well as estimates of the total costs that would be assigned to each zone using PJM’s DFAX methodology for below 500 kV facilities. According to PJM’s calculations for these eighteen facilities, more costs would be allocated to the western zones under the postage-stamp methodology than based on the DFAX methodology. Specifically, PJM estimated that the costs allocated for the AEP, Commonwealth Edison (ComEd), Dayton, and Duquesne zones based on the DFAX methodology would be approximately $88 million, $15 million, $0.92 million, and $0.59 million, respectively, while approximately $1,194 million, $1,038 million, $164 million, and $134 million, respectively, would be allocated under the postage-stamp methodology.”
PJM also started harping on their silly “congestion costs” argument again:
“PJM explains that transmission expansion driven by reliability will also likely reduce congestion costs for transmission users. PJM’s 2008 RTEP indicates that, if proposed “backbone” projects had been in place for 2008, congestion savings would have been nearly $2 billion, and for 2011, the proposed backbone projects were expected to produce congestion savings of $1.25 billion relative to simulated congestion absent the backbone reliability facilities.”
Isn't it funny that "congestion" is being reduced even though most of the projects have not been built? It's high time that PJM and the power companies do an honest reassessment of the "congestion" these projects will supposedly solve, instead of continuing to regurgitate the 2008 numbers as justification for their unneeded projects.
However, the parties opposing postage stamp rates correctly pointed out to FERC that:
“Moreover, opposing parties contend that many of the benefits of 500 kV and above facilities accrue disproportionately to eastern zones. For example, the parties state that reduced congestion largely benefits eastern zones, since these zones will see reduced Locational Marginal Prices (LMP), while LMPs will actually rise for western zones. “
But, FERC tries to justify this burden on western consumers, who are the ones that put up with dirty, fossil fuel generation and its attendant high social costs, as well as having their property taken for new transmission lines:
“Parties opposed to the postage-stamp methodology assert that the ability of eastern zones to import low cost power from the west may harm western customers as LMPs converge. Specifically, they allege prices will fall in areas that lower-cost generators formerly could not serve because of congestion, while prices may rise near generators that previously could not export energy to other portions of this region. However, the relative prices between the resources in the eastern and western zones of power flows change (for example, on a daily basis due to the comparative price advantage of generators in some areas versus others or to changes in the generation fleet seasonally or over time), and PJM’s static DFAX model (which these commenters support) cannot capture such indeterminate potential changes. Moreover converging prices signal that the grid is reliable and robust enough to support energy flows in any direction and that the benefits will accrue to the market as a whole.”
“These projects provide benefits to the exporting area as well. For example, greater transmission capacity facilitates the development and construction of additional generation capacity, leading to increased capacity and diversity of generation. Accordingly, access to markets at lowered delivered cost provides significant benefits to the exporting utility and area.”
Oh boy! More coal-fired generation for West Virginia? Be still my heart! I sure hope I live long enough to see some “benefit” from a future power flow from the east coast, or the addition of more coal-fired generation in West Virginia.
So, what does this Order mean for the future?
“…various hybrid approaches blending the DFAX and postage stamp methodologies were proposed by the Pennsylvania OCA, the Pennsylvania PUC, and VEPCO, but the structure and implementation of such approaches were not adequately addressed in the record of this proceeding. Order No. 1000, among other things, requires public utility transmission providers to include a cost allocation method consistent with the principles of Order No. 1000 in its Tariff. Consistent with the recommendations of the parties that a hybrid approach be further developed, such approaches may be examined within the context of compliance with Order No. 1000, which we think is a more efficient commitment of the Commission and stakeholder resources than further evidentiary hearings in this proceeding.”
Unfortunately, it looks like FERC just went through the motions here in an attempt to justify a previous bad decision and satisfy the court, instead of rectifying their mistake. If you think all FERC’s justification for postage stamp rates sounds rather contrived, you wouldn’t be alone. Even one of the Commissioners thinks they didn’t get it right. Commissioner Cheryl LaFleur dissented and believes that a hybrid cost allocation mechanism is preferred.
FERC continually fails to move forward and constantly finds itself spinning its wheels while tied up in litigation over its actions taken to please investor owned utilities. Perhaps if they stopped trying to please the lobbyists who are always whispering in their ears and concentrated on just and reasonable rates for consumers, we’d all be better served.
See also: Open Invitation for FERC Commissioner Moeller to Take a Tour of West Virginia's "Strawberry Farm"