Pennsylvania Testimony Bombs Transource Project

Yesterday was the due date for testimony opposing the Transource project at the Pennsylvania Public Utility Commission.  And it was like a bomb... completely destroying all the pretense of economic benefit from the project.  The truth about the project and PJM's "magic math" will change the way people think about this project forever.  There is no economic benefit for Pennsylvanians.  In fact, Pennsylvanians will end up paying much higher energy costs if this project is approved by the PUC and constructed.

First let's look at the testimony of the three experts on behalf of the Pennsylvania Office of the Consumer Advocate.  Because the testimony is so extensive, I'm going to break it up into separate blog posts for each expert's testimony.  Today, let's tackle OCA expert Scott Rubin's testimony.

Scott Rubin, an independent utility consultant and attorney testified on the regulatory policy issues raised by the Transource project.  Rubin critiques PJM's benefit-cost analysis and offers his opinion on the economic need for the project.  He recommends that the PUC deny Transource's application with prejudice.  This means that a substantially similar case for this project cannot be re-filed after denial.

Here's a quick summary of the bombshells you can find in Rubin's testimony:

• Transource’s filings in this case do not consider the effects of recent changes in Pennsylvania law that should affect the Commission’s review and analysis of the proposed projects.
• Transource’s East and West Applications each identify only one reasonable alternative route to its selected routes. The route selection process apparently failed to consider other routes that would be likely to result in lower cost and lessened environmental impacts.
• PJM’s so-called “benefit-cost” analysis for non-reliability projects like the IEC Project does not properly evaluate the benefits of a proposed project. The analysis completely ignores increases in costs that would be incurred by zones outside of the region benefiting from a project. That is, the economic analysis used by PJM and Transource completely ignores the fact that the lower-cost power that would flow into certain regions is already being used elsewhere.
• While the IEC Project would reduce costs in portions of PJM, the overall effect on PJM would be that the costs of the IEC Project would greatly exceed the project’s benefits. Indeed, accepting all of Transource’s assumptions shows that every dollar invested in the IEC Project would produce less than three cents of benefits for PJM.
• The effects on Pennsylvania consumers would be even more severe than the impact on PJM. Over a 15-year period, consumers in Central and Eastern Pennsylvania would incur increased power costs of more than $340 million while consumers in Western Pennsylvania would receive lower-cost electricity valued at only $2 million.

PJM has pretty much ignored Pennsylvania law and Transource follows suit.  A recent court case, Pennsylvania Environmental Defense Foundation v.
Commonwealth, and Pennsylvania's recently enacted Act 45 will come into play in the PUC's decision.  Transource is trying to pretend these issues don't exist.  Read more about how these could halt the project in Rubin's testimony.

On routing, Transource failed to provide alternate routes as defined in the Commission's regulations.  Transource's "alternate" routes followed its preferred routes for a large percentage of their way.  A preferred and alternate route should not overlap more than 1/4 of their distance, otherwise there is no alternative.

Rubin does a fantastic job unpacking and explaining PJM's magic math.  While PJM and Transource have been telling the public that the project will save some $800M in energy costs over its first 15 years of use, Rubin reveals that those "benefits" are  not offset against any increased power costs elsewhere in the region.  The $800M in savings is for the special people in the Washington, D.C. metro area.  Costs in Pennsylvania will go up.  Instead of balancing the savings for Washington against the costs for Pennsylvania to come up with an overall "savings," PJM tosses out any numbers from zones that show an increase in costs before adding up its "savings."  Only zones that show a savings are used to measure savings.  Zones that show increased costs are not included in the "savings" equation.

If a zone has a positive ΔNLP – that is, its power costs increase over the 15-year study period – the zone is dropped from the calculation. Only zones whose discounted sum of ΔNLP is negative – that is, power costs decreased over the 15-year period – are included in the benefits calculation.

For this example, I will assume a very simplified system with only three zones. The 15-year NPV of ΔNLP shows the following: Zone 1 has a benefit (lower ΔNLP) of $100; Zone 2 has a benefit of $50; and Zone 3 has a detriment (higher ΔNLP) of -$110. Overall the three zones experience net savings of $40 ($100 + $50 - $110). For purposes of PJM’s analysis, however, Zone 3 would be dropped from the calculation and the project would have a “benefit” of $150.

$800M in "benefits," PJM?  I don't think so.  PJM put its finger on the scale!

And then there's the way PJM calculates "costs."  They use a form of revenue requirement, but not one that in any way resembles the  ratemaking revenue requirement that determines how much consumers actually pay.  Consumers pay a lot of additional costs over and above the capital costs of a project.  PJM's cost calculation is a complete lie... even when the costs are actually updated, which Transource has failed to do.

Rubin confirms that the only purpose for the Transource project is to lower costs for the special people in the Washington metro area.

To over-simplify a bit, the IEC Project will lessen the alleged electrical barriers (congestion) and enable lower-cost electricity to reach the higher cost areas of MD-DC-VA. To be clear, MD-DC-VA have plenty of power, so the IEC Project has no reliability benefit; but costs to those areas can be reduced if additional power can be imported cost effectively from lower-cost areas.

Mr. Rubin takes a deep dive into PJM's benefit-cost analysis and pretty much concludes that PJM's methods don't follow recommended benefit-cost methods.  And here's where the premise for the Transource project falls apart.  I mean just falls completely apart.

Q. Does the so-called benefit-cost methodology required by PJM and used by Transource meet the requirements of a benefit-cost analysis?
A. No. The PJM methodology used by Transource fails to capture all of the benefits and costs associated with the IEC Project.

Busted, PJM!  You are so busted!

...the PJM methodology ignores the negative consequences to utilities (and their customers) outside the region to be benefited. That is, when calculating the benefits of the IEC Project, Transource calculated the reduced power costs (primarily in MD-DC-VA) from being able to import lower-cost power into that region; but it failed to subtract from those benefits the higher costs that would result in other regions (including Pennsylvania) because they would no longer have the benefit of that same lower-cost power.

Do you get where Rubin is going here?  The Transource IEC is going to INCREASE POWER PRICES IN PENNSYLVANIA and other non-benefiting zones in PJM.  And here's where PJM's magic math gets sneaky:

The spreadsheet model includes a calculation of the net benefit or cost for each control area within PJM. Incredibly, though, when it comes time to determine a project’s “benefits” only those regions that would experience reduced  costs are included in the calculation. All regions whose costs would increase as a result of a project are simply ignored.

Let's say that again.

When PJM first reviewed the IEC Project, it found Project benefits of $1,188 million, as shown on the attachment to OCA II-14 (attached as Schedule SJR-1). This represents the present value of 15 years of savings in Net Load Payments (“NLP”) (that is, energy costs). The Schedule shows, however, that this figure completely ignores the zones where energy costs would increase as a result of the IEC Project.

Let's take a look at this table.

In the table provided by Transource, a positive number represents an increase in power costs (that is a net cost or detriment from the IEC Project) and a negative number represents lower power costs from the IEC Project (a net benefit). Take the first row as an example. AECO is the Atlantic Electric zone within PJM (the greater Atlantic City, NJ, area). This shows that over the first 15 years with the IEC Project in service, power costs would increase by [$17.90] million for Atlantic City area customers if the IEC Project is completed. Simply, this means that AECO currently is able to use slightly more of the lower-cost power than is economically optimal because of constraints that keep some of that power from flowing into MD-DC-VA.

See this PJM zone map to find the corresponding geographic areas that will either pay higher or lower prices if Transource's project is built.  This is a quick and easy way to demonstrate that the Transource project will cost money, real money, to electric consumers in non-benefiting zones.  And remember, PJM did not include these increases in costs in its calculation of "benefits."  Its almost as if the people in these zones don't exist... only the special people who will receive the lion's share of PJM's "benefit."

So, how much does the Transource project actually lower power prices overall in the PJM region (as if every consumer in every zone mattered equally).  $17.05M over 15 years.  If the increased power prices are subtracted from the decreased power prices, there's only $17.05M of savings left.

The net efficiency gains are the only true measure of the IEC Project’s benefit. The approach used by the Company assumes that the lower-cost power that flows into MD-DC-VA would not otherwise confer any economic benefit but for the construction of the IEC Project. In reality, though, that lower-cost power is being used in other regions of PJM (primarily Pennsylvania and New Jersey).  Thus, the benefits from the IEC Project should be measured as the reduction in power costs in MD-DC-VA, offset by the increase in power costs in regions like parts of Pennsylvania where power costs will increase.

And then the mushroom cloud appears that vaporizes any economic need for the project:

Q. If the IEC Project provides net benefits of $17 million over 15 years, should it be constructed?

A. No. As of September 2018, the estimated construction cost is $366 million, resulting in an estimated 15-year cost (PVRR) of $498 million. Thus, the IEC Project would cost significantly more than the benefits it would provide, resulting in a benefit-cost ratio of only 0.03. That is, for every dollar spent on the IEC Project, it would provide only three cents worth of benefits. Because the IEC Project is being built solely to reduce power costs, and not to provide any reliability benefits, the IEC Project is not economical and
should not be built.

So, if IEC is going to produce $17M in "benefits" over 15 years, how much is it going to cost again?  Even with PJM refusing to update the cost of the project since 2015, PJM's little revenue requirement number is $498M.  Let's say that's a cool half billion for argument's sake.  That's five hundred million dollars of your money spent in order to create a total of seventeen million dollars of overall benefit for all consumers in the region.

The real cost benefit ratio for the Transource project is 0.03, not the 1.4 PJM recently claimed after their own magic math analysis.  For every dollar you spend on this project, you will receive 3 cents in return value.  That's a loss of 97 cents on every dollar you pay for this project!  That's completely outrageous, PJM!  What the heck are you doing with my money?  Has PJM forgotten their purpose?  It's supposed to be for benefit of electric consumers in the region (ALL electric consumers, not just special ones).  However it now seems more like PJM works in a discriminatory fashion only for benefit of certain consumers.  Or maybe they only work for utility member financial gain.  One thing's for sure... PJM is not working for me!

And another thing... Rubin's testimony confirmed that PJM's cost allocations for the Transource project are set in stone at the time the project was originally approved in 2016.  Compare the cost allocation chart here with the new "benefit" chart above.  It is evident that some PJM zones that were originally assigned cost responsibility for this project because it appeared they benefited at that time are now going to end up with increased costs because of the project.  Not only do these utilities no longer benefit from a project they are forced to pay for, the project they pay for will increase their power costs!  It's like paying for a punch in the face.  As an example, let's look at the AEP zone, the first on the cost allocation list.  AEP will pay for 6.56% of Transource's currently estimated $500M cost.  That's nearly $33M dollars AEP customers will pay for the Transource IEC.  And what will they get in return for their money?  $5.3M of increased power bills.  Add it up and AEP zone customers will be paying an additional $38M in their electric bills and getting zip in return.  All cost, no benefit.  This is a stunning example of how badly PJM is failing at its job.  So, how bad is it?  Really bad, according to Rubin.

The IEC project would cost $498 million over 15 years, but it would lower power costs by only $17 million, resulting in a net loss to PJM utilities of more than $480 million. Thus, PJM as a whole would experience a net loss of $32 million per year for each of the first 15 years of the IEC Project. The Project is not economical for PJM’s utilities (and the consumers who purchase electricity from those utilities) and should not be constructed.

A little closer to home, Rubin makes the same kind of analysis including only Pennsylvania utilities (remember, the PUC works for Pennsylvanians, not PJM customers as a whole).

Thus, when including the costs of paying for the IEC Project, the net effect on Pennsylvania would be to have power costs increase by approximately $367 million over the next 15 years, or by more than $24 million per year.

Get that, Pennsylvania!  Your costs will only increase.  There is no "benefit" for Pennsylvania.  And PJM expects the PUC will approve this project?  Why should they?  No sane person pays to be punched in the face... or the wallet.

After reading this testimony, I'm pretty sure PJM's and Transource's facade of magic math, half-truths, and lies has worn completely through.  It's over.  Transource's project cannot be approved.  It's time to cancel this project, which is costing me more money every day this farce continues.